Re: Pricing

In the cold eyes of financial analysts, what appears as a meltdown in the markets is really a process of “re-pricing” stocks.

What this means is that most investors — hedge funds or individual punters — anticipate a slowdown in global economic activity. That translates into less business and less profit. In turn, that means stocks are priced lower.

Two weeks ago, a massive sell-down of stocks happened across the globe. Just as quickly as they fell, the markets bounced back. For a while, it seemed the markets were consolidating. Then, over the past few days, the markets fell again.

It looks like investors are grasping at straws — or chasing after phantoms. Nobody is quite sure about where the global economy is going, although the economic fundamentals indicate that while a slowdown is likely, a slide back into recession is avoidable.

Old hands in stock trading say the global markets have never been as volatile as they have been the past few weeks. The markets either crashed or staged strong recoveries, but not gyrate as they have been doing.

If the markets are uncertain and stock values constantly fluctuate, businesses will generally avoid making long-term investment plans. Doing so requires a stable price environment and a certain degree of certainty about how things will go. That certainly does not pertain today.

The most proximate cause for this week’s market panic was the outcome of the summit meeting between French President Nicolas Sarkozy and German Premier Angela Merckel. The two leaders of Europe’s largest economies met to agree on a Eurobond float that might help stabilize the continent’s financial institutions in the face of grave fiscal problems plaguing some of its members.

The market interpreted the outcome of that meeting as a disappointment. Investors expected more decisive action and felt that European governments were running out of policy tools to deal with the worsening debt crisis. A massive sell-down of European stocks happened.

Soon after, investment bank Morgan Stanley released a report forecasting slower global growth bordering on recession. The release of that report coincided with a US employment report indicating worsening unemployment along with other numbers indicating a slower housing market and weak consumer sentiment.

The bloodbath in the stock markets worsened. Currency exchanges became more volatile. Investors cashed in their stocks and sought sanctuary.

The closest available shelter was gold.

A few months ago, when gold broke the $1,000 per ounce mark, everybody thought this had to be an abnormal price that should soon correct downwards. Yesterday, gold was trading at $1,822 per ounce while the prices of other commodities (including oil) were trending downwards. Analysts have pronounced gold to be the new virtual global currency.

The price gold commands should benefit producers of the precious metals like the Philippines. Unfortunately, an unstable policy environment prevented the investments needed to produce the metal efficiently and at more economic scales. There are opportunity costs that accrue to us because we are not able to exploit the current spike in gold prices to the hilt.

This might be a good moment for the BSP to unload some of the gold reserves we hold — if only to cover the costs incurred keeping our currency exchange stable.

Ironically, the downgrade notwithstanding, interest rates for US bonds plunged to record lows this week. While the US public debt might seem impossible to manage, investors still consider US treasuries the safest investor sanctuary given the prevailing environment.

The situation in the markets is such that the horizon for strategizing has severely shortened. Individual investors and governments alike are forced to react to a rapidly changing situation on a day-to-day basis.

From the events of the past two weeks, it has become impossible to predict the medium-term prospects. It is not healthy for the economy if people simply hold on to their cash and refuse to invest. That is exactly what millions across the globe are doing at this time. –Alex Magno (The Philippine Star)