Thursday, 31 March 2011

A ‘new’ stock market?

Business Mirror

March and the first quarter of 2011 are almost in the books, nearly closed and archived. What a three months it has been. Actually, the last five months have been a time of anxiety for both the business community and stock-market investors.
Granted that the overwhelming majority of Filipinos could not care any less about the Philippine Stock Exchange (PSE); in truth, a nation’s stock market is an important barometer of economic activity because of the way it reflects investor sentiment and attitude. You cannot ignore the P3 billion or P4 billion moving in, out and around the stock market every business day.

Stock-market prices have been in what we technical analysts call a Declining Trend Channel since the beginning of November 2010. Prices go up and down but stay bound within a range but always heading down. The PSE index fell from a high of 4,413 on November 5 to a low of 3,602 in February. That is a drop of 811 points, or over 18 percent, and that is a big deal.

Stock-market investors sold during this period because of anxiety about administration policy, concerns as to the policy direction of the Bangko Sentral, and concerns about both past corporate profits and future inflation. Notice that the Middle East unrest and the Japanese disaster are not on the list because the stock market was falling long before you cared about Arab protesters or ever heard of a placed called Sendai, Fukushima. As I have said before, I am convinced that stock-market price action can and often predicts the future three, six, maybe nine months ahead.

The Egyptian stock market doubled in value from early 2009 to May 2010. Between May and July, the market lost more than 20 percent during more than a correction as prices never rebounded to the May 2010 high. Selling then would have been a great idea since the market has fallen another 15 percent since its July 2010 close.

Electric power-generation companies are boring stocks to own since they rarely fluctuate much in price and are bought because they usually pay a good dividend. Tokyo Electric Power (Tepco) is no exception, with the price barely moving between January 2009 and September 2010. Suddenly, the price fell 20 percent in one month last September, long before the earthquake. From ¥2,500, the stock trades now at ¥500.

The New York stock market is not rising on the back of good economic performance. From mid-2007 until February 2009, the market was in free fall, losing 50 percent. Between March and November 2009, the Dow Jones rose from around 7,000 to over 10,000. In March 2009 the US inflation rate was a negative 0.38 percent and in November suddenly jumped +1.84 percent, a huge reversal. The market continues to rise even as economic growth falters because investors are “predicting” continued and increasing higher inflation (stock markets like the beginning of an inflationary period) even as the US government continues to say inflation is very small. The stock market says otherwise.

The local market has reversed its downward trend, subject to confirmation over the next week of trading as the PSE index must now push through 4,100.

Yesterday’s dramatic increase in prices came with the announcement of the buyout by Philippine Long Distance Telephone Co. (PLDT) of JG Summit Holding’s ownership of Digitel Telecommunications. This is a great deal for all concerned. While PLDT does pick up an additional 14 million subscribers, it expands the ownership of its company, which includes the Japanese telecom company NTT. JG Summit picks up a valuable asset with its PLDT shares that can be used as a cash-generating asset without increasing debt or selling equity. JG summit can use those PLDT shares to borrow money at low interest rates while keeping its balance sheet looking very favorable.

Now to the cell-phone consumer. The initial reaction from some is that this is a bad deal for consumers because of less competition. I do not buy that argument. While telecom companies’ profit margins are being squeezed because of price competition, one less player is not going to diminish the competition between Globe and PLDT. Both companies know that consumer penetration is very high and may reach a saturation point in the next few years. Each is digging into the lower economic brackets with cheaper phone-usage options. And, more important, as saturation continues, both will dig deeper to pull customers away from each other. As long as PLDT and Globe need to fight each other for more market share, the consumer will not suffer. Just recently, Globe began a vigorous campaign to increase its postpaid business, long the jewel of Smart’s crown. PLDT may become even more aggressive in its price cutting now that it has a much-larger market share over Globe.

Remember that we had a “duopoly” before Sun was formed and that did not keep the Gokongwei group out of the business. San Miguel Corp., which has a substantial stake in Liberty Telecoms, Bell Telecoms and is planning to acquire Express Telecom, is probably ready to take on both PLDT and Globe the same way as Sun did before.

The local stock market looks very good right now. We may have a “new” stock market for the rest of 2011. Many stocks are rising on news stories and plans, including several high-profile corporate buy-ins and partial mergers.

But I would caution you against buying and relying too much on the media hype. Public companies know well how to play the “press release” and “PSE disclosure” game to move their stock price and, often, that price movement ends in sorrow for the average investor. One listed company presented the stock market with a disclosure that is false in nature, if not totally dishonest. Fortunately investors have not bought into the propaganda yet and I hope they do not. The PSE is not obligated to fully validate the complete reliability of corporate disclosures so let the buyer beware.

Buy the PSE. Buy the peso. Buy the Philippines.

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