Forex strategies: How I Shorted the Naira

[Disclaimer: This post is just a case study. I am not writing it to claim that I got rich from some currency short or to encourage any aspiring short sellers on how to make trades or deals that will affect the value of the currency of our beloved country].

It was early 2015, around January, February to be precise. The value of the Naira had just taken a beating against the greenback and our Elections were nearing. Few anticipated that oil prices would keep falling all through the year.

In 2007 and 08 I thought the oil price of around $100 per barrel was just a temporary high but it stayed up there longer than we most anticipated. Then the world became used to high oil prices. It was a lost opportunity to a country like Nigeria I believe as the government went an unnecessary spending spree while the foundations of the economy were still shaky. Fast forward to 2015, there I was, a self-proclaimed student of world economic trends with a chance to play real life "short selling" with the little that I had or didn’t have.

I first read about short selling in 2008, I was just beginning to take an interest in the stock market and I tried to buy around 300,000 Naira worth of stocks. I got just a few bucks out of that as the stock market in Nigeria collapsed the following year. I wondered if someone read a little more and analyzed a little more of the capital market situation in the country back then and found a way to short most of the overvalued stocks (most stock prices were supported with credit from sometimes the banks that are issuing the stocks). I never found a way to short the stock market, so I gave up.

Early 2015 I had a trip planned. I was terribly worried about the fall of the Naira and I was scared the Naira could fall even further. Then it hit me, this is a situation I could short and make a profit. But before I attempted a short I realized with nervousness of the coming elections, the Naira could fall more and if oil prices keep falling, it could fall even further. So I used the excuse of the trip I was going on to collect a Naira loan which I then changed into Dollars at a rate of around N185 to the dollar and I kept the money.

After I came back from my trip and it was time to pay back my loan, I sold the Dollars at the rate of 220 each. I made a profit of N35 on every dollar I bought at N185. I paid back the loan and kept the N35 profit on every N185 I borrowed.

At today’s rate, a day after the U.S Fed raised interest rates, I would have doubled my profits if only I kept the loan long enough. I would have kept it till next year as I anticipate an oil price fall to follow the U.S. Fed rate hike.

 

Nigerian economic crisis? who should we blame?

The nigerian economy in crisis.

The SEC chief blames the banks for the current economic downturn and mainly for the stock market plunge. He blamed the ways the banks gave out loans and their way of raising money.

Lending is a vital part of every capitalist economy, but sometimes not paying back the loans can bring out the cons of a capitalistic system or a free market.

In Nigeria, 388 billion naira in such loans could not be recovered, why? Because mainly the loans where used to buy shares in the then thriving stock market and the colaterals used to borrow such loans where also stocks. In an event of any bear market, consumer confidence will plunge and a big sell out will make the market fall further thereby making the borrowed money depreciate with the stock prices and as the collateral also depreciates, this causes more kaos and panic. Even if the borrower sells the stocks, plus the stocks, he cannot pay back the loans and the banks are left with collateral in stocks that are almost worthless. In this kind of scenario, the borrower or investor loses everything and the bank too loses the money it lent out.

This is very similar to what happened in the US, only for what we have in Nigeria may be less stable and a bit more risky. there also, the crisis was ignited when people took mortgage, they couldnt pay back the money they borrowed for their homes, while the homes depreciated in value and they were forced to go into foreclosure. The lost their homes and the banks got stuck with real estate far less in value than the money the lent out to the home owner. The crisis hit the banks real hard that Government had to intervene and many people lost their jobs, many more their homes.

What we are seeing here in Nigeria could be worse than what there is in the US. why? Because the stock market is more volatile than the real estate or housing market, i.e a housing crisis could be a bit more stable than a stock market crash.

As a solution, we can see how the Government in America reacts to its crisis. If successful, we can borrow a few startegies and save the economy.

Also government can buy and hold a few stocks to reduce the amount of selling and dealing that causes the stock to plunge back as soon as they start gaining some ground and people start selling off again. the sec can also intervene and try and enforce a minimum holding period for some stocks so as to eliminate some trading done by investors to profit from turmoil like this.

The executives responsible for this shouldnt go unpurnished if the is proof of their wrong doing or carelessness.

At first, the Government officials though that Nigeria was immune to the global economic crisis. I dont blame them, though I dont know why the thought so, but I also though we were immune to the crisis citing our growing revenues from crude oil sales. I thought we were heading into a boom like in india and china only that ours is not fuelled by manufacturing or information technology but by crude oil.

I did not expect the crude oil prices to fall back quickly and now we are stuck in a correction following the overvaluing and manipulation of share prices in the stock market.

Anyone knows where we are heading?