Stock Market and the Economy, Is There A Connection?

Is there a connection between the nation’s economy and the stock market?

Frida Len Palermo got us thinking with her article:

The Real Score Between Stock Market and A Nation’s Economy

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Making Sense on Inflation Rates

Inflation rate is the annual or year-on-year rate change of the Consumer Price Index (CPI). CPI is a measure of change of the prices of a basket of goods and services commonly purchased by households in a particular area. The beginning prices are based on 1988 prices. Each region has different number of items included in the basket.

CPI1

The items are classified in six major groups and assigned with “weights.” The weight is determined on the percentage of total expenditure that is spent to a specific major group. The statistics were derived from the results of the 1988 Family Income and Expenditures Survey (FIES).

CPI2

Based on the table above, we can deduce that 58% of total expenditures spent go to food, beverage, and tobacco for the whole Philippines.

In order to determine the price level of specific items, sample outlets are selected to get the price quotes. There are about 9,000 outlets selected nationwide based on the following criteria:

  1. Popularity of the establishment along the line of goods to be priced
  2. Permanency of outlet
  3. Consistency or completeness of stock
  4. Accessibility of outlet

The outlets selected are permanent source of price data unless:

  1. Closing of business
  2. Disappearance of item from the stock for more than three consecutive months or permanently

It is replaced with the nearest retail outlet that is within the vicinity of the replaced outlet. The choice of which outlet to choose is left to the discretion of the price canvasser using the criteria for regular outlet selection.

Knowledge of the composition of the CPI will give us more insights about the inflation rate. By simply analyzing which of the six major item groups is likely to go up, we may be able to anticipate the inflation rate and the monetary policies. Being aware of the food prices which account for more than 50% of the CPI will ideally allow us to anticipate whether the inflation rate will go up or down before official data can be released and whether or not the BSP will modify current monetary policies.

 

Macroeconomic basics here:

https://fundamentalenthusiast.wordpress.com/2012/08/08/macroeconomics-basics/

Unemployment, Energy Sector, Ethanol Plant, Stock Thoughts: MER

Unemployment

Social Weather Stations (SWS) estimates unemployment rate at 24.6% .

I don’t get it. If that would be the unemployment rate then should we be at a recession?

National Statistical Coordination Board (NSCB) estimates unemployment rate this January at 7.2%.

http://www.nscb.gov.ph/secstat/d_labor.asp

I prefer to rely on NSCB data.

I am open for any alternative thoughts.

 

Energy Sector

Few take the energy security seriously. In the coming years, assuming the Philippine economy continues to grow; there will be an electricity shortage.

 

How will an individual investor play this opportunity? Invest long-term on stocks that are into electricity trading and electricity generation.

My opinion only.

Ethanol Plant

Gokongwei plans more power and ethanol projects in Negros:

http://business.inquirer.net/108007/gokongwei-plans-more-power-ethanol-projects-in-negros

Gokongwei is planning to do what ROX is already doing. Lol

More on ROX:

https://fundamentalenthusiast.wordpress.com/2013/02/03/roxas-holdings-inc-pse-rox/

MER

MER is seeking for more power?

http://business.inquirer.net/108021/meralco-turns-to-psalm-for-additional-power

Increase in electricity volume sold by MER means an increase in the revenue of MER.

More on MER:

https://fundamentalenthusiast.wordpress.com/2012/11/10/manila-electric-company-pse-mer/

Exploring the National Statistical Coordination Board Website

The primary source of Philippine GDP figures is the National Statistical Coordination Board website. Assuming you are to obtain the figures that composes the Industry sector, follow these steps:

1. Go to: http://www.nscb.gov.ph/stattables/

2. Click GDP, GNI

NSCB1

 

 

 

3. Click the title

NSCB2

 

 

4. Click “Industry”

NSCB3

 

To determine the figures that composes the GDP by industry click “by Industrial Origin”

To determine the figures that composes AHFF sector click “Agricultural, Hunting, Forestry & Fishing”

To determine the figures that composes Services sector click “Services”

My Common Sense Approach in Interpreting the GDP

Philippine GDP has three major sectors:

  1. Agriculture, Hunting, Forestry, and Fishing (AHFF)
  2. Industry
  3. Services

AHFF has the following subsectors:

1. AGRICULTURE, HUNTING and FORESTRY
a. AGRICULTURE
Palay
Corn
Coconut including copra
Sugarcane
Banana
Mango
Pineapple
Coffee
Cassava
Rubber
Other crops
Livestock
Poultry
Agricultural activities &  services
b. FORESTRY

2. FISHING

Industry has the following subsectors:

INDUSTRY SECTOR
a. Mining & Quarrying
b. Manufacturing
c. Construction
d. Electricity,Gas and Water Supply

Services has the following subsectors:

SERVICE SECTOR
a. Transportation, Storage and Communication
b. Trade and Repair of Motor Vehicles, Motorcycles, Personal and Household Goods
c. Financial Intermediation
d. Real Estate, Renting & Business Activity
e. Public Administration & Defense; Compulsory Social Security
f. Other Services

After learning what composes the Philippine GDP, analysis of the Philippine economy will be simple and asking the right question will be the key to derive useful insights from the data.

Below is the Philippine GDP pie chart:

IG1

The Philippine economy depends on the service sector? What supports this sector? Remittances from abroad

Below is the pie chart for AFFH Sector:

IG2

AHFF sector has the smallest share in the Philippine GDP, how can the government improve AHFF share? Investment in rice production

Below is the pie chart for Industry Sector:

IG3

The second driver for growth in the Industry sector is construction, what is the future of the construction subsector in the Philippine economy? Private-Public-Partnerships

Below is the pie chart for Services Sector:

IG4

Trade subsector is the largest contributor to the Services sector, what does this imply? Strong domestic consumption

 

What conclusion can you derive from all the data above?

The strong economic performance of the Philippines was attributable to the Country’s Service and Industry Sector. The share of the Service Sector in the GDP stands at more than 50% which means that an economic development that will cause the sector to grow can boost the Philippine economy. However, it would also mean that an unfavorable economic development that can contract the industry can drag the Philippine economy down. Diversification of GDP growth source to other sector such as the Agricultural sector is important. Also, good governance should be continued beyond the current administration to maintain or further improve the attractiveness of the Philippines for investments both local and foreign.

 

Source: http://www.nscb.gov.ph/stattables/

Deficit, Hard Landing in China, Benjamin Graham, Stock Thoughts: Stocks too high?

Deficit

Deficit at 2-2.3% of GDP:

http://www.bworldonline.com/content.php?section=TopStory&title=Deficit-at-2-2.3%-Of-GDP&id=65379

What does that mean? It means the government has more fiscal policy up his sleeve to push our country’s GDP higher.

 

Hard Landing in China

What is about China’s hard landing? Why is everybody worried about that?

China’s GDP growth is fuelled by heavy investments by its government and therefore not sustainable. When it stops, aggregate demand will fall and China’s GDP growth will plunge, a hard landing.

What industries will be much affected?

Companies deriving their revenues through sale of produce to China.

Can you think of a company?

 

Learn the basics of Macroeconomics here:

https://fundamentalenthusiast.wordpress.com/2012/08/08/macroeconomics-basics/

 

Benjamin Graham

I am hungry on anything Benjamin Graham and this video of WEB talking about him is a 5.46-minute well spent:

http://www.youtube.com/watch?v=HCZMs01W0KM

 

Stocks too high?

My boss and I were invited for talk about stocks in front of an MBA class. They threw a lot of good questions and one is:

Is the stock market already too high for us to enter?

The answer is simple:

Know the business that you are buying. Understand how it generates revenue and determine if it can still exhibit favorable growth in the future. Everybody has an edge or competitive advantage.

Open your eyes and be aware of what you already know, what you are capable of learning more, and who your connections are. That is your competitive advantage.

A Simple Illustration of Global Macroeconomics

What happens when Philippines sells a COMMODITY to US?

A trade between countries whether goods or services constitute what economists call a current account.  The transaction above generates a positive current account balance as the Philippines receives a dollar while a negative current account balance as the US pays a dollar.

The same effect will be in the US should the process be reversed.

What happens when Philippines sells an ASSET to US?

An investment in the Philippine economy by another country forms part to what economists call capital account. The transaction above generates a positive capital account balance as the Philippines receives a dollar while a negative current account balance as the US invests a dollar in the Philippine economy.

The same effect will be in the US should the process be reversed.

Sum CURRENT ACCOUNT and CAPITAL ACCOUNT then you will have what economists call BALANCE OF PAYMENTS.

What will happen if US will always import more than it exports? Assuming that US has no capability to print money, what do you think will happen to the US economy? It will run out of cash!

The situation I cited above would be a nightmare for any country but this is exactly what is happening in Greece. Greece’s current account [1] was consistently at negative territory. Also worth noting is its budget deficit (government spending exceeds government revenue) and declining GDP.

Euro is a currency used by 22 countries: Andorra, Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Kosovo, Luxembourg, Malta, Monaco, Montenegro, the Netherlands, Portugal, San Marino, Slovakia, Slovenia and Spain and the Vatican.

As a member of the Euro, only the ECB has the sole authority to set monetary policies and print money. The only option that a country has if they ran out of money is to borrow money or what we often see as government bond issuance. However, in the case of Greece, few investors are willing to lend them money as evidenced by their high interest rates.

Notes:
1.   Capital account was not given much importance since it is not a clear indicator as current account. A surplus or positive capital account means that money is flowing into the country which could also mean that the country is borrowing or selling assets. The same as in negative capital account which might mean that money is flowing out of the country or increase ownership on foreign assets.
2.   http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf
3.   Long-term interest rates, http://www.ecb.int/stats/money/long/html/index.en.html#fn3