Third Eye on the Third World

Date October 15, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The Stock Market Panic”

To quote a good friend of mine, “Anyone who thinks the stock market crisis is over has rocks in their head”.

The collapse in stock prices particularly in New York last week was described as a selling climax or capitulation, supposedly indicating the bottom was reached. This week’s historic one day rise is supposedly the beginning a new dawn. Nonsense. Despite the fact that the shares of certain companies are ‘cheap’, very few are buying shares to put in their portfolio for the long term.

The stock trader who bought when the Dow Jones Average was up 100 points, made a killing when the market ended 900 points higher. The ones who bought when the market was up 900 points only got killed.

Conventional stock market wisdom encourages investors to take advantage of lower prices by buying more to average the cost over the longer term. This can make sense in most instances. But how can you average your cost when the stock you bought at $20 two months ago is now trading at $5.00?

Last week was also described as a time of “irrational fear”. Stock market wisdom says that the time to buy is when there is blood in the streets. The question then becomes, how much blood does it take to signal a buying opportunity? Fear is only irrational if it is unjustified and not a single expert can make an accurate prediction of what the future may hold.

The global economic rescue package is only an attempt to stabilize the situation, not a cure for systemic flaws and failures. No one has a clue as to the next year of economic activity in the United States or Europe. No one can forecast as to what levels bank lending will return. No one can estimate what will happen to consumer spending in the months to come and these economies are driven by the consumer. And remember this. The Dow Jones dropped from 14,000 to 9,000, a 35 percent fall. To go back up to 14,000, the market must rise 56 percent. Does anyone realistically believe that several trillion dollars of stock buying is going come in to push the Dow up 56 percent in the foreseeable future?

Perhaps the best stock market truth is that you should sell until you can sleep comfortably.

Based on country stability, corporate growth, and economic soundness, there are only three stock markets I can see that make investment sense; Canada, China, and the Philippines. I would also include Iraq, but their market only trades a million dollars plus per day.

Canada is a small country with the world’s strongest banking system and a large amount of profitable energy/commodity related companies. China has 1.5 trillion dollars of foreign reserves to support their economy. The Philippines is a place of calm in an economic storm.

So why is our market down? Because foreigners are bailing out to get their money back home and local investors rarely have a clue why they bought in the first place so therefore do not have a clue why they are selling.

To sell local stocks because New York, London, and Japanese markets are down is simply foolish because there is no direct and very little indirect connection. To see the shares of companies like PLDT, Megaworld, Meralco, and the banks at these levels is amazing. Oil is under $80 a barrel and will probably be lower by year-end, taking care of our recent inflation problem. All the stable economic drivers including exports, remittances, agriculture, and consumer spending are still growing.

I have yet to hear a rational justification that shows the correlation between the corporate value of PLDT, Megaworld, Meralco, or any other issue to the global debt crisis. I know what investors in Japan, Europe, and the US are fearful of. What are local investors afraid about?

Show me that Megaworld’s profits will be down 75 percent over the next 12 months to rationalize the stock falling 75 percent. If so, then MEG will be a great buy at 50 centavos. If not, it is a great stock bargain right now.

The market will probably fall further to the 1,950 area in order to get as much of the foreign money as possible out of the PSE. And if you are a short term player, you should also sell. If you are a longer-term investor, accumulate on the way down or wait for the decline to stop and then jump in with both hands.

On a personal note, I answer all your emails, if I get them. Your email might still be floating around the internet trying to get to me. Therefore, if you do not receive a reply within 24 hours, please email me again.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

// posted by john mangun @ Sunday, October 19, 2008