Sunday, February 26, 2006

Personality Based Politics and The Acceptance of Income Disparity

``To say that you're going to have social justice means you're going to have to concentrate power in the hands of some small group of people to override rules, and standards, and so forth. And people do not see that that's more dangerous than the injustice that they're trying to wipe out." Thomas Sowell, columnist,

Obviously, this is a clear case of shooting ourselves in the foot. While one may argue correctly, using present values, that economic gains have not filtered to the masses and that the financial markets may not ‘entirely’ be reflective of the overall economy, signals emitted by the marketplace are usually discerned as LEADING indicators that signify a change in social mood (Robert Prechter, Elliot Wave International) and economic cycles. In short, the improvements in the marketplace could be indicative of an impending recovery or a gradually unfolding recovery in our midst.

Yes, I know, I have argued alot about liquidity driven markets, but that is precisely the point, today’s macro framework has been particularly liquidity driven, such that because the world is swimming in too much money, this has filtered into the country’s financial markets as well as into the domestic economy. Thus, our country’s recovery has been anchored on liquidity dynamics more than a structural one much like most of its contemporaries or the emerging market economy class, albeit they could be transient and dependent on the continuity of liquidity creation and intermediation.

Let us be honest to ourselves, all forms of recoveries in any aspect of our lives; be it physical, financial, emotional or spiritual, in the norm, does not come with a wink of an eye but rather through the passage of time (Of course there are exceptions to rule like winning lotteries is one).

Only to the “personality-based” politically obsessed minds can one not or refuse to see these emerging positive developments.

Personality based politics in my definition is analogous to a game of musical chairs. Under the present system of popularity and patronage derived economic opportunities and expectations for government led stimulus or more government intervention in the provision for our social needs, no amount of leadership change would successfully reform the country’s economic and financial status (as said above present gains are a matter of global liquidity dynamics rather than a structural one) ...UNLESS the populace is given the unbridled opportunities under an environment that would allow them to take the necessary risks, to fail, learn and excel in their respective fields in the open market.

Whining about social/income inequality (as seen in growing social/income inequality in US, China or other parts of the world) or mouthing egalitarian objectives conventionally seen with our leaders, politicians and their factotums are nothing but a facetious attempt to pay lip service to the public (demagogues). In reality these represent nothing but a bunch of canards...and they know or are aware about it! Nonetheless, in assuming or maintaining political power, which incidentally emanates from the myopic, gullible and fickle voting public, the political players simply have to tell or promise on what the public simply wants to hear (perpetuating these untruths)!

Yet the quest and struggle for political power is simply so compelling because it practically is all about Spending Other People’s Money (SOPM)! Everybody seems to have their ‘rightful’ concept about governance, or bluntly said, how to spend someone else’s money...except theirs. It seems that hardly anyone realizes that more laws equates to more budget or spending, yet none of the local analysts/experts or ‘self -righteous reformers’ have ever parleyed on the correlation of the du jour word of “corruption” to the relative size of government. Everybody seems to be agog with the fallacious inferences and associations of the virtuous aspects of governance (SOPM) while IGNORING on the structural ones.

In essence, the world is simply never equal. Borrowing the sagacious words of Gavekal Research, from their book Our Brave New World (emphasis mine)...

`` The acceptance of income disparity is probably the hardest thing to achieve in the current political structure of most countries. Why? Because most countries counterpoise the ‘social’ to the ‘unequal’ and strive to avoid wide income disparities.

`` But the refusal to accept income disparities is very destructive. Inherently, it implies that capital is taken from where it is efficient and generating higher returns and distributed where it is not. Such a course of action can only lead to an improverishment of the greater society; and when the greater society gets poorer, it is the poorest members who suffer the most. Time and again, this has been the experience of socialism.

`` Trying to prevent the growth of income disparities is also denying an important economic reality: income disparities are a tremendously creative force. As Thorstein Veblen showed in the Theory of the Leisure Class, one of the main motors of capitalism is the desire for conspicuous consumption; or as popular knowledge calls it, the wish to keep up with the Jones’. If there are no Jones to keep up with, why get out of bed in the morning?”

Monday, February 20, 2006

A Reprise: Fear Not A Rising Peso

(edited from Newsletter edition)

``The real difference is that China’s communist government has succeeded in globalising a much larger share of its population than India’s democratic government has managed to do.” Kenneth Rogoff, Harvard economist

During the past week, a headline article in a business broadsheet appeared where various domestic economic experts broached deep concern over the sharp appreciation of the Peso with some of them suggesting that our government keep the local currency at certain levels. In other words, some of our experts are advocating compelling the government to intervene and manipulate the local currency for what I believe as “perceived short term” benefits.

The kernel of our argument in my January 2 to 6th edition, (see Fear Not the Rising Peso) was based on the prospects of diminishing export competitiveness which we aptly debunked. A second issue was likewise raised by the article concerning the domestic economy’s dependence on remittances wherein a weaker dollar allegedly translates to weaker consumer spending by the beneficiaries of the foreign exchange brought into the country by our overseas workers.

Let me reiterate the fundamental premise of my contention, relative to export competitiveness, currencies as expressed by its price value or exchange rates have not been the sole and most important determinant of export competitiveness especially in a world where demand, supply and finances have gradually been integrating.

To wit, Japan’s currency have jumped over a period of time from 370 yen in 1970 to about 118 yen today, yet its trade balance have reached are treading near or at record highs as shown below.

On the same plane, we see a sharp reversal of Brazil’s currency, the real, since 2002, yet the currency’s strengthening has produced, instead of attenuating exports, surging trade surplus brought about by record exports even as the commodity based economy tries to climb up the value chain by adopting “internal reform measures”!

An opposite viewpoint could be seen with the US dollar index. As measured by its trade weighted share relative to its corresponding major trading partners, as seen in the above chart, the US dollar benchmark index has fallen from 2002 to 2004 nonetheless has failed to curb its record setting trade deficits and in fact continues to fall into the abyss, see figure 6!

In other words, while adjustments in currencies through fiat policies appears to be an easy way out to remedy trade imbalances, they have unintended consequences that may prove more detrimental or fatal than what is aimed to be rectified for political convenience.

To quote leading Austrian economist and free market advocate (emphasis mine) Ludwig von Mises, ``If one looks at devaluation not with the eyes of an apologist of government and union policies, but with the eyes of an economist, one must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, favor them exclusively. A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations' monetary systems.”

It seems that our experts have forgotten that the gist of today’s issues have been strongly interrelated with the Brobdignagian deficits in the US that has led to a steep decline of its currency during 2002 or 2004. Effectively, the transmission of this decline in the US dollar has prompted for a “push” to our peso (higher) albeit belatedly relative to our neighbors.

Second is the question of the valuation metrics. Despite the Peso’s fall from Php 26 to Php 56 to a US dollar from 1992 to 2005, the rate of change as measured in the Philippine export growth has even slumped (see January 2 to 6th edition, see Fear Not the Rising Peso)! We can draw up economic models for all to see yet question is will it work? But who would pay for a misdiagnosis effected by misdirected government policies? Why not let the market set its own valuation metrics?

Third, getting our products to the global economy by building the required infrastructure. To quote Harvard economist Kenneth Rogroff, ``Over the past five years, China has multiplied its highway system five-fold. Its 50,000 kilometres of new roads are built to handle even large aircraft...If your products can’t get to the global economy, you cannot conquer it.” Instead of asking our government to intervene in the currency markets, why not suggest to use instead the excess reserves to build the required infrastructure to allow local enterprises to compete in the global marketplace.

Fourth, with the evolution of the trade dynamics borne out of technological changes, the trend of outsourcing has been inclined towards accessibility to a supply of highly qualified labor pool with an environment conducive to productive collaboration between corporations and universities. Let me quote the New York Times report of Steve Lohr (emphasis mine), ``The study contended that lower labor costs in emerging markets are not the major reason for hiring researchers overseas, though they are a consideration. Tax incentives do not matter much, it said. Instead, the report found that multinational corporations were global shoppers for talent. The companies want to nurture close links with leading universities in emerging markets to work with professors and to hire promising graduates.”

Fifth, if the aim is to get a big portion of our economy to be “globalized” then the country has to set conditions conducive to capital and investment flows. It has to give weight towards lowering the cost of doing business, increase labor productivity, adopt and maintain regulations, economic and monetary policies favorable to capital flows and market access, improve accessibility to the capital markets and reduce state intervention to economic affairs. Why then concentrate on the price factors instead of real concrete changes or reforms?

Sixth, is the risk of incurring foreign exchange losses; considering the financial difficulties of the present government, could we allow our public institutions to absorb more losses or incur further financial strains for gains that are likely to be ambiguous? How about the risk of diffusing inflation into the economic system? Have devaluations not been the cause of reduced savings to the people and reduced standards of living transmitted via price inflation?

Throughout the entire 2003 to the First quarter of 2004, Japan intervened in the currency market spending about ¥35 trillion yen or US $317 billion to control their rising domestic currency but had proven to be ineffective then. Luckily for the Japanese government, the Yen fell significantly last year as the US embarked on a tightening campaign, where global investors used the Yen and Yen denominated assets to finance a global trading arbitrage, thereby offsetting their initial losses. What if luck is not on our side? Again who again pays for the misjudgments?

Finally, is the issue of consumer spending; while the negative side of our labor exports have been highlighted by the media to even demean the industry by labeling them as “maid exports”, why is it that our experts seem to mollycoddle on the “rhetorical” preservation of a fragile consumption-led remittance based growth model rather than advocate on an investment fueled one which could be induced by a rising currency?

To a reprise a quote from Dr Marc Faber (emphasis mine), ``a strong currency has never been a problem in the long run. It forces corporations to become extremely efficient, to innovate and to invent new methods of production. Weak currencies on the other hand are an incentive to compete based on short term favourable exchange rate movements – in nature very much alike protectionist economic policies.”

Resistance to change would be a natural reaction that could be expected from the man on the streets....but normally, not from our experts.

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URC’s Possible Change In Share Price Dynamics

(edited version from newsletter)

One of the outliers or exemplary performers of the Philippine Stock Exchange has been Universal Robina Corporation . It is one of the two stocks that has your investor analyst bemused all this time (in my radar screen since 2003) considering that it has significantly outperformed the market in general, the index or its industry contemporaries. Figure 3 shown below shows how URC has upstaged its colleagues.

Figure 3: URC (red line) has been consistently bested Alaska Milk (blue line) and San Miguel B (green line) over the past two years.

Consider this, since the bottom or the inception of the bullrun in 2003, from the yearend 2002 priced at Php 2.75/share until Friday’s close, URC has unnoticeably returned an astonishing 545% almost equivalent to gain of PLDT! In comparison over a similar period, measly returns can be found among URC’s peers, namely, Alaska Milk +63.6% and San Miguel B +25%. Ginebra San Miguel even posted a negative 40% defying the market’s buoyancy seen in the runup of mid 2003 to 1st quarter of 2005.

So what has URC accomplished to merit above gravity returns? In my view, none. While URC has the best top line growth average for the past three years among its peers by a margin, it appears to be priced at the top-end of the industry, meaning URC cannot be construed as inexpensive relative to its industry leagues. I have to admit though that I haven’t scrutinized the annual report or financial papers of URC or its competitors and have instead depended on the financial valuation ratios provided for by to make this curtly ‘generalization’. You’d have to give me the leeway for possible deficiencies.

However, another thing I’ve learned from my mentor (in some of his choice of stock investments~ of course, again this would be unorthodox or against your traditional or textbook way of selecting stocks) is the selection or positioning on issues by virtue of the so-called possible “drivers” or “jockeys” relative to particular issues. He believes that certain personalities (usually insiders or owners or associates thereof) would be engaged in M&A or Joint Venture (JV) or other corporate activities or at least a semblance of, that would eventually whet the investor’s imagination and/or appetite for a speculative punt in an attempt to drive up stock values.

For instance, in the case of URC, prior to the recently concluded secondary offering, according to some accounts, the company shares floated in the market ranged from 5 to 10%, or even to as low as about 3.0% according to the Philippine Daily Inquirer. Essentially, this means higher demand for unliquid issues can drive prices to stratospheric levels as that of URC and vice versa.

And here is where my theory goes...Since the owners of the company could have lined up a secondary offering way back as an early part of their corporate strategy, their objective could be as ingeniously simple: to optimize fund raising by driving up share prices to optimal levels. In essence, to sell more shares to the public it had to contrive an image of past success!

Maybe the owners of the company could have been partially responsible for levitating share prices indirectly (through varied associate firms or individuals) seconded by the bullish backdrop during the early leg of the bullish phase in 2003-2005. Simply put, they could have jockeyed up the shares from the lows of Php 2.75/share up to the 20’s (the bulk, of course, would cost below the price offering) and sold it back to the public at Php 17/share (including their additional 25 to 30% shareholdings equates to profits galore)! Since the market float then was about 5% of total capitalization, it would cost a minimum to drive up share prices considering the known war chest of the owners!

Using our back of the napkin tabulation, total shares traded from January 2003 until Friday’s closed was at more or less 198 million shares (inclusive of cross trades) compared to the recent float of 634 million shares or roughly 31% of the offering. That is to include last week’s activities; URC traded over 33 million shares during its relisting (inclusive too of cross sales). Excluding last week’s trade and assuming a 50% take up by our protagonists; at an average of P 12 per share (high side of estimates) it would roughly cost them in the range of P 800 million to Php 1 billion worth of buybacks (again high sides of estimates) during the past two years to achieve a return of about P 10 billion (the 25-30% float comes with a par value P1)! Amazing.

Of course, the natural advantage of a vastly market floated shares are manifold, such that it enables the company to reallocate or redirect profits to “maximize shareholder value” by investing on projects that may increase returns, to allow for more liquidity to enable foreign fund managers (institutions, mutual funds and hedge funds) to acquire significant shareholdings, such that the company maybe included in their portfolios~ for prestige and returns objectives, and to accommodate in strategic investors who may share their technical or technological expertise or gain entry to new markets.

The major disadvantage would be is that if my underlying assumption on the dynamics of URC’s share prices is accurate, then it has fundamentally changed. For one, motives to increase share prices by the abovementioned economic agents has now shifted to the market for determination. Second, given the larger supply of shares into the market, it would be more costly to drive share prices unless accompanying demand for the company’s shares rises in tandem, from which local speculators are unlikely to have the funds to finance for a punt. Third, in all likelihood, URC’s share performance would now shadow (plus or minus on a margin) that of the activities of the Phisix.

All told, my suggestion is not to project URC’s past into the future. You may likely get disappointed.

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Monday, February 13, 2006

Remittances Growth Subject To Global Economic Dynamics

Now alot of readers may think lightly of how globalization has come to affect demand, supply and finance even at the local level. While most local and some foreign brokers appear to be overtly optimistic, I am however, cautiously optimistic since I am quite aware that sentiment borne out of cycles dictate on the flows of the market rather than what is concocted as the words of Robert Folsom of the Elliott Wave International (emphasis mine), ``This is why "discipline" is usually the first word out of the mouths of consistently successful investors and traders, when they're asked how they managed to succeed. They know that while the market is a formidable foe, undisciplined investors face a far more lethal enemy -- namely their own emotions, and the emotional impulse to follow others.

The chart below courtesy of Arthur Woo of HSBC as published by the leading local business broadsheet the Businessworld shows of the risk arising from a US impelled slowdown which COULD adversely affect sentiment over at the local market...

Changes in Remittances are subject to Vagaries of Global Economic dynamics

Periods of rising global growth (gray line) has accompanied rising remittances except during the Estrada Crisis in 2001 (reflecting the divergence).

In short, if the world economic growth slows, remittances which serve as one of the significant backbones to the Philippine economy (about 10% of GDP) could likewise be affected too. The constriction of remittance flows would essentially spillover to the industries presently benefiting from it.

Needless to say, the Philippine economy, as key exporter of labor is an integral part of the international division of labor and thus, subject to the volatility dynamics of the global economy. This is one year to be less aggressive and more defensive. Ignore this warning at your risk.Posted by Picasa

First Gen: Year of the Investing Dogs?

My apologies for not having posted updates since I was out of town and had been inaccessible....Anyway here is one belated “micro” article which I sent last January 27, and which I think deserves a look...

First Gen: Year of the Investing Dogs?

"It can be no dishonor to learn from others when they speak good sense."- Sophocles, Greek Playwright (496-404 BC)

Because it is the NEW “year of the Dog” then we will take the definition of “Dog” in the context of the investments. In the financial markets, a “Dog” is usually defined as “a bad investment” or ‘investments that under perform”. In the US markets, the ``Dogs of the Dow” is defined by as ``An investing strategy that consists of buying the 10 DJIA stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks.”

This suggests that the lunar year of 2006 could be one of the following: the year of UNDERPERFORMERs, a bad year for equities or possibly the year of the high yielding dividend paying stocks.

The First Gen IPO ends its offering this week, and was reportedly met with unresponsive demand from the public or in particular, domestic investors, which fits our new year’s characteristic of our “Dog”. However, could it be that the market has discounted factors or have been remiss in their assessment of the First Gen IPO?

First of all, First Gen is an Independent Power Producer (IPP) which is required to list as part of the Electricity Power Industry Reform Act (EPIRA). In other words, First Gen’s listing is part of a compliance of an existing regulation. Without the law, it would be unlikely for First Gen to list.

Second, Utility firms are usually characterized by high margins and huge dividend payouts, identifies an important aspect of utilities investing as (emphasis mine), ``Utilities still go to great lengths to ensure distribution of cash to shareholder; relative to others the industry offers good income potential. Dividend Yield, measured as the Annual Dividend/Market Price at the time of purchase, probably offers the best tool for gauging the income generated by utilities stocks. Besides, a solid dividend yield suggests a more attractive proposition for conservative investors.” In short, the public may have omitted the reason for investing in utilities…DIVIDENDS.

Today, the public has tagged First Gen as typical of any publicly listed firm which disregards the significant “FUNDAMENTALS” aspects and fails to distinguish between capital appreciation- based relative to dividend-based investing. Most of them have reckoned that stockmarket investing is primarily the capital appreciation based ergo the “speculative bent” of domestic investors rather than what fundamentally matters.

To consider, mainstream sellside analysts are wont to present to its clients the attractiveness of an issue based on sophisticated financial jargons, yet I find it quite unusual where NONE of the conventional/mainstream analysts so far has delved on the margin-dividend aspect of the issue.

And quite curiously too, First Gen has been bizarrely reticent about declaring its Dividend Yield. While it has noted in its prospectus of the nominal figures it distributes as dividends it has clammed up on how much dividends it pays out per share.




















net income




Payout Ratio




I have made a short table based on the data from its prospectus of the dividends it pays out to its shareholders (common and preferred) and its net income. I omitted my estimates of how much it pays out per share since it looks too enormous and could be most likely wrong. However, based on its stated net income and nominal dividends payout...the minimum payout or payout ratio (dividend/income) has been an incredible no less than 45% since 2002!!!

Third, the previous IPOs could be an example to what we may call as ‘Past Performance are not indicative of future results’. One may find subscribing to last year’s IPOs as “UNPROFITABLE” because to this point none of them has risen above its subscription offering and all three were listed during the PEAK of last year’s bullish market; in particular, Semirara Mining (SCC) listed on FEBRUARY, Manila Water (MWC) and SM Investments (SM) both listed on March.

One would also note that the three issues where mostly warmly received (remember five to eight times oversubscribed!) during their offering, which at the time had a very bullish backdrop considering the upside momentum of the Phisix. Stated differently, today’s lackluster appetite for First Gen has been due to the “rear view mirror effect”, phlegmatic sentiment aggravated by poor track record of past IPOs. Comparing the past issues to First Gen is like comparing apples to oranges.

Candidly, I have NOT scrutinized on the entire prospectus of First Gen to make an in-depth ‘fundamental’ recommendation. However, being your contrarian analyst or seeing value in what the public fails to appreciate, First Gen looks likely a buy for me (I have not subscribed but am looking at the prospects of buying on listing). In essence, when the public disregards or dismisses the reason to why one should invest in utilities, gauges subscription on IPOs based on popularity and uses flimsy basis as comparison, my inclination is to go against the popular sentiment.

Fourth, utilities investing are also reckoned as defensive or countercyclical investing meaning going the opposite direction or against a cycle, where on general market weakness, utilities tend to outperform the general market since energy issues are usually considered economically as having inelastic demand.

Finally, today’s global trend of ‘supply inelasticity meets growing demand’ has resulted to investors paying attention to energy related issues…utilities issues have not escaped the global investor’s eyes…

``Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." remarked the legendary investor Warren Buffett. Ah ah, I certainly would not ignore the writings on the wall.


A follow up observation on First Gen (February 12)....

Here is an irresistible commentary by a local analyst who predicts First Gen to FALL by as much as 18%???!!!...., ``Like SM Investments and Manila Water, First Gen was offered “without a discount" to comparative companies. If it follows the performance of those recent IPOs (emphasis mine), First Gen could fall around 18%”...based on comparing apples to oranges!!

I noted that past performance cannot be indicative of future outcomes. This analyst has essentially been entrapped in the so-called heuristic bias or cognitive illusions of ‘hindsight bias’ or ‘anchoring’ in determining his projections about the share prices of First Gen by comparing “laggards” mostly weighed by sentiments rather than fundamentals (instead of comparing with companies from the same industry).

Second, such observation emanates from the initial listing activities which had been weighed down by lackluster sentiments in the general market, as well as in the particular stock (as a matter of bad publicity more than anything else), in short, the analyst is a practitioner of “rationalizing” events to past actions rather than finding value buys.

If I am right (conditional on the dividend per share data) about the “surprisingly above average dividend yields” offered by the newly listed utility power producing firm, especially in a defensive market, First Gen would likely be a winner than a DOG. I am yet trying to get in touch with the proper authorities to uncover “unearthed” figures that I expect.Posted by Picasa