Wednesday, 12 August 2009

Where is the stock-market rally coming from?

Outside the Box
John Mangun
Business Mirror

Is it too much to expect that people who talk about the stock market understand how the stock market works?

There are some very fine business journalists in this town who explain to you every day what the financial markets are doing. But their voices seem to be drowned out by the “experts” who are giving you wrong and empty-headed information.

First, politics and political leaders do not move the markets. Yes, good and bad policies do influence stock-market prices, but only to the extent that those policies affect, for better or worse, the general economy and corporate profits. Until such time that the “government” puts a gun to your head and forces you to buy or sell shares, this and every other administration is not part of the equation of price movement.

Second, prices moving up or down do not constitute part of the approval/disapproval poll of the President. Obama’s poll numbers are the lowest in 2009; the New York Stock Exchange is at its 2009 high.

What the “experts” cannot seem to figure out is that stock-price movement is determined by money movement, you moving your money. If money comes into the market, prices go up. If money moves out of the market, prices move down. And that money movement is determined by whether the holder of those funds believes that he or she can make a profit by the buying and selling of shares. That’s it. Simple. Nothing more.

However, there is another factor in the game of stock-price movement. Money is the fuel that energizes the economy as well as stock prices. No matter how new and expensive your car is, it will not run without fuel. And even with a full tank, you still have to press the accelerator.

We can easily measure the “fuel” in the economy by looking at the growth of the money supply. The money supply is basically the amount of cash in circulation. If the money supply grows, all that money has to go someplace. A portion goes to the banking system in the form of deposits. Another portion goes to buying things. Some more goes into long-term nonliquid assets like real estate. And a portion goes into very liquid, short-term investments like the stock market.

Last week, the Bangko Sentral ng Pilipinas reported that the broad money supply grew at 12.6 percent in June. That is on the back of 15-percent growth in May. More potential fuel for the economy.

Now where did that money go? Of course, people spend money. However, there is a balance between consumer spending and production of goods for the consumer, as inflation is flat. If too much of the increase of the money supply was going into daily buying, inflation would rise. It did not.

Bank deposits are rising, as evidenced in the fact that bank lending is up. But not a lot of excess cash is going into deposits as interest rates are low and, therefore, the return is not very attractive.

Real estate is still selling, but these are major purchases and you can own only so many new condos; plus, this is not a cash-convertible investment. Your money is tied up.

So, a sizable amount of the new cash that is in the economic system is going into the stock market. The market value of the shares listed on the Philippine Stock Exchange (PSE) that make up the composite index is P1 trillion with the index at 2,800. The 2009 low of the index is about 1,800. Note this: Every 1-point increase in the PSE composite index represents over P350 million of increased market value. That means the 30 top-listed companies have increased in market value by almost P400 billion since March 2009.

That P400-billion increase in market value did not come from thin air. That is real value backed by real money. That increase in market value was fueled by you taking P100 billion of your money and buying shares. It is not an illusion. It is your real money.

Granted, it would be better for the economy if that P100 billion had been invested in long-term sustainable businesses. But no one can blame you for putting your money into the stock market, which is instantly cash-convertible, when you have to listen to all the “gloom-and-doomers,” primarily with UP economic degrees, telling you how bad the economy is and how foolish you would be to invest in the Philippines. Of course, you probably earned substantial profits on your investment if you heeded “wise” advice and started buying stocks on March 30, when the title of this column was “Get into the PSE now.” The stock market should pull in another P150 billion to P200 billion over the rest of the year, pushing the index up another 20 percent or so. Then we should see a shift in allocation of money to those sustainable businesses, which in turn will fuel the economy even more.

This is a legitimate stock-market rally fueled by real hard-earned cash. And it is not going to stop anytime soon.

PSE stock-market information and technical-analysis tools were provided by Inc. E-mail comments to mangun@email.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it .

No comments:

Post a Comment