Thoughts for the Weekend: What's in store for 2008

There has been much trepidation lately among US investors, particularly those investing in the US stock market. This uneasiness also spread to the local market. If you are one of those who actively trade the local stock market, you will realize that there are more people looking to sell than to buy.

The problem lies in two things - the fear of a US recession, and the so called credit crunch. Those fears have resulted to the volatility of stock market indexes worldwide, not just in the US and in local shores. Will these problems stay within the stock market or will this affect you and me?

The answer sadly, is a yes. My perspective is that which is based on logic and all sense of practicality. It's not based on economic figures nor analysts' reports.

Try looking at the news, particularly business news. During the first half of the year, everybody was trumpeting their cheer for the Philippine Stock Index this year. 4000 by December. Left and right, all you could read in the papers were signs of jubilation, and giddy anticipation of what will not happen anymore. Have you seen any analysts saying that by December 29, our index will be 4000, or maybe 3800?

You don't see anyone saying that anymore. When someone is bearish about something, they either make no comments about it, or just try to look through things like a glass half full. "We will track the US Markets", or "It will depend on economic reports", blah blah.

So tell me, have you seen any bullish reports on the stock market lately? People say life imitates art, for me, news is the reflection of life.

Let's shift our focus now to the bigger picture - the economy. If you watch US business news, most of the messages being bandied on the TV is the "risks of going into a recession". I've heard some analysts saying that there is a 1/3 chance of the US going into one. What if the US IS already in one?

Like I mentioned in my other blog, a friend of mine who works for a call center has had some difficulty closing sales from the US. Belt tightening? That's my guess.

What happens when the US goes into a recession? There is a saying that when the US sneezes, the whole world catches a cold.

When the US is in a recession, the dollar falls, the prices of precious metals and commodities - gold and oil - rise. People who have their assets in dollars will likely switch to these two commodities. The recent correction in oil prices is temporary. Remember, the demand for oil is greater than the supply. And basic economics tell us that when demand is greater than supply, prices will likely increase.

The falling dollar my dear friends, is the main reason why our peso is appreciating. Without going into the details of how our economy has "been growing" or its figures thereof, let's see. A government is like a company. It needs revenues to sustain its operation. Our tax take has not been increasing, in fact, it is short of the government's target.

The main reason why foreign investors were coming back to invest in the local stock market was that we were seen to balance our deficit by next year. We're close to achieving that, not by revenue takes, but through asset sales - Transco, Power Plants, Meralco Stake, PNOC EDC. (There is also THAT problem with the power sector, but we're not discussing that). What will happen when the government is finished with selling all of the remaining assets? No more budget deficit, no more assets, and still no tax revenues! This is why your government is fond of taxing everything that they catch their fancy on.

Another reason why our economy is booming is because of the call center business that was flourishing in the country. However, let's look at the stock price of one listed company, PAXYS (PAX), which is a call center operation. It has sunk from the Php 30.00++ highs to its current price of Php 5.90. It's lost almost 80% of its value in less than a year.

Folks, the stock market is considered the barometer of the economy. If we are to use PAX as that for the call center industry. Do you still think it is a sunshine industry?

Most call centers are from the US. This means that when they come to our shores, they invest in dollars. However compare this. Last year, for every dollar of investment, they could get 55 pesos for it. Now, the've lost 13 pesos in less than a year. This makes their investments in call center infrastructure - the biggest capital investment to put up one, a whole lot more expensive. Do you think call centers won't blink first before thinking of investing here?

Like the great analysts who said that we'll hit 4000 for the stock market this year, many of them also said that the peso would strengthen to 45. However, reality check please, Php 41.21 as of today. There are already people saying that next year, we could hit Php 38.00.

When I looked at the peso dollar chart two months ago, I had a gut feeling we'd fall to 40 this year. The chart is like an arc going from Php 28 to our high Php 55s, and now going back down. Php 38 next year? I think not. I think we'd hit 30-35. This is IF the US proceeds to a prolonged recession.

So tell me Mr. Guerilla Investor, what's this got to do with me?

A lot.

Our domestic consumer economy is 60% - 75% dependent on OFW remittances. Everything from clothing, to education, to utility bills, to groceries and to impulse spending, all these money come from money being sent here. People who got used to getting 55 per greenback have to contend with 13 pesos less. And by next year, it will balloon to almost 20 pesos less per buck.

Knowing the local culture of spending, there will be few belt tightening, however, there would also be fewer items bought from the retail stores, and this isn't by choice. This is due to fewer pesos being exchanged per dollar. This will ultimately mean lower corporate earnings for companies because of sagging sales. If companies want to curtail costs and still retain their previous years' earnings, they will do what? Cut costs! And the biggest overhead is? People! Jobs will be cut amigos.

Another fallout of the peso appreciation? The booming real estate sector. Remember the Peso and Dollar exchange rate? OFWs who have begun paying amortizations will still have to pay them, therefore, they'll advise their families here to cut back on their senseless spending. Those who intended to buy properties will likely postpone or hold off their purchases. However, realty companies who have already started their projects can't just stop midway. They have to finis them. Thus, there will be a supply glut in the market which will lead to price depression.

Everything is interconnected. This is why there is a phenomenon called the domino effect.

So the next time you spend your hard earned peso this month, think of the bleak year ahead of you, and maybe, just maybe, you'll hold off that purchase of a brand new mobile phone, or shirt, or shoes, or pants, or any want that you try to fool yourself into thinking it's a need.

The economics of things is not in the numbers or the reports. It's in the things that you see everywhere around you. And sometimes, you don't have to be an expert to see the clues that are in front of you. You just have to notice them.