After a bad trading close of 7,479.03 on July 28, the market bounced back and left a blazing trail that culminated in a closing high of 7,662.55 on August 8.
The market’s climb was a remarkable comeback in what might be a potential rebuke to the old views about what the Ghost Month, which officially started on August 14, could bring.
Alas, the confidence was short-lived. What followed a six-day run was a fall that has yet to see its end. As of last Friday, the market was down to 7,408.44, some 70.59 points or 0.94 percent below the July 5 close and only 85 points or 1.16 percent away from the year’s lowest close of 7,323.44.
All counters, with the exception of the mining and oil sector, were down for the week as follows: Financials, down 75.61 points or 1.75 percent; industrials, down 162.91 points or 1.43 percent; holding firms, down 52.70 points or 0.77 percent; property, down 140.30 points or 4.42 percent; service, down 74.84 points or 3.57 percent. The mining and oil sector, on the other hand, was up with 29.80 points or 0.25 percent.
In turn, the 30-stock component benchmark Philippine Stock Exchange index (PSEi) suffered a weekly loss of 124.08 points or 1.65 percent. The All Shares index also had a weekly loss of 75.61 points or 1.75 percent.
Statistical records offer two apparent reasons that contributed to the market’s fall. One is that as foreign investors’ trading activities accounted for an average of 51.72 of total market transactions, they were net sellers for the week by a wide margin.
Two, average number of trades for the week increased while total market capitalization continued to decrease. This indicates smaller investors—who are the so-called weaker hands in the market—must be buying.
Under this condition, the market could be in the so-called distribution. This means that high net worth individuals and institutional investors, or the so-called stronger hands in the market, are selling.
When this happens, the market—almost always—drops. One particular exception is when a strong bull run is in progress.
Update on the Greek bailout
The current crisis traces its roots to 2009 when the Greek government admitted its budget deficit was already more than the EU’s (European Union) limit of 3 percent of the gross domestic product (GDP). At the time, it was actually equivalent to 12.9 percent of the GDP.
The crisis took a more serious turn in 2010 when “after announcing an austerity package that would lower its budget deficit to 3 percent of GDP in two years,” the Greek government sounded warning bells of defaulting four months later.
The European Union (EU) and the International Monetary Fund “extended 240 billion euros in emergency funds.” However, the funds “only gave Greece enough money to pay interest on its existing debt and keep banks capitalized and barely running.” In addition, because of the required austerity measures, it “further slowed down the (Greek) economy, reducing the tax revenues needed to repay the debt.”
In 2011, the European Financial Stability Facility (EFSF), another lending facility funded by EU countries, added 190 billion euros to the bailout. This caused Greece’s debt-to-GDP ratio to rise in 2012 to 175 percent or “nearly three times EU’s limit of 60 percent.”
By then, unemployment rose to 25 percent and riots erupted in the streets. For their anti-austerity program, Alexis Tsipras and his Zyriza party got a resounding mandate to run the government in the last legislative elections in January.
Now largely vilified for abandoning the election promise and with prospects of a political revolt that may possibly challenge his position, Tsipras rather did a good job in carving an otherwise fine new “Euro zone funding of up to 86 billion euros (described by opposition as beset with ‘stiff conditions’) to save his country’s economy from certain collapse.”
With the new bailout package to drive up the debt-to-GDP ratio to 200 percent from the present 175 percent and “pile more debt onto the shoulders of an already over-indebted nation,” accordingly, the latest package according to William Cline of the Peterson Institute for International Economics “will, in reality, reduce Greece’s medium- and long-term debt burden.”
As carved out, the new package will be used to repay half of Greece’s existing debt. It will repay 35.9 billion euros in debt to the IMF and other parties, the rates of which are costing Greece 3.7 percent as compared to the 1.65 percent of the new loan.
This will amount to a debt relief, rather than an increase in Greece’s burden, Cline said.
Also, another 25 billion euros will be used to recapitalize the four major banks “which hold 90 percent of the country’s banking assets.” This will increase government ownership interest in them to “about 90 percent from the current 40 percent.” Cline estimated this move could rake in some profits for the government later in the privatization of these banks.
In summary, the discounts Greece will receive on both existing debt and the new package will render its interest payments to average 3.7 percent of GDP until 2020 (3.4 percent to Italy) and 4.3 percent until 2024 (equal to what Portugal pays to service its debt).
Bottom line spin
The devaluation of the Chinese yuan, actually, has a more direct impact on the Philippines. However, the Greek bailout package has some significant impact on other markets that, in the end, may also affect the Philippines.
Following developments this weekend, it is possible that the market’s current sell-off may stop and that the stronger hands may start buying back. When this happens, the year’s high in the 7,700-mark might be challenged.
But this may not happen—yet. Intermittent profit-taking, even on small margins to play safe, might continue to prevail as a strategy in the meantime. This may prevent the awaited market run-up from happening this week.
The writer is a licensed stockbroker of Eagle Equities, Inc.. You may reach the Market Rider at marketrider@inquirer.com.ph , densomera@msn.com or at www.kapitaltek.com