Stock Market 005: Harsh PSE realities

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The belief that all stock markets are created equal is a great misconception about the Philippine Stock Exchange (PSE). An example of this distortion is the use of the term “bourse” to describe the PSE. That word is applicable only to non-English speaking stock markets. But a bourse is a bourse…or something like that.

It is the same idea that compares the Philippines to Thailand, conveniently ignoring the 7,000 islands thing and being in the middle of the ocean. Apparently, those two factors do not have much effect on the Philippine economy and development.

But the PSE is the oldest stock exchange in Asia. The problem is that not much has changed in the structure of the local “bourse” since then.

Ignore for a moment the trading practices found in most markets like universal short-selling, margin trading, and official “Stop Orders.” That will not mean anything to you personally unless you have actually invested and traded in markets with those practices. However, the PSE is actually three stock markets.

To be listed on the New York Stock Exchange (NYSE), for example, you must qualify with a minimum: $100-million market value, $50-million stockholders equity and $2-million pre-tax income in the two preceding years. Almost any company can list on the Nasdaq exchange as long as the chairman’s family name is not “Ponzi” and the registered office is not a Post Office Box in a jungle. Note that Tesla and Facebook are listed on the Nasdaq. Microsoft and Amazon are also there because they previously could not qualify for a NYSE initial public offering.

There are requirements for PSE listing but investors ignore differences for the “Main Board” and the “Small, Medium and Emerging [SME] board.” But, in reality, there are three “PSEs.”

The 30 issues that make up the PSE Composite Index, while not necessarily the 30 largest by market value, are the “blue chip” stocks. Note, though, that most of these companies went public, not out of love for the stock market, but because they have substantial foreign investors and foreign lenders that want the legal transparency that listed companies provide.

There are “second line” issues sort of like the economic “middle class.” However, just like in real life, there is “upper-middle class”; and “lower middle class” based on size, profitability and, maybe most important, stock market trading activity. Finally, there is the group variously known as “basura stocks,” “Rocket-chips” and “third-liners.”

The importance for you as an investor is that each of the “three PSEs” requires different strategies if you are going to make money. Each also requires a different investor psychology and amount of work and monitoring. That three-day seminar where you learned all those financial evaluation methods will not apply to figuring out which company will be “the third telco.” I could tell you which one will be, but that would spoil all the fun.

The influence that local stockbrokers play in our market is unique also. This must be the only exchange in the world where certain brokers are known to traders as “Tatay,” “Jap,” and the famous “Black Samurai.” If they buy or sell a particular issue, you must do the same. At least that is how the conventional wisdom goes.

Back in the day, before computers and the Internet, even the huge NYSE broker—Merrill Lynch, with its 30,000 stockbrokers—never had the power to move prices the way some of our local brokers have. But always remember this harsh stock market reality: When your stockbroker makes money, it does not mean you are going to do the same.

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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.

 

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John Mangun

E-mail me at [email protected] Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
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