Friday, 30 March 2007

Two Rectangles

30th March 2007

The Malta Independent - Friday Wisdom

Billboards with two rectangles on a blue background came within sight this week. They depict an artistic derivation of the national flag and carried the message that TVM, the public owned media station, is being refreshed for our benefit. This follows the recent public announcement that TVM in now operating in the black.

This message nearly offended me coming in the week when viewers were forced to watch on private pay cable TV the two football matches played by the Malta national team in the European soccer competition.

The whole purpose of having a publicly owned media station is to ensure that events of national importance are carried over easily accessible free to air media irrespective of the commercial economics for doing so. It is for this reason that consumers pay to the public sector an annual fee in the form of a TV license.

If the publicly-owned media company does not fulfil such function of carrying free to air national events of historic, cultural, political and sport related importance irrespective of their commercial value, then what, may I ask, is the purpose of having a publicly owned media station in the first place?

If the TVM becomes just another commercial station what is the public sector’s role in a purely commercial operation? Now that the State has divested itself of all other commercial undertakings, what is the need for holding on to a commercial media company which fails to fulfil its public function – unless of course TVM’s existence is politically justified to ensure that the government in office and its ministers have their daily ritual on the news bulletins?

Just imagine the furore that would arise in
Italy if the matches played by the national football team were contracted for exclusive viewing over private pay TV channels.

It is curious how liberalisation in the telecommunications and media sector is actually working against the consumers’ interest. It is an odd case where false competition is being introduced and is putting the consumer in a worse position than when the sector was controlled by monopolies.

There was a time when the whole package of foreign soccer was available, against payment, through the sports package of Melita Cable. The opening of the pay TV to competition meant that the soccer package was split between two operators, forcing the consumer to subscribe to two different services at an additional cost, to enjoy the same menu.

If this principle were to be applied to mobile telephony it would be equivalent to giving Vodafone coverage over half the island and Go Mobile over the other half forcing consumers to subscribe to both Vodafone and Go Mobile to enjoy total area coverage.

In these circumstances it is fair to ask who is protecting the interest of the consumer in the media sector. What is the role of the telecommunications regulator in this respect and how does it overlap with that of the Broadcasting Authority? Or is it a case of this overlap causing confusion, with the consumers’ interest being neglected by both?

TVM does not need to be refreshed with new logos and brand images. It needs to be either re-invented or buried. Either it performs the true functions of a public sector media station on the BBC model, being strongly autonomous from the government and protected by, or indeed merged into, the Broadcasting Authority, to ensure that its autonomy enjoys constitutional protection, or else it should be buried and the organisation or its assets sold on a commercial basis. Either one or the other, but nothing in between.

Today we start the celebrations of the Holy Week with the processions in our towns and villages with the statue of Our Lady of Sorrows. There our heavenly Mother will sit heart-broken beneath the Holy Cross formed by two rectangles. The message for repent and charity comes much more consistently from these two rectangles than the message of refreshment for our benefit from the two rectangles on TVM’s billboards.

Friday, 23 March 2007

Four Years Later

23rd March 2007

The Malta Independent - Friday Wisdom
It was quite a few weeks in 2003 between 19 March and 12 April. With the benefit of four years’ accumulated wisdom one can now pass some judgment on two events that happened four years ago, one local and one international.

On 19 March 2003, the US and a very skimpy international alliance started the war on Iraq which had to lead to a regime change, the discovery and destruction of weapons of mass destruction (WMD), and the installation of democracy in Iraq, which had to serve as a beacon of light for the democratisation and westernisation of the entire Middle East, leading to stability of oil exports from the region at prices which would help the developed economies to continue buying energy supplies at a cheap price.

12 April 2003, the Nationalist Party was given an undeserved election victory on a silver platter by the Malta Labour Party which obstinately refused to decouple the European Union issue from the general election result, forcing the hand of many voters who wished to vote for change to reluctantly vote for more of the same.

Though the war in
Iraq has much more serious repercussions on a global scale than the outcome of one particular election in a tiny island state, I cannot help drawing some similarities.

Both events started with a lot of misplaced hope based on outright misrepresentation, which is now causing the incumbents serious problems of credibility. The PN had promised that EU membership would lead to an eternal spring and that our problems would find instant painless solutions through attraction of foreign investment creating work and wealth. Objective observers like yours truly who argued that the benefits of EU membership are mainly in disciplining our politicians to do what needs to be done irrespective of their electoral fortunes were pooh-poohed or outrightly rubbished by the PN.

The chickens are coming home to roost. The very fact that the Gonzi administration had to manoeuvre within the corset of stringent quality standards set by EU regulation has produced an immediate impact, irrespective of the long-term benefits, which is a far cry from the promised eternal spring. The PN has lost each and every electoral test faced during these four years and hopes for a velvet revolution in the tail-end of the legislature seem misplaced given that Labour is unlikely to hand over the election again on a silver platter by linking some one-off higher order issue to the next election result as it stupidly did in 2003.

For the Bush administration, the chickens have roosted already. Not only has President Bush broken all records of personal unpopularity for any incumbent president, but the Republicans have lost control of both the House of Representatives and the Senate. The price of oil is meantime roughly double what it was at the start of the
Iraq war, reflecting in part the risk premium for the regional instability that has been caused by the Iraq war.

Both events have other similarities.

They both promised flowers and prosperity. The PN by promising that EU membership of its own would be a panacea for all our ills leading to an instant eternal spring, whereas the invasion of Iraq was depicted as a necessary regime change to free the world from the risk of abuse of WMD leading to the invading forces to be greeted as liberators and showered with flowers as they entered Baghdad.

Both events have instead ended in a sea of red. The PN has seen itself immersed in a sea of red Labour votes, which seems to have gathered enough momentum as to become irreversible in the remaining time of this legislature. The
US administration has seen itself locked in a Catch-22 situation of being damned if they stay and damned if they leave. Not only has their misrepresentation to justify the war been exposed for wide international condemnation, diluting the role the US commands on the world stage, but it has been the cause of far more carnage and instability that the cruel Saddam regime could have ever dreamt of.

More US military personnel have now been killed on the Iraq war stage than the number of all lives lost in the 9/11 terrorist acts, and this not to mention the tens of thousands, some even suggest hundreds of thousands, of Iraqis killed in the near civil war now eroding the last traces of civilisation in Iraq forcing millions to flee to safety in foreign lands abandoning their family, their possessions and their dreams merely to try to keep their body and soul together. And yet there is no way out and President Bush’s assurances that victory is still possible sound more hollow by the day as it has become impossible to define what would constitute victory.

What a difference four years make!


Friday, 16 March 2007

Labour`s to Lose

16th March 2007

The Malta Independent - Friday Wisdom

The local election results confirmed a trend started in 2002 when the Malta Labour Party beat the Nationalist Party in all electoral contests except in the general and local elections of 2003.

Taking the same districts where the local elections were contested last weekend the MLP’s share of first preference vote has gone up from 49.26 per cent in 2001, to 50.11 per cent in 2004, to 53.20 per cent in 2007. The PN’s share of vote per contra reduced from 48.13 per cent in 2001, to 46.41 per cent in 2004, to 43.89 per cent in 2007.

The trend is unmistakable at least in so far as local elections go and the same trend was again confirmed at the European Parliament elections at a national level in 2004. This hardly leaves any room for interpretation.

What does leave a room for interpretation is why the general elections results of 2003 went so much against this trend and by implication whether the same would happen again in the general election to be held later this year or the first half of 2008.

The Prime Minister was quick to waive away the local election results and repeat his determination that by the next general election we will again witness a purple revolution where the red preferences turn into blue, not least through the participation of the approximately 30 per cent of the electorate who through apathy or fatigue decided to stay away from the polls last Saturday.

The opposition leader stopped short from explicitly stating that Labour’s latest wide victory at the local elections practically wraps up in their favour the outcome of the general election, but he repeated his strong confidence that the trend is clear, unmistakable and irreversible and that the Maltese electorate will vote for change come the next general election.

The following two arguments can be made with conviction. The first argument is that the Maltese electorate, although eager for change as is normal in a living democracy, will continue to show its wishes at the local level and at a national level where in the results equation there is not the issue of Alfred Sant becoming the next Prime Minister. However at a general election, when in the result equation there will be the strong prospect of having Alfred Sant as the next Prime Minister, the electorate will not forget the fiasco of 1998 and will again, as they did in 2003, go against the trend and re-vote the PN in government.

The second argument promoted by the Labour camp is that the 2003 election result was a one-off affair highly influenced by the issue of EU membership which forced many who in normal circumstances would have voted for Labour, through conviction or through fatigue with the Nationalists, to vote PN as the only alternative to seal
Malta’s membership in the EU. This higher order issue will not be present in the next general election and therefore there is every reason to assume that the trend will not suddenly reverse as it did in 2003, so that Labour can carry their string of victories since 2004 to the next general election.

Readers may pick either of these arguments as they can both be made with persuasion and, when a week is a long time in politics, nothing can be absolutely guaranteed so much in advance.

Yet I am more inclined to think that the next general elections is Labour’s to lose as indeed they managed to do with the 2003 elections, which I had contested in Labour’s ranks.

I well remember the clear message that started emerging from my visits to the electorate throughout 2002. In that year again Labour beat the PN by a nine-point margin in the March 2002 local elections. The MLP went into euphoria and practically assumed that the next general election result was all but wrapped up in its favour.

The feedback from the electorate was indicating otherwise. The message was unmistakably clear. The majority was keen to vote a change in administration but equally keen in securing
Malta’s entry in the EU in 2004 if for nothing, to bring over the country an external source of discipline which leading politicians could not bring upon themselves.

I well remember pointing this out to Alfred Sant and indicating that it was not in Labour’s interest to pursue his thesis that all had to be decided in a general election. On the contrary Labour’s interest would best have been served by a sharp distinction between the general election and a referendum on EU membership which had to be binding on the government and should therefore have been conducted after the general election so the government in office would have the parliamentary term to execute the people’s decision in a referendum.

The 2003 election also was Labour’s to lose and they did manage to lose it and hand it over on a silver platter to the PN by linking the EU membership issue to the general election result forcing many to vote PN against their wish. It is the main reason why I could not accept to stay within Labour where the leader was not prepared to keep himself responsible for the wrong strategy which denied the party a practically assured electoral victory.

Yes, the next general elections are again Labour’s to lose.


Friday, 9 March 2007

Pricing of Risk

9th March 2007

The Malta Independent - Friday Wisdom

On Monday 26 February, most international equity markets in the world closed at near all-time or many years’ high. They had last suffered a price correction in May 2006 when they had continued moving erratically one step forward one step backward for two months. Since early July 2006 till 26 February, the markets displayed a s
trong one-way upward move, registering solid double-digit growth on most exchanges without any serious correction along the way.

The strong run-up was making investors apprehensive. They did not want to leave the party too early but they knew that the market was ripe for a correction even though most agreed that fundamentally, the international equity markets were still reasonably priced given the strength of corporate profitability.

Then in the week between 27 February till last Monday, the market corrected falling more than five per cent and wiping away the profits that had accumulated since the start of 2007.

What causes such sharp volatility on international capital markets? Occasionally this is triggered by an external unexpected event, a major terrorist attack or a market failure by some big player. But this time round there was nothing of the sort and therefore investors are looking for reasons to understand the reason for this sudden reversal in order to help them in deciding whether to exit their position or ride through in the belief that the market will soon recover its sanity.

For those who have been in this business for a long time, such events present more of an opportunity rather than a disaster. Investors who base their decisions on fundamentals remain confident that fundamentals don’t change overnight and the opportunity to buy value at a cheaper price comes only when the quick-buck investors lose their nerve and start dumping value stocks to cut their losses.

So what causes such sharp volatilities on the market? Simply because the market is not composed solely of value Warren Buffet-type investors, on the contrary it is largely populated by bed-and-breakfast investors who try to make a quick buck, often leveraging their position by borrowing to invest more than they have in own money, and relying mostly on market momentum rather than fundamental-value analysis.

Such day-tripper investors often incorrectly price the risk of investing, believing that on their short-term investment horizon the momentum will keep prices moving in the direction they bet on and therefore pay acquisition prices that do not correctly reflect the risk inherent in their investment.

This explains why it is healthy for markets to occasionally adjust their valuations by short, sharp, downward movements to shake off such greedy investors who cannot correctly price the risk they are taking on when investing on a momentum basis.

When markets experience eight months of continued one-way growth as happened since July last year, the market starts attracting such day-tripper investors that increase demand and take market prices higher than they would go pushed by their own organic momentum.

As the market keeps going up, such short-term investors who often would have leveraged their position through borrowing, start getting jittery but hold on to squeeze the last pip out of the lemon.

Ultimately, when profit-taking starts, they will try to liquidate positions to protect profits or cut losses and many investors try to rush out of the narrow door simultaneously.

This exacerbates the correction until such day-trippers are flushed out of the system and until share prices adjust to bargain fundamental-value territory that brings back interest from long-term investors who laugh at the opportunity to buy value at a discount.

The events of the last couple of weeks give a live demonstration of the lesson that the market is a mixture of fundamental-value investors and psychology-driven investors.

Fundamental values do not fluctuate wildly but psychological feelings do fluctuate as people’s perception of risk changes like the weather. This forces inexperienced investors to buy expensively at the peak of positive psychological feelings towards the risk of investing and sell cheaply when the risk appetite falls and the market psychology of risk turns negative.

Fundamental-value investors make money by disregarding the wide swings in psychology moods and buy when market prices correct into bargain territory and ease off their investment positions when prices extend themselves out of fundamental value.

My feeling is that fundamental investors will soon enter the market when they are convinced that day-tripper investors have been squeezed out of the narrow door leaving behind attractive valuation on equity share prices. 

Friday, 2 March 2007

How will my Dog Vote

2nd March 2006

The Malta Independent - Friday Wisdom

In evidence that we are gracefully slipping into a pre-election mode, we are witnessing increased frequency of supposedly scientific-opinion surveys which tend to indicate which political party is ahead in the race to gain the electorate’s mandate for governing the next legislature.

All surveys I have seen so far can hardly be termed scientific. They suffer from strong in-built defects or biases which nullify their claim of being a representative sample of how people would actually vote if an election were to be held tomorrow.

The first major defect in all surveys lies in the disregard of the sizeable section in the chosen sample that refuses to participate in the survey. Where such refusals form a sizeable part of the targeted audience and the base is extended until the minimum quantity of respondents is reached, the results based on those who actually reply become automatically unrepresentative of the whole electorate. Those who refuse to participate in the survey will certainly not refuse to participate in the actual general election whenever it comes.

The second evident defect in such surveys is that they often disregard also a sizeable section of those who actually participate in the survey but answer that they will not vote, or do not know if they will actually vote or that they have not yet decided whom they will vote for. In all surveys, these undecided participants form a very large part of the chosen sample and they cannot be excluded from the final results as if they will not be voting in the general election. Given that the historical difference between winners and losers in the general election often boils down to a handful of percentage points, the undecided sector is too big too ignore. It is often made up of the voters who will ultimately decide which side the electoral scale tips in the end.

A further defect of most surveys is that they do not attempt to make a scientific adjustment to results to reflect the dishonesty bias in such surveys. This is often tricky but there are ways how to measure this dishonesty bias by asking historical questions (whom did you vote for in the last elections?) which can then be measured against historical facts to measure the extent of the inbuilt dishonesty bias.

So in the end, the only conclusion I would safely draw from such surveys is that they are unreliable as a forecast to the outcome of the next election. The parties have to gear up in the coming months in order to sway the undecided voters their way.

I can see that the main political parties will adopt very different strategies to achieve such objective.

The PN know that their biggest handicap for winning the next elections is the length of their tenure in office. A good part of the undecided voters are eager for a change in administration as they perceive the present government as fatigued, arrogant and as a failure in delivery of the eternal spring they promised at the last elections. They are eager to give Labour a chance but are somehow not yet convinced that in fact Labour would be a better alternative. So they remain undecided.

The PN strategy versus these voters would focus on the personality of the Prime Minister and party leader. Their campaign will focus on his personality and will put the organisation in the secondary line as a blurred background. The Prime Minister regularly beats the Opposition Leader in direct personality opinions polls. The PN will focus their campaign to portray him as a counterbalance to the party’s fatigue and long tenure in office by depicting him as young, relatively new in office, practical and sensitive decision-maker who stands no non-sense and is making substantial headway in lightening the substantial baggage he inherited from his predecessors who were more lax with the public purse and did not have his high governance standards.

Labour on the other hand know that in the public perception their current leader suffers considerable disadvantage through the bitter experience of his performance between 1998 and 2003 and can hardly make much headway by focusing on his personality.They also have a problem in focusing their campaign on past achievements of the organisation as these are way in the past, somewhere in the period between 1971-1980 which serves little purpose except for historical records in which undecided voters can hardly be interested.

Consequently Labour’s strategists know that their best chances for winning over the undecided voters would be on exposing the defects of the incumbents rather than on promoting their own merits. They will bend over backward to portray the current Prime Minister as part of the old guard who are responsible for the country having had to swallow bitter fiscal discipline of these last few years to bring back sanity to public finances.

The respective parties’ success in conducting focused, fresh and effective election campaign will largely determine the outcome of the next general election which is still very much in balance. It will be decided by the way my dog votes.