Have we hit bottom yet?

Watching business news anchors night after night reminds me of a long road trip I took with my sister’s family in the early 70s through Virginia – down to Williamsburg and Newport News— and up the coast to Delaware and back to Washington DC. My niece and nephew were about five or six years old then and it was quite a task trying to keep them still hour after hour while strapped to their seats. My sister made them count the cows they see, do some basic addition and subtraction and even some spelling. But every 10 minutes or so, the question comes up: are we there yet?

Funny but the news anchors are sounding just like impatient kids on a long road trip as they ask every other guest the basic question: have we hit bottom yet? I don’t blame them. That is the basic question we all have in our minds. Given our instant gratification mindset, the impatience is understandable.

But no one is brave enough to say what everyone wants to hear because in truth, no one really knows for sure if we have hit bottom yet. So the question is asked any number of ways. One favorite of the anchors every time there is a sharp fall in the Dow Jones is whether there’s capitulation yet.

Capitulation is a military term that means giving up… surrendering. In the stock market, capitulation is associated with “giving up” any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.

According to Investopedia, after capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom.

For us here in the Philippines, we watch what’s happening in the foreign markets specially in the Dow because our own market is greatly influenced by what happens there the night before. Our local market is rather small so that it really moves only when the foreign equity funds are investing. Our market ends up flat or declines worrisomely when these foreign funds leave in droves.

Yet, that doesn’t mean we don’t have good companies that are worth investing in. It only means the foreign funds are liquidating their positions out of fear of global developments. For a while there was talk of decoupling, meaning emerging markets are somehow insulated from the problems of the industrialized countries. But as it turned out, globalization is a stronger force than many of us thought. We are all in the same leaky boat.

I caught an interview of a major fund manager on Bloomberg last week and he is saying the emerging markets deserve a serious second look. Mark Mobius, chairman of Templeton Asset Management who helps oversee about $20 billion of emerging-market assets, sees bull markets breaking out for emerging market stocks around the world.

Mobius told Bloomberg TV that he found fantastic bargains in emerging markets. In fact, he said, a serious investor must move quickly to avoid missing those bargains. He explained that it is easy to hold back because of all the negative news but he is moving ahead himself.

How to choose the good ones in this kind of market? Mobius likes companies with big cash holdings. “Cash is king,” he says. “We want to make sure companies have enough cash to hold them over in any eventuality. We like low debt too.” Mobius is also looking for companies with high dividend yields, or those that can invest for future growth yet have cash left to pay shareholders.

“You are going to see a lot of bouncing off the bottom because there’s a tremendous amount of uncertainty in the market,” Mobius said. “But I have a feeling we’re at the bottom and now we’re building a base for the next bull market.”

But there are also analysts who think recent Asian stock gains are a temporary “bear-market rally” because valuations have yet to plumb the lows seen in past recessions. A portfolio manager of Fidelity Investments, the world’s biggest mutual fund company, said in a briefing in Seoul, “No one can call the bottom in the stock market.”

So, are we there yet? No one knows for sure. But that’s not the question to ask for investors like Mobius. He is saying we still need to be cautious but we also have to be alert to opportunities. There are terrific companies out there with or without a recession and their stock prices are at a bargain too. The trick is in finding out who these companies are.

Corruption watch

Two flagship projects of Ate Glue are in the “are we there yet” category: NorthRail and SLEX modernization. Both have taken too long and both are under suspicion for corruption.

NEDA is reported to be in the process of approving an additional funding for the NorthRail to the tune of $300 million. The 32.2-km long North Rail Project originally costs $503 million, which translates to an average cost of nearly $16 million or P900 million per kilometer, a staggering sum that indicates a possible overprice. That makes the additional costs being sought simply outrageous.

Northrail president Edgardo Pamintuan said the contractor, the China National Machinery and Equipment Corp. Group (CNMEG), has put on hold the resumption of the construction pending approval of the increase. Pamintuan told Manila Standard Today the fresh funding will cover inflationary costs, foreign exchange differences, and variations in the original scope of work.

Even as Pamintuan claims his group studied the costs submitted by the Chinese contractor, doubts are being expressed on the accuracy of the figures. How come the costs are still sky high when the cost of steel and other construction materials have gone down drastically in recent months? As for the forex costs, the peso had only been weak over the past year.

NEDA Chief Ralph Recto should provide greater transparency on how the numbers were derived unless he wants to retire from politics. A repeat of NEDA’s failure to stop an obvious scandal (as in the ZTE broadband scandal under Romy Neri) will kill Recto’s political aspirations. The NEDA board was supposed to approve it in a meeting yesterday and suspicions are rife that there is another attempt of the Arroyo administration to railroad the railroad project while it still can.

On the SLEX, the long suffering motorists using this vital artery will just have to suffer a lot longer. I heard over the grapevine that the Malaysians who were awarded the modernization project are still in a long drawn out process of negotiations with PNCC over the costs of a portion of the project which was advanced by the government agency.

The money involved is supposedly not that large but neither is the work that PNCC did. From what I heard, people supposedly in representation of PNCC were trying to get an obviously overpriced reimbursement from the Malaysians. The Malaysians of course refused, the negotiations continued in Kuala Lumpur and a compromise amount that’s still overpriced, was supposedly agreed upon. But the Malaysians asked for a receipt which brought them back to an impasse.

Actually, the Malaysians don’t need the PNCC anymore after PNCC failed to get a renewal of its franchise from Congress. The Malaysians have their own STOA which is enough legal cover for the massive investments they are putting on SLEX. Then again, perhaps there are those in PNCC who profit from delaying the completion of the modernization project because that would put the Malaysians in control over everything including the toll collections.

If the NLEX is any indication, once the private concessionaire takes over, the leakage in toll collection is plugged and the motorists get to enjoy value for money with plenty left over for the investors. Those who profit from toll collection leakage couldn’t care less if the motorists suffer from the present horrible conditions at SLEX.

Art Aguilar who heads PNCC should look into these reports and work to speed up the modernization of SLEX. I have met Mr. Aguilar a few times and he strikes me as a pretty decent person. He should clear up the mess not with the usual press release denying everything but with positive results the motorists can feel.

Words of Wisdom

 From Lal Chatlani.

Never test the depth of the water with both feet.

Boo Chanco’s e-mail address [email protected]