Tuesday, 1 September 2009

The good news keeps coming

John Mangun
Outside the Box
Business Mirror

The newspaper headlines have finally caught up with all the gloom and doom coming from the economic experts, primarily with University of the Philippines on their résumés. Read this: “GDP growth for second quarter contracts 3.9 pct,” “GDP shrank 3.5 percent in the second quarter from a year earlier,” and “GDP in the second quarter contracted 4.9 percent from a year earlier.”

Sorry, my mistake. Those are the headlines, respectively, from Malaysia, Singapore and Thailand. The Philippines headlines read, “On an annual basis [year to year], second-quarter GDP climbed 1.5 percent.” In fact, the Philippines’ “second-quarter gross domestic product growth at a seasonally adjusted 2.4 percent from the first quarter was the highest since 2.4 percent in the first three months of 2007, and beat market estimates” (Reuters). Actually it only beat the “market estimates” of the “experts.” The confidence factor of local businesses and prices on the Philippine Stock Exchange have been predicting a good second quarter for the last three months. It is only the “experts” that are surprised that the Philippines is doing comparatively so well in the face of a global recession/depression.

The reason is simple; the Philippine economy does not depend on the United States.

The Japanese just concluded a dramatic election that potentially will change the course of that nation. The ruling Liberal Democrats, which have held power for 55 years, were handed a landslide defeat at the hands of the Democratic Party of Japan (DPJ). What is critically significant is that the DPJ ran on a platform moving the economy toward less dependence on the US.

Those countries, which include almost every one in Asia, that depend on the US for their wealth-building are looking for any bright spot, real or imagined. Most of the bright spots are imaginary.

Asian exporters saw their numbers decrease, but not as bad as in the first quarter. That is like saying the cancer is still growing but at a slower pace. Dependence on the US is still a terminal disease.

The US is headed for even more economic trouble over the next six months both from internal and external factors.

We know that both China and Japan have financed their exports to the USA by loaning money to purchase their goods. Two things are changing. The first is that neither country is interested in becoming the “casino financier” for the US anymore. Second, if these economies are determined as they appear to be to shift away from dependence on US exports, there is no reason to loan any more money. The day of reckoning is soon coming to the US and will hit around November. If the US cannot sell the massive quantities of debt paper that they normally do to China and Japan, then the only alternative is a very large devaluation of the US dollar. The result will be a sudden and greater downturn in Asian exports.

Domestically, unemployment continues to increase. The Obama administration is counting on the US consumer to bail out the economy. But increasing unemployment decreases consumer spending even more, causing more companies to fire workers, creating more unemployment and a larger decrease in consumer spending. The only solution to break this vicious cycle is increased government spending. But the government is out of money, probably cannot borrow in the quantities it needs, and the economy will sink even further.

The Philippines’ only significant “dependence” on the Western economies is through overseas Filipino remittances. We have seen that despite the global economic downturn, remittances have not been damaged. Further, the government’s decision to keep the peso at an artificially low rate has given those remittances a boost in purchasing power here at home. Whether it will make economic sense to keep the peso weak remains to been seen over the remainder of 2009, but for now, it is working well.

The Philippine Stock Exchange (PSE) may be the most visible barometer of the future economic condition of the Philippines. And here, the picture could not be much brighter. As long as we keep seeing commentaries in the press about the potential for a large decline in stock prices, all is well.

Although the PSE index has risen from the February 2009 low of around 1,800 to the current 2,800, the best is yet to come for individual issues. From my latest Market Update: “We are just about ready for the indictor line to break above the ‘zero’ mark. This is critical and very important. This last time the Monthly Buy Signal moved above ‘Zero’ was in January 2004, and once that Buy signal broke ‘Zero’, the PSEi went from 1,500 to 3,500, more than doubling. You are part of the greatest PSEi price rally since the one that began in 1990 after the ’89 coup attempt, and that over the next eight years then, prices nearly quadrupled.”

In other words, the last six months have merely been the opening act for what is yet to happen. A comment in one of yesterday’s newspapers about prices on the PSE being expensive is wrong. What stock prices are telling us now is that over the rest of this year and into 2010, corporate profits will catch up with stock prices, even as prices go still higher, anticipating even higher future profit growth.

Unlike most of the other global stock markets, Philippine investors are buying the hard-earning generating assets of listed companies, not merely dreams about a better future. Investors in the PSE are forecasting a bright economic future, putting their money where their optimism is. They will be well rewarded betting on the Philippines.

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

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