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My 30cents on MMM

I think I am done suffering fools on this MMM Ponzi scheme. The wordings of MMM's terms and conditions and its insistence on using spare cash hence “we are not hurting but helping everyone” shows its a well planned daylight robbery of ignorant Nigerians.

Charity is giving without expecting a direct compensation from the recipient, with most purely gaining a sense of fulfilment in being privileged to improve the lives of others. The idea that I helped you today and someone can be guaranteed to help me on a greater proportion in 30days, 30% more than my "charitable contribution" at the beginning and now improved to 50% more this December with the lack of liquidity in the scheme is base case foolish. Nigeria is an emerging economy, its quiet disappointing that nothing has changed of our leaders, their inability to protect vulnerable citizens in this desperate times. All talks and no action. You were elected leaders to make and take tough decisions and blocking the MMM website earlier rather than just warnings would have gone a long way to reduce the amount of casualties. Yes some would have lost their money but it would have been more their "spare cash”. Yes it always starts with “spare cash” but why would anyone see something that can earn them 30% from their pocket money and not start thinking of putting their live savings? It is the job of our leaders and elected officials to be proactive. Just like a baby would want sweet for breakfast, lunch and dinner but it doesn’t provide all the nutrients required to grow. Am I calling Nigerians babies? Far from it, but in desperate times, hope can take the place of reason and it is the role of leaders to step in.

MMM is simply a balloon of charitable giving, that can only continue to expand if it gets contribution on an increasing geometric proportion and would have been sooner or later guaranteed to burst. Its 30 day absolute interest rate of 30% further makes the model virtually impossible to sustain in an economy where there is little next to nothing you can do to earn that kind of money in a year. As those that are part of the scheme can testify, you are always encouraged to invite new people into the scheme because truly it is only with their money in that you can get your money out.

To my main point of writing this, Nigerians, please do not make further charitable givings into this MMM. The argument is the need to slow down the rate of withdrawal given the Christmas season and bad press but you can still contribute, who are you contributing to if no one can withdraw? We are intelligent beings and at some point we should sit down and ask ourselves truthful questions such as, if I was given N1mio today, do I have the ability to make N300k extra on it a month from today? Some will possibly say yes, but the next question should be, how many of such opportunities exist in Nigeria for the 3 million Mavros to all invest in? Because except 100% of that business succeeds, someone is not getting their money back.

It is unfortunate for those that have their money stuck in it, I feel sad for them, because yes desperate times called for desperate measures and MMM timed its entrance to perfection. There are only two endings to this story, because the size of the MMM is still relatively small in Nigeria in dollar terms, MMM could probably speak to an investor to put in new cash. What this means is that 1 month from today payments will be made, but please trust me when I say this is the worse of the 2 outcomes. Its payment in January will see some take their money and run, but will also attract a significant new number of contributors because of the increased confidence from its none failure as predicted by most observers. The new contributors to the scheme will first be used to pay the investor and the Ponzi scheme continues but now on a bigger scale. Ponzi schemes run on confidence and this would have certified future confidence in its recovery. However when the Bubble finally bursts, the amount of citizens affected will be quite significant. The second ending is one where they are unable to pay in January and this puts an end to scandal, it might look the more painful approach in the short term and with Christmas around the corner, but it will affect fewer people and lives.

Theoretically, the Nigerian market is ripe for carry trades. With 10month dollar Naira futures at 210 offer and spot around 280, a sale of spot and investment in a 10 month T-bill paper currently trading around 12% yield provides a minimum real yield of around 35-40% for foreign smart money. There are arguments that the Naira even at 282 is still slight overpriced but adjusting for a 15% inflation (a number which is expected to slowly decline due to its one-off effect) an investor still gains a real return of around 20-25% return. Hence an investment at this stage is only unattractive if one believes the Naira is still around 20-25% over-valued. Adjusting for a potential 10-15% further weakness in the Naira to around 310-320 still provides a decent 10% real yield for an investment. This currently inverted curve is clearly there to attract spot and help kick off the two-way trading on FX and while the CBN through the futures markets has eliminated exchange rate risk by paying the differential, the liquidity risk is clearly still a concern for potential inflows given the how hard it was to pull funds last year but every investment has a level of risk. I believe a delivery of dollars by the CBN to those that bought in the special window this month and possibly the next would go a long way in restoring some confidence to such investors.

At the moment, most of the banks authorised by the CBN to participate in the futures market are still working on in-house setups and approvals to allow trading of the product. In some cases training or recruitment is required for expertise on the product. This would take some time and clearly affect how quickly the product gets going, its liquidity and availability to offshore investors who might have trading lines with some banks and not others. I believe the first wave of flows will be driven by hedge funds looking for outright returns but their entrance and potential to steady the spot market should provide some comfort for bigger long term investment portfolios, but in my opinion this is more like a 3-6months down the line outlook.

Post the announcement of the first $20mio futures trade, the markets have reversed significantly, 200-500bps rally across the T-bill curve mostly driven by the anticipated future demand from offshore client participating in the futures curve and the improved liquidity in the system from matured T-bills on Thursday. The liquidity strain in the system over the last 2 weeks post the CBN special FX intervention clearly affected the market liquidity causing a significant selloff hence the quick turnaround and bullish sentiment in the market in anticipation of a potential offshore re-engagement seems quiet overdone. With current global outlook looking quiet uncertain given the issues in Europe and its potential effect on the government’s ability to raise money through the Eurobonds market at an attractive yield, the DMO would certainly be looking at the potential to raise more capital in the local market via over sale of securities as the levels look attractive compared where it has been able to raise money in the last two primary auctions.


The markets at the moment trades on headlines and would expect this to continue this month ahead of macro data especially inflation. For some market participants, the upside for being long at this stage outweighs any downside. In my view, I would expect to see some reversals especially on the bonds ahead of the auction in 2 weeks’ time and on the T-bills if the CBN decides to do an OMO, but with auction coming up next week and the potential to raise significantly more capital at cheaper rate, one would expect the DMO to be putting a call into the CBN to hold their hand.


Good luck trading


Olushola Adeniyi

Post approval of an expansionary budget that would involve raising new capital, should the DMO be aggressively managing Stop Rate? Yesterday’s auction management showed the weakness in the Nigerian fixed income market. Inflation, lack of new inflows to Pension funds, Sale of Available for Sale portfolios by banks and expectations of a rate hike at the next MPR remain the drivers of higher yield.

Inflation.
Market expectations for inflation are between 13.3%-13.8% for April. This is post 11.4% and 12.8% in February and March respectively. Yesterday the government removed the subsidy on fuel further stoking the fear of a continuing rise in inflation. This change would see petrol rise from 86.50 to above 145 Naira and also allow the petrol importers to source FX from the secondary market which as of now doesn’t trade actively. According to some analysis, a fuel price of 145 Naira puts FX at around 320 Naira to the dollar which is around where the Black Market trades. With the Vice President also announcing the government’s intention to substantially review current FX policy, one would expect a potential devaluation in the official rate in the near future to align the two parallel markets. This hike in fuel price would significantly affect market expectation on the direction on inflation as April was meant to be a peak for inflation given the lag in imported dollar inflation from last year.

Inflows to Pension Funds
The continuing issues with states around net allocation from FAAC and the inability of the states to pay wages continues to affect the amount allocated to employee pension and has limited the amount fresh inflows in to PFAs. These funds also continue to demand a higher rate of return for new investments. Flows have also seen a continuing selling from Available For Sale books of banks who continue to expect a yield rise and are trying to capture profits from positions held from previous higher rate purchases.

Monetary Policy Rate
Post comments by the Central Bank Governor highlighting the need for real rates to remain positive, and with the continuing view of an inflation rise, the market is priced for a 150-200bps hike in rates. Even with such hike, real rates would be at around 50bps assuming a 13.5% on April inflation figures. The inflation figures are expected next week ahead of the MPC meeting and while there is a chance of a lower increase in rate, would expect this to be compensated with a significant hike in CRR.

The question remains where do rates go from here? Ahead of inflation figures and MPC, would expect Treasury bills to continue to be driven by market liquidity with most of investments remaining in the short end of the curve, mostly be driven by liquidity management by banks. Open Market Operations will remain key as the CBN continues its tightening policy for liquidity over 250-300bn. Would expect the long end to remain flat to a slight rally in the absence of OMO.

For Bonds, the auction has provided a chance for shorts to cover and while it was managed, the lack of a huge participation from PFAs means one would not expect to see a huge short squeeze normally associated with these surprise cutoffs. Would not expect to see a huge buying from market post auction as they seem content to wait for clarity on the macro front. For banks, any rally creates an opportunity to open new shorts ahead of macro data and would expect to see further weakness as AFS of banks continue selling, reflecting their long term view on rates.

News of a potential devaluation is positive for the prospect of renewed offshore involvement in the market but would not expect to see significant participation until the liberation of the 2-way FX market. As the Vice President emphasized, the current issue around FX cannot be resolved through management of demand but rather addressing the issue of dollar supply, hence we hope the review can be quick and effective.


Good luck trading.