``Every investment is a form of speculation. There is in the course of human events no stability and consequently no safety." -- Ludwig von Mises
Kung Hei Fat Choi!
As we enter the New Year of the FIRE PIG, a yahoo article tells us that this year could be expected to be a turbulent one, with possible incidences of epidemics, disasters and violence. The yahoo article quotes a Hong Kong feng shui master Raymond Lo ``Pig years can be turbulent because they are dominated by fire and water, conflicting elements that tend to cause havoc”.
However, despite the bleak outlook, most of the soothsayers, says the article, think that world economy will continue to boom, yet advices people to be cautious about their investments (duh!).
Another astrology link tells us of an opposing view, that Year of the Pig will be lucky! According to Chineseastrologyonline.com, ``The Chinese see that pigs eat food all the time, enjoy sleeping all day long and worry about nothing during their entire lives. Therefore, pig is a lucky animal.” Maybe FOR the Chinese denizens of the Mainland; China’s bourses in Shanghai (+12.07% y-t-d) and Shenzhen (+37%.67!) have been on FIRE since 2006 and are thought to be in a “bubble” by some analysts, while Hong Kong’s Hang Seng (+3.02%) hasn’t been far behind.
Well, what concerns us is this very important Wall Street “piggy” maxim, ``Bulls, Bears Make Money, Pigs Get SLAUGHTERED!” Which means whether the market is in advance or decline, it is the “greedy” suckers who essentially gets creamed...ALWAYS.
Now speaking of greed, all, if not most of you, are now aware that the Philippine Stock market, once a PARIAH, is today’s CYNOSURE.
It certainly has been a twist of fate, and a most significant vindication on my behalf. (While turning bullish on the market in 2002, the years of drought have depleted most of my resources which almost compelled me to reluctantly shift careers...I was essentially saved by the proverbial BELL! Sorry to my batchmates who had earlier expected me to join them in their field).
The record breaking developments of the Philippine financial markets as seen in the Phisix and the Peso have now been splashed into the MAIN headlines (and NOT just the business headlines) of the front pages of the major local broadsheets. What used to be a function of plainly business interests has NOW BECOME a FUNCTION OF SOCIAL SENTIENCE! As I have repeatedly argued, the financial markets bear the important facets of social phenomenon aside from the “commonly known” economic, financial or corporate dimensions. The present breakthroughs are very important indications of transformation because it HIGHLIGHTS the evolving phases of the stock market cycle or the cyclical phases of any financial market.
In addition, as signs of complacency, low regards to risks, and prospects of easy money, I continue to receive queries on which issues to speculate on by vulnerable retail investors. For you who read me, you’d know that my usual response to these, “I am NO SOOTHSAYER or CLAIRVOYANT to know or identify which stocks will be tomorrow’s darlings, as I CANNOT READ THE MINDS of the collective thousands of investors.” Yes sorry, but I cannot live up to your “excitement expectations” of me because my concern is about ABSOLUTE RETURNS and not of faddish themes as mainstream analysts are wont to do.
I have long given up on the “excitement themes”, particularly betting on Jai-Alai (well, honestly it closed more than I had to give it up) or Horse Racing, and believe me the financial markets are NOT of the same class if ONLY to be based on time frame preferences.
The public in general has this misplaced notion that such activities are one and the same. To such context, we might say that the degree of assumed risks EQUALS to the degree of expected returns. While the average investors put to risk 100% of their capital to generate 10% returns, prudent investing means the reverse, risking 10% of capital to generate 100% returns. In other words, people get what they deserve.
While chart reading may yield some clues, they serve NO guarantees, and are NOT foolproof of the momentum you and I would like to expect. Charts function as a tool in my view, and have not been the ultimate determinant of my investing decision making process.
Chartists who declare that they read psychology, and operate SOLELY on such premises, in my view, simply are instruments of brokers whose aim is to churn accounts in conflict to our goals. Furthermore, the portrait of price action operates SINGULARLY on a historical context, where if to paraphrase the Sage of Omaha Mr. Warren Buffett, ``if past history was all there was to the game, then the richest people would be librarians.” In the markets, the reality is that previous performances are NOT surefire signals of tomorrow’s action.
Moreover, the concept of price action as a standalone analysis misses out the psychological premises in the field of economics (Austrian) such as the HUMAN ACTION and of IRRATIONALITY of the markets in the variegated outlooks of behavioral finance/economics, George Soros’ Theory of Reflexivity, Multi-fractal analysis of Benoit Mandelbrot and the dynamics of Booms and Busts as conveyed in the book Manias Panics and Crashes by Charles Kindleberger. In other words, pattern recognition based on price action, for me, serve as a ONE dimensional and oversimplified approach to investing, which may NOT be the optimal way to generate superb returns.
By the way, for your information, my mentor started me out basically as a technician, owing my first lessons to the book of Alexander Elders “Trading for a Living”. How time has changed.
Remember there is NO one HOLY GRAIL for financial market’s investing. Quants and their Nobel Laureates ilk have likewise designed sophisticated mathematical-probability modeled trading programs that basically underestimates statistical “FAT Tail” or low probability high impact events. The 1998 LTCM fiasco clearly comes to mind. Yet many of today’s hedge funds operate on such paradigms and are levered to the hilt in order to generate above par returns.
We might as well also remember that TODAY’S FAVORITES/WINNERS MAYBE TOMORROW’S LAGGARDS and vice versa. It is RANDOMNESS over the short run that dictates on the market in spite of the declarations of your most loved prime time analysts.
Because markets reflects of a social spectrum, the recent successes of the Phisix will surely attract more of the numerous skeptics in the long run, while at the same time enhance the risks taking appetite of the general investing public. It is no less called than the SURVORSHIP Bias where people see only [or are drawn] to the winners. A befitting quote from Ex-US President John F Kennedy’s underscores such phenomenon, ``Victory has a thousand fathers but defeat is an orphan”.
Local business analogies would be mini boom-bust episodes of the “pan de sal”, “lechon manok”, shawarma, “pearl shakes” [zagu] and etc...
Since the state of the present Philippine market cycle is essentially in a bullmarket or in the advancing phase over the long run, the general premise that one should consider is that of the Rising Tide Lifts All Boats (RTLAB), although not equally. Yet under a more torrid circumstance, as Wall Street says, Even Turkeys Fly in Strong Winds (ETFSW), which means that even the weakest showing stock today will be boosted as general sentiment will buoy the issue regardless of fundamentals or story.
Considering yet the narrow breadth of the supplies of listed companies, the speculative tendencies of the public will mean more issues being bidded up regardless again of fundamental outlook, and more upside volatility in the frantic state to pile up on winners.
As we tackled in our Jan 29 to Feb 02 edition (see The Phisix is UP 9%, It’s EASY Money Out There!), of the snowballing exuberance, the Phisix surged to a 10-year high (up 2.7% w-o-w, +11.7% y-t-d!) late this week. The SURVIVORSHIP Bias has NOW lured investors to the a RECORD BREAKING number of trades, averaging about 11,500 a day for the week, while daily traded issues spiked to an average of 172 a day! The market appears to be getting really ecstatic now.
If the past would RHYME if not repeat itself, then you could be looking at an interim TOP. Yet, as a client texted me earlier on the supposed consolidation of the PHISIX and the US benchmarks, my response was the market hasn’t revealed signals of stress yet, which proved to be a lucky observation considering that both the PHISIX and the US benchmarks took on NEW highs at the latter segment of the week.
Figure 1 stockcharts.com: Confirming Averages
In figure 1, the great run of the US benchmarks has expunged all sorts of previous divergences. Today, the Dow Jones Industrials (black-red candle), Utilities (lower pane) and Transports (line chart behind) have chimed to signal that the upside momentum, according to the Dow Theory, has strengthened in spite of the litany of “wall of worries”.
Further, major headlines as a social indicator could mean the public has, for the interim, jumped on ONE side of the trade and this could translate to a short-term profit selling event, nevertheless this comes in the face of the rising US benchmarks which has so far greatly inspired the mighty rally seen in the Phisix.
As you have known, I have been NEUTRAL to BEARISH on the interim on the Philippine equities and the Peso considering the frenzied momentum relative to the exogenous risks presented. Although, I have not recommended to anyone for that matter to SELL yet, considering that the premises of irrationality could translate to EVEN MORE UPSIDE MELT-UP, which could even be aggravated by the accelerating upside momentum in the US markets.
On the other hand, I have asked those who have been unable to resist the ITCH or the “social” pressure to jump into the market with caution, investing only the amount of which one can afford to risk or assume upon a position of risk which one can afford to sleep upon.
While the market may encounter a counter trend soon, AS ANY CYCLE DOES, the long term trend remains accommodative towards one’s mistakes. But that doesn’t mean that one should ride roughshod over the market. Reckless behaviors equate to ignoring the risk equation which frequently results to either poor returns or even at worst; gut wrenching losses.
What I have repeatedly suggested to you is to TIGHTEN YOUR STOPS and await for the next cycle before undertaking an overweight position. After all, successful investing is all about patience, and discipline, without it PIGS get slaughtered and sold to the market.
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