The Low Correlation Between the Stock Market And Economic Growth

Analyst John Mauldin cites Crestmont Research’s Ed Easterling who argues “stock market is not correlated with economic growth”.

They say “secular bear markets even have higher nominal GDP growth than secular bulls”, with the chart below as proof…

And also say “34% of the years since 1950 with economic growth have experienced declining earnings per share (EPS) growth!” Again a series of chart below as proof…

I am puzzled.

If “low correlation” means economic growth has not functioned as a good indicator of the direction of the stockmarket price trends, then why the heck, do these experts keep talking about various aspects of “economic growth” at all? This is obviously a cognitive dissonance.

One factor for the insistence of the “economic growth” conversation could be that they don’t agree with the referenced opinion.

A second factor could be entertainment value. Experts write to entertain more than to disseminate positive knowledge.

A third factor could be to use of such contrarian evidence as cover to their earlier misdiagnosis of the markets and the attendant mistakes in prediction.

Finally this could all be about social signalling.

Yet this just goes to show how more and more ‘experts’ appear to be getting lost or confused about what’s been going on. In other words, traditional methodologies and metrics are becoming more dysfunctional.

And all this provides more credence to what I’ve been saying all along.

Situational Attribution Is All About Policy Induced Inflation

``Believe nothing just because a so-called wise person said it. Believe nothing just because a belief is generally held. Believe nothing just because it's said in ancient books. Believe nothing just because it's said to be of divine origin. Believe nothing just because someone else believes it."- Buddha, Unconscious Beliefs

If fundamental attribution bias is the “undervaluing or failing to acknowledge the potentiality of situational attributions”, then that means people overlook or substantially underprices situational developments.

For instance, some have suggested that stock market prices today as having been “overvalued”.

Well in my view, prices are relative:

1. in terms of direction: low prices can go lower and high prices can go higher,

2. valuations are always subjective and

3. prices can be seen as higher/lower in a relative sense when compared to the specifics. In the psychological context this is known as the contrast principle/effect or judgments based on relative comparisons or simply higher compared to what or whom?

Importantly, the issue of prices or valuations would greatly depend on the situational attribution or developments.

Situational Directions

So what has been the “situational” course of events?

It’s apparently not imputable to traditional or conventional specific metrics, because evidences haven’t been pointing to such direction, see Figure 2.

Figure 2: Stockcharts.com: Correlation: Phisix, Euro, Emerging Markets and Oil

The Euro which comprises 57.6% of the US dollar Index according to the ICE Futures, seems to be leading the way for Emerging Market Stocks (EEM), including the Philippine Phisix (PSEC) and commodities as represented by oil (WTIC).

The highs of the Euro (vertical blue lines) have been coincident with turning points of the specified markets above, but with a lag.

In short, over the interim the rising euro, or the inversely the falling US dollar index seems tantamount to higher financial asset prices.

As we have repeatedly argued, the global inflation dynamics are apparently being transmitted into equity, commodities and property markets (ex-developed economies) via the currency channel, as described in many past issues including the latest [see last week’s Warren Buffett’s Greenback Effect Weighs On Global Financial Markets].

Therefore, if markets haven’t been driven by conventional specific metrics, then why should we utilize conventional metrics as a gauge to determine our trade positions? That would be like using sonar to track airplane movements.

Inflation Dynamics In The Phisix And The World

The beauty of any theory would lie within its applicability or by the function of factual evidences… (see figure 3)

Figure 3: PSE Sectoral Indices: Rising Tide Lifts All Boat

The sectoral indices of the Philippine Stock Exchange (PSE) depicting synchronicity in motion.

Current market activities have strongly been demonstrative of the tidal ebbs and flows (or our Livermore-Machlup model see Are Stock Market Prices Driven By Earnings or Inflation? ) of the Philippine marketplace as we have long forecasted.

Our outstanding premise has been the lesser the efficient the markets the more prone to inflation driven dynamics.

Although domestic stock prices have risen in general, price levels have been nuanced, where some sectors have been outperforming the others [see Sectoral Performance In US, China And The Philippines].

The present pecking order of outperformance: Mining (green), Holding (red), the All Index (maroon), commercial (pink), property (blue), bank (black) and services (grey).

As you can see, the “rising tide lifts all boats” phenomena compounded by the relative price level actions have all been reinforcing the symptoms of an inflationary (liquidity) driven boom.

Such situational course of events hasn’t confined locally but to the world though.

As we pointed out in the latest Global Stock Market Performance Update: Despite China's Decline, Emerging Markets Dominate, 68 (83%) of the 82 issues monitored by Bespoke Invest (based on August 20^th) registered positive gains against 14 (17%) which accounted for losses.

Despite China’s Shanghai benchmark, which fumbled for the fourth consecutive week of losses (this week 3.38%) for an aggregate 4 week loss of 17.2%, China has been up 57% on year to date basis.

The Philippine Phisix as of Friday’s close seems to be closing the gap fast.

Nonetheless, the best performances have been among key emerging markets (many of which are situated from Asia), some having been beneficiaries of low systemic leverage and an unimpaired banking system, which has responded favorably to lower interest rates, while some have been reaping from rising commodity prices.

Although we expected some degree of differences relative to the US to emerge, this hasn’t been so yet.

The evolving activities in the US seem to reflect on more of the actions seen in most of the world.

According to Bespoke Invest, ``93% of stocks in the S&P 500 were trading above their 50-day moving averages. That number has come in slightly with today's declines, but it's still above 90%.” (emphasis added)

In short, macro thinkers, who fixate over the actions of the US, but negate the activities across the geographically diverse asset markets have been missing out on these developments.

The Validation Of Our Livermore-Machlup Model

More proof of more liquidity driven boom in the domestic market? (see Figure 4)

Figure 4: PSE: Daily Traded Issues (left) and Number of Daily Trades (right)

When the marketplace becomes reanimated, the speculative appetite expands.

This implies that transactions would cover issues that are less liquid (low market float), which can be found mostly among second or third tier securities.

As you can see in the left window, the daily traded issues have been broadening. This means that the advances in the Phisix are being seen in general terms, validating Jesse Livermore’s assertion.

Moreover, improving daily trades suggests of more people participating or engaging in churning activities.

Again another manifestation of a bullish breadth (right window).

It doesn’t stop here.

Figure 5: Advance Decline Spread: Broadening Gains

Another indicator would be the advance decline spread.

In the height of the selloff in 2008 (red ellipse), the advance decline spread has been obviously tilted towards huge broad based selloffs.

Today we see the opposite, since March of 2009, the internal activities in the Philippine Stock Exchange has largely been in favor of the advancing issues (light green ellipse).

To consider, local investors have usurped the role as the dominant pillar of the current state of the Phisix, a role which we presume should contribute to a sturdier trend and likewise could be deduced as having become less sensitive to the external developments, in contrast to the 2003-2007 cycle.

Added together, all these essentially have been validating our Livermore-Machlup inflation driven tidal dynamics thesis, where the collective inflationary policies by global governments will presumably take a major role in determining asset pricing conditions.

So stubbornly insisting on the idea of conventional metrics as a gauge of the market’s parameters will only lead to wide off the mark appraisals and severe underperformance.

The Economic Disconnect And Domestic Mainstream Policies

So does a 54% year to date surge in the Phisix translate to a V-shape recovery in the Philippine economy?

The Economist gives as an answer, (bold highlights mine)

``Although the return to robust quarter-on-quarter growth of 2.4%—the highest in over two years, following a first-quarter contraction of 2.1%—fits the international pattern, the economy has not contracted at all in year-on-year terms during the current global crisis. Growth of 0.6% in the first quarter appears to have marked the low point in the current cycle. Still, the recovery is far from entrenched. At just 1.5% year on year, real GDP growth in the three months to June was far below the 2004-08 quarterly average of 5.5%.

``In output terms, the service sector was the main driver of economic growth in the second quarter. Services output rose by 3.1% year on year, up from 2% in the previous quarter. Government services rose by 7.7% in real terms, reflecting stimulus spending. Trade rose by 3% on the back of strong growth in retail activity. In contrast, agricultural growth slowed sharply due to weak production of rice and some other crops. And industry contracted for the second straight quarter, falling 0.3%. Although the government's fiscal measures boosted construction, which rose by 16.9%, and mining and quarrying also recorded a big gain, growth in these areas was more than offset by the decline in manufacturing. This underlines the weakness of demand for Philippine exports, which has hit manufacturers hard.”

So seen from mainstream’s “money is neutral” perspective, then today’s Phisix, if it were to reflect on the performance of the economy, has vastly been overbought.

But seen from a perspective where the economy has been detached from the stock market and where the latter have been propelled by circulation credit expansion from a combination of government spending, low interest rate regime and a raft of other Bangko Sentral ng Pilipinas (BSP) policy instruments [as expanded peso and US dollar based repurchasing (repo) agreement, Credit Security Fund (CSF) that guarantees funding access to small cooperatives from which provides financing to small business and the easing of accounting regulations such as reclassifying “financial assets from categories measured at fair value to those measured at amortized cost” and where banks were allowed “not to deduct unrealized mark-to-market losses in computing for the 100 percent asset cover for FCDUs, effective until 30 September 2009).” (Gov. Amando Tetangco Amcham Speech August 11)], all of which could snowball into a massive source of structural misallocation of resources in the local economy, prices will be determined by the scale of leverage that will be imbued by the domestic financial system.

Yet like all policymakers globally (except for Israel which has dumbfounded the marketplace by being the first central bank to raise interest rates), Philippine BSP Governor Amando Tetangco takes on the mainstream tack, (bold emphasis mine)

``This 200 basis-point cumulative reduction in the policy rate will help stimulate economic growth or help moderate the slowdown by bringing down the cost of borrowing and reduce the financial burdens on firms and households. This will help us avoid or at least mitigate the negative feedback loop from weakening economic conditions to the functioning of the financial sector. Lower policy rates would also have the effect of shoring up business and consumer confidence.”

Business Cycle, The Philippine Version

Artificially reduced rates will only send false signals of the true amount of real savings available for lending. This would unnecessarily increase the acceptable level of risk taking activities by shifting the time preferences for both the lender and the borrowers. This in turn induces investments in the durable capital goods and or investments in the longer term process of production at the same time where consumption demand will be expanding which thus would leads to serious economic distortions and competition for resources, or in short, malinvestments.

To quote Professor John Cochran and Noah Yetter in Capital in Disequilibrium: An Austrian Approach to Recession and Recovery, ``But with a credit expansion relative reduction in the interest rate, producers are attempting to lengthen the production structure while consumers are attempting to shorten it. Longterm investment is booming at the same time as demand is growing for final consumption. Available resources are not sufficient to sustain both processes— individual business plans made in response to the interest rate change and the new pattern of consumer spending set up the problem of the ‘dueling production structures’. Thus the expansion in the money supply brings about unsustainable growth, characterized by a pattern of over consumption and over investment accompanied by malinvestment, investment inconsistent with consumers’ time preferences.” (bold highlight added)

Moreover, such policies allows the public to take on more debt than warranted which leads to systemic overleverage similar to the Asian Crisis, US housing and dot.com bubbles, as Prof, Thorsten Polleit explains in Bad News for Our Money ``It allows borrowers to issue even more debt, refund maturing debt at artificially suppressed interest rates, and reduce their real debt burden at the expense of money holders. The downward manipulation of the interest rate drives a wedge between the (real) market interest rate and the societal time-preference rate, and therefore wreaks havoc with the economy's intertemporal production structure. It leads to economic impoverishment, as it would stimulate consumption at the expense of savings and encourage malinvestment of scarce resources. What is more, suppressing the interest rate does not provide a solution to the overindebtedness problem, which is a result of government-controlled fiat money produced by banks extending credit in excess of real savings.”

Moreover, such policies only borrow economic activities from the future.

Floyd Norris of the New York Times recently noted how US homes prices reflected on the degree of inflation, initially rising (boom) but falling back (bust) to the same inflation adjusted price levels where the cycle all began [see US Home Bubble Cycle: Upside Directly Proportional To Downside]. Of course, all these came at the expense of the society. Hence Mr. Tetangco’s anxiety over the negative feedback loop can only be deferred until sometime in the future when enough imbalances will force itself on the marketplace.

Figure 6: Washington Post: Banks 'Too Big to Fail' Have Grown Even Bigger

Of course, monetary inflation has moral consequences; it redistributes wealth in a way where the initial recipients would be major beneficiaries from such policies.

Similar to the US where taxpayers and small businesses and small banks today have been sacrificed for “too large to fail” institutions which has even expanded more today (see figure 6), in the Philippines, investors with liberal access to the domestic banking institutions are likely to be the capitalists benefiting from the economic rent or politically bestowed economic privileges (licenses, cartels, monopolies).

So the wealth redistribution from present economic policies is likely to benefit the political elite at the expense of rest of the society.

In addition, with the fast approaching political Presidential election season, we should expect the present expansionary monetary landscape to be sustained. Here is a clue, again from Governor Tetangco, “Lower policy rates would also have the effect of shoring up business and consumer confidence”.

Besides, government’s fiscal spending to are likely to rev up in order spruce the economic landscape and financial marketplace for a Potemkin Village effect [see previous discussion in Philippine Peso: Interesting Times Indeed].

Well, Governor Tetangco in terms of policymaking would likely seek the comfort of the mainstream crowd once such policies start to unravel.

Hence he is likely to take heed of the insights from the mainstream icon at heart, this from John Maynard Keynes, ``Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Anyway, comfort of the crowd it is for Asian policymakers.

From China’s Premier Wen Jiabao (Reuters) ``Therefore, we must maintain continuity and consistency in macroeconomic policies, and maintaining stable and quite fast economic growth remains our top priority. This means we cannot afford the slightest relaxation or wavering."

Or From South Korea’s Finance Minister Yoon Jeung Hyun (Bloomberg/Credit Bubble Bulletin) ``There is a risk that the economy may fall into a double dip if the government shifts the stance of policy too fast…It’s premature to discuss the timing of an exit strategy.”

However, even if Asian authorities have qualms on tightening present policies, the interest rate markets suggest that they will be tightening soon.

According to the Wall Street Journal, ``Asia's central bankers say they have no timetable for raising interest rates. But some investors already are placing bets to the contrary, speculating that India will go first, followed by China and Korea.

``The money is being put down in the huge interest-rate-swaps market, where the yields on two-year maturities across much of Asia have risen sharply in the past few months.

``This market, which had $403 trillion of contracts outstanding at the end of 2008, draws a range of investors, from hedge-fund managers to companies looking to hedge against a change in monetary policy. About a quarter of its volume is traded in Asia.”

Nonetheless even if Asian authorities begin to tighten for as long the US maintains ultra loose rates, pump the prime (deficits expected to reach $9 trillion in 2019!) and flood the global system with greenback emissions (Warren Buffett), we should expect the continued stickiness from inflation to be reflected on financial asset prices.

While markets could indeed show episodes of outsized volatility, as in the case of China or in the past in Russia, the impact from the present policies, in support of the Ponzi based global economic system, which are likely to be stretched way into the future for political motivated reasons should cushion or even give a boost to the reflation in asset prices.

Timing markets won’t be a recommended approach given the swiftness of market action.

Bottom line: Situational Attribution is all about policy induced inflation.

Bubble Thoughts Over Meralco’s Bubble

``The lies the government and media tell are amplifications of the lies we tell ourselves. To stop being conned, stop conning yourself.”-James Wolcott, American Journalist

Meralco is in the spotlight anew.

The country’s premier utility firm, which holds the exclusive franchise for the electricity distribution for the National Capital Region (NCR), caught the public’s attention following a spectacular record romp by its share prices.

And last week’s parabolic vertiginous ride appears to have been playing out the blowoff phase of a conventional bubble cycle. (see Figure 1)

Figure 1: Bubble cycle (left) and Meralco (black candle right)

Importantly, like typical bubbles, the culmination of which can be identified by delusional rationalizations aided by experts exacerbated by media- Meralco’s skyrocketing price has been attributed to speculations on a prospective ‘tender offer’ (Bloomberg)!

Allegedly one of the titans involved [see King Kong Versus Godzilla at the PSE; Where Politics Trumps Markets] in the drama of the recent corporate joust has acquiesced to a purchase price of Php 300 per share which would require a mandated offering to minority stockholders!

Yet rising prices and some special trades (block sales and cross trades) have been used as signs to confirm on such myths.

Why do we think all these rationalizations seem ridiculous?

Simply said, because logical reasoning has been totally thrown out of the window!

As financial writer and investment speaker Joe Granville warned, ``the media is the biggest enemy of the small investor, mostly headlining the wrong news at the wrong times, playing on his misguided reliance on fundamentals and his normal fears and greeds.”

Putting A Perspective On Meralco’s Price And Corporate Disconnect

To put on some level headed perspective we will deal with some key issues.

First, on a year to date basis, despite the recent turbocharged upsurge, Meralco hasn’t been the only leader with 284.87% of gains (as of Friday’s close).

Other issues like Phisix component mining giant Lepanto Consolidate (+271.43%) and Business Process Outsourcing Paxys (+358.33%) have seen the similar or greater level of share price action as seen in the above chart represented by the green and red lines respectively.

As an aside, I wouldn’t suggest that the latter two would seem in a bubble considering the U-shaped recovery vis-à-vis Meralco’s actions which appear to have replicated the motions of a bubble paradigm as shown in the chart.

Although from a trough to peak basis, Meralco, hands down based from last year, does hold the tiara for market outperformance (700%).

Nonetheless, one must be reminded that past performances are not indicative of future outcomes.

Two, Meralco’s share in the Phisix has now jumped to 7.7% from less than 1%, as we similarly pointed out in Beware Of The Brewing Meralco Bubble!, and now holds the second spot after PLDT in terms of free floated market cap.

This for a company whose profits are constrained by political forces! (see below)

Meralco has effectively, leapfrogged over former heavyweights Ayala Corp, Bank of the Philippines, Globe Telecoms, Ayala Land and SM Investments.

With Meralco’s share of the Phisix gaining more weight, any ensuing volatility from its share prices will likely be reflective on the directions of the Philippine benchmark unless counterweighted by the lagging erstwhile behemoths.

Three, financial valuations, if any of these apply at all, have ENTIRELY been jettisoned for wanton speculations and nonsensical justifications.

As we discussed in Meralco’s Run Reflects On The Philippine Political Economy, the share price movements in the local markets hardly reflects on corporate fundamentals.

The first three factors cited above have clearly been validating our Livermore-Machlup model where Philippine equities move in tidal fashion underpinned by liquidity or loose monetary landscape.

This climate essentially begets a predominant horse racing outlook or mentality, where canards touted as facts mostly emanating from the foibles of cognitive biases.

In short, NO liquidity from loose monetary policies equals NO bubbles, and all the rest are simply footnotes.

As writer Peter McWilliams warned (bold highlights mine), ``The media tends to report rumors, speculations, and projections as facts... How does the media do this? By quoting some "expert"... you can always find some expert who will say something hopelessly hopeless about anything..” Indeed.

Fourth, common sense should dictate to us that perhaps none of these engaged (supposedly cunning and astute) Taipans, whom have built their wealth and “credibility” over the years, would likely pay for excessively or overpriced assets, unless they have other undeclared agenda in mind, which are exclusive of profits meant for the institutions which they represent.

Yet, any outrageous and reckless acquisitions, that would put at risk the interests of such institutions involved, could provoke a minority shareholder revolt. That’s assuming shareholder activism is alive here. Nevertheless, even in the absence of it, we should expect the minority foreign shareholders to vote with their feet.

In short, the supposed buyout, from the alleged stratospheric levels, signifies as tremendous costs to the interests of the company they represent from both the majority and minority stakeholders’ perspectives.

Needless to say, the present day hysteria from rising share prices is temporal in nature and subject to market cycles and does NOT represent the underlying fundamentals. Unless people think that these tycoons are dimwits, I would bet on the opposite…that the so called godfathers involved are cognizant of this!

Fifth, even if the so called buyout does occur, it is less likely that such deal would be consummated in transparency or reflective of market conditions.

These titans could have such transaction wrapped up much earlier than known by the public, or have done so with attendant compromises such as rebates et.al., and could use recent actions as a partial exit point to profit from today’s insanity.

Lastly, as we have been repeatedly arguing, the Meralco brouhaha is beyond the sphere of normal financial analysis because it is a POLITICAL SENSITIVE public listed company.

You can’t just attribute earnings without comprehending on the business model from which the company operates on.

Besides, here, the interests of the owners under the said platform are divergent from the interest of the minority shareholders.

Here is why.

Meralco’s Business Model: From RORB TO PBR

Lately, Meralco’s business model has shifted from Rate of Return Based (RORB) to Performance Based Rating (PBR).

According to GMANews.tv, ``The new PBR scheme also replaces the return on rate base (RORB) formula, which charges customers for using Meralco assets — including posts and cables — in bringing electricity to its end-users.

``Under the RORB, public utilities such as Meralco are disallowed from charging rates exceeding 12 percent of the worth of its total assets.”

So what’s PBR?

According to the same article, ``The new scheme provides “rewards and penalties for performance and non-performance respectively, Jose de Jesus, Meralco president said.

``Under the said mechanism, Meralco may be required to pay fines should its performance — such as failing to immediately respond to a blackout — fall below certain standards.”

And why PBR?

According to the “quasi independent” regulator of Meralco the Energy Regulatory Commission (ERC),

``The ERC adopted the PBR for distribution utilities starting in 2005 pursuant to its authority under Section 43 (f) of Republic Act No. 9136 (EPIRA) to adopt internationally accepted rate making methodologies. PBR strives to achieve a balance between efficient price levels, allowing utilities efficient revenue to ensure their sustainability, and maintaining or improving network service performance levels. It provides strong incentives to improve operational efficiencies. International experience (Australia and United Kingdom) indicates that, over time, with its built-in mechanisms for incentives and fines depending on the utilities’ performance, PBR leads to reductions in the real price of electricity distribution while improving service levels.”

Aside, the ERC has required Meralco to implement a subsidized rates for the poor by the so-called “NEW LIFELINE program, where ``The ERC reiterated that customers consuming only 20 kWh and below shall continue to enjoy the 100% discount granted them and shall pay only the adjusted PhP5.30 per month metering charge, while the other lifeline customers shall enjoy a discount corresponding to the consumption level under the new lifeline program approved under the DTI case, including the PhP21.00/customer/month minimum charge.”

Implications Of The Business Model: Absolute Dependence On Political Discretion!

What ALL of these means:

1. Basically prices charged to the paying consumers of Meralco are solely determined by the ERC and NOT by the markets.

This means that Meralco’s profits are ultimately determined by fickle political winds.

As Ludwig von Mises described of Bureaucratic Management of Private Enterprises, ``But ours is an age of a general attack on the profit motive. Public opinion condemns it as highly immoral and extremely detrimental to the commonweal. Political parties and governments are anxious to remove it and to put in its place what they call the “service” point of view and what is in fact bureaucratic management.”

Think $100 oil. Rising energy prices are likely to stoke political discomfort among the society’s underprivileged from which would force politicians to focus on “windfall profits”.

Yet, in a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.

In short, where financial reports will unlikely be transparent, the interests of the owners of Meralco and the minority shareholders departs.

2. Meralco maintains a subsidy for the poor from which are tacitly charged to the account of the middle and high income consumers.

This exemplifies as a “private” company, functioning under stringent control of political interests, conducting the political redistribution aspect in behalf of the government. Hence Meralco acts as a subcontracted implementing agent under political behest.

This implies that economic rents or “profits” for Meralco’s owner managers will only be attained under the auspices of the political leadership for as long as the political interests are served.

3. Under the PBR, the ERC determines the “carrot and stick” for Meralco.

Basically, Meralco’s lifeline hangs on ERC’s dictate!

This implies that the ERC and Meralco will haggle over what comprises as sufficient or inadequate under the PBR guidelines and NOT the consumers.

And since rules are always technically subjective and subject to nonlinear or amorphous interpretations, they will be subject to compromises. Ask the lawyers.

Therefore this implies two things:

One absolute subservience to the political office, where to quote Ludwig von Mises in Bureaucracy, ``Under this system the government has unlimited power to ruin every enterprise or to lavish favors upon it. The success or failure of every business depends entirely upon the free discretion of those in office.” (bold highlights mine)

Second, instead of looking after the welfare of its clients (Metro Manila consumers), the unlimited dependence on the discretion of the government bureaucracy means conflict of interests from parties involved abound.

Principally, the owner’s priorities will mostly be directed into the realm of public relations; of wheedling or currying favor with that of ‘The Powers That Be’. Satisfying the public will requirements will be subordinate to this.

Again from Ludwig von Mises, ``In such an environment the entrepreneur must resort to two means: diplomacy and bribery. He must use these methods not only with regard to the ruling party, but no less with regard to the outlawed and persecuted opposition groups which one day may seize the reins. It is a dangerous kind of double-dealing; only men devoid of fear and inhibitions can last in this rotten milieu. Businessmen who have grown up under the conditions of a more liberal age have to leave and are replaced by adventurers.” (bold emphasis mine)

The sordid and unfortunate experience of the current managers in the besieged Lopez group (who appear to be outgoing****), having to oppose the PGMA administration politically, serves as fundamental and shining example of the consequences of political defiance.

So those nurturing the view that owner-managers of political enterprises will be looking for one dimensional financial bottom line growth are living in a world of fairy tales.

Thus, financial statements have little relevance to Meralco’s valuation as a financial security because economic rents accruing the owner-managers of Meralco may come in sundry forms, than simplistically “profits” as defined by textbooks.

Besides, as pointed out in Has Meralco’s Takeover Been A Good Sign?, the current managing owners of Meralco have to deal with socio-political, bureaucratic and political risks, which ultimately mean that they need to be in constant harmonious relations with the current and forthcoming political leaders.

These are things that are learned outside of traditional or mainstream school curriculums. And yet these signify as unorthodox or contrarian views that operate realistically.

4. The ERC’s leadership is appointed by the President of the Philippines.

This makes the agency hardly independent as purported to be, but instead beholden to the administration.

Again since political appointments are almost always based on political affiliates or interests and are hardly ever about virtues or meritocracy, the direction of regulatory implementation and compliance will likely be dependent on the caprices of the political leadership.

Conclusion/Additional Comments

All these imply that the rewards from the ownership of Meralco comes with the blessings of the ‘Powers That Be’ combined with a possible implied backstop (guarantee) in the case of failure or bankruptcy, provided that the interests of the company’s owner managers or political entrepreneurs operate along the lines of interests of the incumbent political leaders.

Therefore it would be foolhardy or naïve to believe that the tycoons that got engaged in Meralco with billions of pesos of investments, had been there to only leverage on the political misfortunes of the present owners and to speculate on share prices while at the same time ignoring the risks associated with the political aspects of having a stake in Meralco.

Also, this implies that the changing dynamics of the ownership structure of Meralco strongly alludes to the next president-the identity of which only the kingmakers or the chief Meralco proponents know.

****The prevailing notion is that there has been an ongoing power struggle in Meralco.

For me, this seems like an oversimplistic crock.

In my view, both protagonists appear like unheralded allies, only awaiting the appropriate opportunity for a graceful exit for the Lopezes, which I think should come after the elections.

As per Joe Studwell in Asian Godfathers, ``The reality is that tycoons are typically forced to invest together because of the environment in which they operate.” (emphasis mine)

Considering that Meralco’s destiny is fundamentally intertwined with the Presidency, this probably implies that both godfathers could be straddling in support of different candidates in the forthcoming Presidential elections where its outcome will decide who among the two groups will takeover.

Although it is most likely that a price agreement for the prospective exchange may have already been sealed but perhaps at prices much less than the rumors (my guess is anywhere Php 90-120).

Moreover, it has been my inclination to believe that the Meralco saga will unfold similar to the Philippine Airlines privatization, where former PLDT chair Antonio Cojuangco initially fronted for the bidding which ultimately landed in the laps of Taipan Lucio Tan, the current owner.

Finally, of course, both parties would want to see Meralco’s share prices remain elevated, hence through various associates or intermediaries, they might continue to float stories from which the public so eagerly yearns for, as appetizer for their innate speculative instincts operating under today’s loose monetary environs.

However, the idea is-once the political matters have been settled, excess shares could be sold through the markets or that if any contingency arises (such as a dark horse winner in the Presidential elections) both parties can avail of present lofty prices as an exit strategy.