Thursday, 9 June 2011

The PSE crystal ball

Business Mirror

Times are tough when all you have left to rely on for good news is the stock market.

From “Ever since talk began surfacing of the ending of QE2 this month, the stock market has rolled over on the technical price charts. The more convinced the markets have become that the Fed was going to take away the fun and games, the further the equity markets have dropped. It has now reached a point where the stock market is threatening to take out a critical support level. Should it do so, consumer confidence, already reeling from high foreclosure rates, falling property values, soaring gasoline, food and other energy prices, and a lackluster jobs situation, would immediately plummet.

The one thing that has helped keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.”

The only thing that is keeping the US stock market alive is Quantitative Easing (QE); money printing. The trillions in stimulus money and government budget deficit has not done anything to get the US economy going, but it has kept the stock market alive.

However, there is good news for the US stock market. Federal Reserve Chairman Bernanke said QE will continue in one form or another in spite of the fact the QE2 is supposed to end on June 30. But a program of QE3 is a sword that cuts both ways. If the economy is starting to recover, no need for QE3 and stock prices will grow on the back of economic recovery. If there is a need for QE3, then the stock market will continue to feed at the trough of government deficits but the economy is still very sick. And the US economy is still in “intensive care.”

Closer to home on the Philippine Stock Exchange (PSE), government policy and administration actions are being reflected in stock prices and the reflection is not good. In late April, the future looked much rosier with the All-share index reaching a historic high. Since then, the index has fallen nearly 5 percent.

More worrisome for market watchers is that in the first week of April, the prices were ready to reach historic highs on the PSE Index. Momentum was strong and even building. Individual shares were performing well. There was confidence in the air. The market had regained all of its early 2011 losses.

But since the end of April, any attempt at prices going higher has been met by a wave of selling. The market entered an indecision/hesitation period, which can be a good thing as it allows weak shareholders to get out and new money to come in at lower prices.

After this hesitation period, we should be entering the “two steps forward, one step backward” phase. Investors are worried that it may be too soon to buy and yet are also worried they might be too late as prices go up quickly. That would be the true start of a strong upward rally.

Stock prices need to break and hold above 4,300 in the next two weeks or we will probably see a fall to the 4,160 area and a move to 4,150 could easily target a drop to near 4,000.

It is no coincidence that the indecision/hesitation period in the stock market marked the same indecision coming from the administration regarding Mar Roxas’s role in the government. Theoretically, now that it is clear where Mr. Roxas will be placed, there should be a positive reaction.

However, there are many sub-currents disturbing investor sentiment. The postponing of the Autonomous Region in Muslim Mindanao (ARMM) elections is not favorable for stock prices medium term. Anyone with contacts in the South knows that the reaction in the ARMM is not good and could even prove dangerous to the fragile peace situation in Mindanao.

Talk in the mining community that the administration is seriously considering and looking at ways to disturb and change the ancestral domain rights to further centralize control of mineral licensing could create a resurgence of New People’s Army activity. The government might find itself facing a two-pronged attack on “Imperial Manila.”

Investors are now worried and stock prices are the only meaningful indication of “money” sentiment. The crystal ball of the PSE will tell us the short-term future of the Philippines.

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