IF you were in hibernation since early 2009 and just woke up, you might be pleasantly surprised.
Crude oil prices have not changed much since you dozed off. The US unemployment rate is below what it was when you crawled into your bed. The US dollar is stronger today than in 2009.
Most of the major global economies are actually doing better today than when you started sleeping, and global stock markets have gone through the roof.
If so, then why do we see so many worried faces, and hear so much gloom and doom talk? That’s because stock prices are supposedly too high.
It does not matter if a person puts all his or her money into $25,000 ice- cream sundaes at a New York City restaurant, P20 Philippine lotto tickets, or the stock markets. It does not matter if millions of Chinese lose their life savings, and much more are buying into a government-sanctioned and funded stock-market rally.
The problem is not the price of the stock markets, or even that governments are doing all they can to manipulate the markets for political gain, as in China and the West. The problem is that people have very short memories and quickly become accustomed to current developments. Thus, they base their actions on the “new normal.”
Some of us are old enough to remember the time when we could smoke cigarettes on an airplane. The prohibition against smoking on commercial airplanes is a relatively new “normal.”
The US ban on smoking began with domestic flights of two hours or less in April 1988. It was only in 2000 that US Federal law banned smoking on all carriers, and other countries passed similar laws on planes flying through their airspace. I had been flying for 45 years before the smoking ban took place.
But for people who are currently around 30 years old, the smoking ban seems normal to them. They may even assume that it has been in place since the invention of airplanes.
It is the same way with the stock markets. Most of the experts, like many investors, did not experience the 1989, 1997, or 2000 Philippine stock-market crashes, or even the 50-percent drop in 2008. They have no idea how to operate in an environment where global and local stock prices move independent of government intervention
and manipulation.
The “old normal” was that money flows in and out of the various stock markets, and did bear some relation to each other. But that depended on stock prices being free moving and determined by real investors using their own real money.
We are in a period of global financial market chaos. Looking back at history, every period of economic chaos eventually ended and the rebuilding process started once more. The “bubble-maniacs” are worried about a return to the “old normal” and stock price “bubbles” bursting. But before that will be extreme volatility, and almost all investors are unprepared for this.
We talk about the millions of new Chinese investors who bought at the top. Yet, there are millions more who did not buy at the top and did not know how to handle the recent wild stock- market gyrations. From Reuters: “Investors who bought before mid-March are still in the black thanks to previous gains.”
One longtime investor, Mrs. Xu, said she has been holding shares in China Life since 2007 when it traded for around 75 yuan per share. The stock gained a bit during the recent rally, at one point crossing over 42 yuan per share, but then fell back to around 28, and Xu is still holding on. She plans to sell as soon as they break even.
Many issues on the Philippine exchange have price fluctuations of 20 percent and much more, up or down in one day. Most investors are not involved. But are you ready for 10 percent or greater moves in blue chip issues that are household names?
That type of volatility will come long before the markets return to normal levels. While the local market is not manipulated, it will be subject to the same reset process.
The largest one-day movement in recent memory on the Philippine Stock Exchange Composite Index came in 2010 with a 6.75-percent fall. The biggest gain was over 5 percent. Philippine Long Distance Telephone Co. dropped 8 percent also in 2010. Are you prepared for moves of double that figure? That is the kind of volatility we will see before we return to the “old normal.”
****
E-mail me at [email protected] Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
