Tuesday, 15 June 2010

What the stock market is currently saying

Written by John Mangun
Outside the Box
Business Mirror

After the euphoria over a successful election and the likelihood of a brand of “new politics,” the new administration may be in trouble before it even assumes office.

It is a given that Philippine politics is personality-driven rather than policy-driven. That carries with it some danger, as the people are almost encouraged to create their own concept of policy around the personality that they support. It seems, at times, that the majority of the voters are not really interested in hearing about specific policy, preferring broad strokes like “anticorruption” and “poverty reduction,” rather than having to think about the details.

Even the candidates know that this is not necessarily a good situation. When running for office and even after the election, when our leaders attempt to speak about the policy particulars, no one really appears to be listening. When it comes to personality, though, the “details” do seem important. President-elect Benigno Aquino III has already been told very specifically that he should quit smoking and get married. With the exception of the agenda-driven special-interest groups, who has asked about issues such as the next administration’s plan for energy sufficiency and polices related to mineral-wealth development? These kinds of questions are few.

Prior to and since the election, the political pundits have tried to pass over the lack of precise plans given to the public by comparing Aquino with US President Barack Obama. The US elected a president who similarly had little administrative experience and who campaigned on a platform of change.

Perhaps, the pundits should drop the Obama comparison right now as the American electorate, while embracing the Obama personality, is dissatisfied with the policies. Obama’s approval rating after less than 18 months in office stands at net approval of negative 14, with 49 percent voicing strong disapproval and total disapproval at 52 percent. This is the worse rating of any post-World War II president at this time in their term of office.

However, Filipinos are much more “forgiving” and much more realistic (perhaps, more so than the pundits) in assessing their leaders. It is likely that popular support for Aquino will remain solid for quite some time, even if he fails to meet the high and immediate expectations we read about on the newspaper opinion pages.

Nevertheless, the financial markets, fueled and directed by your money, are not as emotional about friendly faces and winning campaign slogans.

The reason I say that the new administration may be looking at some stormy skies for the next few months is what we are seeing in the stock market. The fact that the stock market is small in comparison with the overall economy does not, in any way, diminish the Philippine Stock Exchange’s importance as an indicator of sentiment and a potential predictor of the future.

The collective wisdom of how masses of people use their money is often very reliable. The boom over several years of the US housing market was because the masses believed correctly that government policy would sustain higher prices. The crash came because, eventually, it was impossible for government to sustain that boom policy.

So how can I say that the collective wisdom is so smart? The government did not come out and say, “We are going to create policy that is going to double the prices of houses every two years.” The collective wisdom figured that out, thus creating the boom. In 2007 the government did not say, “Hey, our policies are a failure and the housing market is going to collapse.” The people figured that out. The boom was caused by the people and then the collapse was caused by the people understanding and anticipating the effects of government policy. Even as the collapse was starting, government officials were still painting a very positive picture.

While the Philippine pundits were in panic about a probable failure of the 2010 elections, the people were saying something different. Automobile sales skyrocketed in the first quarter, mirroring the confidence the people had that the election would be a success.

Now the stock market is acting very cautious about the rest of the year.

While there is no fundamental reason for stock-market prices not to be rising, prices are in a period of confusion, combined with hesitation. Ignoring all the positive macroeconomic developments and the outstanding corporate results, since the first of May the market has gone sour. It is not so much that prices have gone down. It is that prices have not gone up, and positive momentum has left the market.

If at the end of June we do not price higher than April’s close (basically above PSEi 3,330), we may see a declining market for the next several months. Why?

Money, particularly investment money, is not impressed with pretty words and pleasant attitudes. Growth and profit are all that matter and, so far, the stock market is saying that there are no specifics as to what the next administration is going to do, favorable to investment money.

Do not, in any way, take this as a gloom-and-doom forecast.

Broad economic activity in real estate, consumer spending, business expansion and the like are long- term indicators and more important for forecasting the future. The stock market is a short-term indicator, but must not and cannot be ignored because short-term indicators will often lead and show the future direction of the long-term markers.

This is the good news. If the new administration can inspire confidence quickly in the stock market, then the long-term picture will become even more favorable as a positive short-term outlook will push the long term to even greater confidence and optimism.

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

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