I am allowed only a certain amount of space for my article and when I exceed it, the editor removes the jokes, as happened last week.
I feel there is so much to write about that I am going to concentrate on the important events taking place. The jokes have been transferred to the daily newsletter, which now runs to five pages and covers the 50 top shares in the Philippine market, the United States, Europe and Japan. Not suitable for investors looking for tips but a must for investment funds, banks, insurance companies, schools or universities with financial courses and anyone with a portfolio of P2 million or more. Financial advice is provided free.
After a hectic week, during which we saw record volatility, the modified $700-billion rescue package was passed by a comfortable 263 to 171 with Barack Obama voting against it. Ahead of the vote, the Dow was up 313 points and the Nasdaq, up by two percent. After it was passed, the Dow closed 151 points lower, so it was buy on speculation, sell on confirmation. There were two reasons for the nearly 500-point intraday reversal. First, so much unnecessary and irrelevant modifications were added to placate the Republicans that investors began to wonder if these watered-down measures would solve the problem. They eventually decided it would not and sold. I believe they are right.
Secondly, the jobless figure was far worse than the most pessimistic forecasts. Economists were expecting a maximum of 105, 000 jobs lost. The actual figure was 159,000 (against 82,000 last month) and even this might be revised upwards. There can no longer be any doubt that the US is in a recession, one that will last well into next year. At present, the unemployment figure is 6.1 percent by the end of next year, but it is expected to rise possibly to 8 percent. I safely predict that the number of jobs lost this year will exceed one million, as the figure is already 760,000. All sectors participated in the decline, except healthcare and mining, which made minor contributions.
The credit markets remain frozen and nobody expects a miraculous turnaround in a few days. The measures to be put in place will take weeks to implement and by then, there will be an election and a probable change of government. If so, new people will take over and have to familiarize themselves with the problems, which will mean further delays. House prices will continue to drop, unemployment will decline at the current rate or higher, consumer spending will fall, companies will not invest, exports will decline if the dollar remains strong and as Warren Buffett said, “The economy has had a Pearl Harbor heart attack.”
It is not all bad news, however. The 35-percent decline in oil prices will reduce the import bill significantly and it will help to reduce inflation. Therefore, I expect the US Fed to cut rates by 50 points either now, to restore confidence, or later. Although the Dow, Nasdaq and S&P indices have dropped by up to 10.8 percent this week, the biggest decline in seven years, I still don’t think we have reached the bottom and I have not recommended any stocks for months. Most of my money is on deposit and I do not feel that Philippine banks are in any danger.
Americans are so scared that they are buying three-month Treasury bills yielding less than half of one percent. Even the two-year note yields just over two percent and the 10-year note, 3.6 percent, all below the current inflation rate. While the stock market plummeted, oil and commodities followed suit, with copper and nickel particularly depressed. This, in turn, causes falls in commodity stocks such as BHP and RTZ and also economies such as Australia, which is now cutting interest rates to stimulate the economy.
Wells Fargo, one of America’s oldest banks, made a share swap worth $7 per share for Wachovia but Citigroup had agreed to acquire Wachovia’s bank assets and has lodged an appeal to the courts. The Fed is also reviewing the deal. The malaise has spread to Europe with the situation in the UK, Ireland, Spain and Germany all looking grim. Last week, the British government had to nationalize Bradford and Bingley, the second largest mortgage lender in the UK. On the same day, a joint rescue bid for Fortis costing $16.4 billion had to be made by Holland, Belgium and Luxembourg with BNP Paribas acquiring 66 percent. Germany spent $68 billion to bail out Hypo Real Estate Holdings, the No. 2 commercial property lender. It was considered too big to fail but they are not going to rescue the banks.
In the foreign exchange market, the euro is at a two-year low against the dollar and the pound is at a low against everything. Japan is no better off because it relies heavily on exports to cover its oil requirements and the slowdown in the US and Europe is causing real concern. Mitsubishi Financial and DBS led the way down for banks and Toyota, Honda and Mazda will suffer from a decline in demands for cars. GM and Ford will suffer the most and the future of GM is uncertain. Industrial production fell at the fastest pace in five years, the unemployment rate rose to a two-year high of 4.2 percent while household spending tumbled 4 percent. Japan has never really got out of a recession, which started in 1990.
China remains as our only hope and the government is doing its best to stimulate the economy by cutting the bank rate, reducing bank deposits, cutting trading fees by half and allowing knowledgeable shareholders to buy stocks a few days ahead of results. Why they are promoting short selling I do not understand. A growth rate of eight to nine percent is sustainable over a long period because there is so much infrastructure development to complete in a country so vast in size. It is necessary to electrify all the rural areas and connect them to a number of mini towns, population is one million. This is a huge project.
There is little to say about the local market, which is the second best performer in Asia but this may not last. Exports are expected to fall, the trade deficit has more than tripled, the government has reduced its growth target for the fourth time this year and the nation continues to borrow money at an alarming rate. Foreign brokers again turned large sellers on Friday to the tune of P740 million and this contributed to the weakness of the peso. I expect the Philippine Stock Exchange index to go lower and continue to tell investors to stay out of the market.
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My temporary email is ronald.eric@yahoo.com.
