Thursday, 16 July 2009

The stock-market crystal ball

Outside the Box
John Mangun
Business Mirror
http://www.businessmirror.com.ph/home/opinion/13264-the-stock-market-crystal-ball.html

If the stock market is a leading indicator, a predictor of the future, then the rest of 2009 is going to be a boom time.

I know that you know the second-quarter economic results will be much better than the first quarter.

We will most likely look back on the first three months of 2009 as being the bottom of the negative global repercussions on the Philippines. With low inflation and increased confidence in many business sectors, this should translate into more economic output for the April-June period. I anticipate that both confidence and output are going to continue for the rest of the year. Even the strident Philippine gloom-and-doomers are going to have to admit at some point in the near future that they have been wrong about this economy.

The signs are all around us if we know where to look.

The recent sale of government debt on the world market is a good example. The Philippine Star headline pretty much sums up the economic picture: “RP global bond issue 6 times oversubscribed.” The government issued $750 million of debt coming due in 2020. Several things are very significant and favorable about this offering.

If foreign investors are worried about the medium- to long-term fiscal problems of the government, they would not have responded so favorably to purchasing this government- bond issue. Other countries are not as fortunate.

The fact that foreign buyers were so interested in participating is evidenced by the fact that the offering was oversubscribed by six times; that is, there were offers to purchase $4.5 billion of these bonds. Granted, the interest rate was quite high in relation to US Treasury debt, but in fact, that also is a bright spot. They received a higher interest rate as a sweetener to the deal, but they were not afraid their money would not be paid back.

Now where does the Philippine stock market figure in all of this? Believe it or not, the local market has been in an unprecedented uptrend for the last six months.

Every month since February 2009, the market has been up. I say “unprecedented” since this is the longest sustained positive movement of our market in the 21st century. And because of this long sustained movement, the market is now signaling that this is only the beginning of higher prices to come.



As a forecaster of the future, stock markets are usually six months ahead of the curve. If that holds true in this case, then we are looking for a much brighter economic outlook for the rest of the year. I tend to strongly believe the predicting power of the stock market. Look at what happened to our market in 2008.

The early part of the year saw prices fall like a rock. The end of 2008 lived up to that prediction as the global financial crisis exploded onto the front page of every newspaper. Then came the worst period for stocks in October. If we move forward six months, we come to April 2009. And then we saw the release of first-quarter economic growth, which was down, of course.

But throughout 2009, stock prices have been up and I believe that this tells us what to expect for the rest of 2009. But what about beyond this year?

Some analyses are saying that the profit-taking over the last month is not a good sign for the future. I strongly disagree. It is a good thing to take profits out of the market from time to time. However, in spite of the profit-taking, overall, prices are still up and July 2009 will end on a positive note.

That is the extremely good sign.

Rising stocks prices become self-reinforcing. Rising prices create an atmosphere of confidence, that brings more money into the market, which creates even more confidence in the future and the belief that prices will go up. Looking at the market right now, that is what I see happening. Confidence-building on confidence.

If this trend sustains even for only a few weeks more, we should rally through the end of 2009 and perhaps longer, or at least until the broad index reaches 3,400. As that happens, you will most definitely see individual stock prices double and even triple from current levels.

Stock prices are quite undervalued in relation to other assets. Look at real-estate prices and how high they have risen in relation to all prices in general. Interest and deposit rates are quite low, which means the “price” of corporate debt is high. The one investment that is still a bargain is stock.

By virtually every measure of stock value—Price-earnings ratio, book value, price-to-equity ratio—stocks are still cheap. But more important, as corporate profit grows with the economy, these measures will still show bargain prices for some time to come. The rally is just begging, as are the profit-making opportunities.

On a personal note, beginning next month I will publish a weekly market update, with trading strategies based on technical analysis which gives entry prices and timing. You find all the fundamental information about local listed firms right here on the pages of the BusinessMirror. If you would like subscription details and an example of this weekly update, now available only to members of the Portfolio Trading Program, please e-mail me.

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PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc. E-mail comments to mangun@email.com.

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