``You can't do well in investments unless you think independently. And the truth is, you're neither right nor wrong because people agree with you. You're right because your facts and your reasoning are right. In the end, that's all that counts. And there wasn't any question about the facts or reasoning being correct.”-Warren Buffett
JUST as I recommended a “Buy” following the conspicuous appearance of a turnaround, the door slammed shut on my face.
Momentarily, yes, the MOMENTUM which I have expected to have carried over seems to have faltered, and that the ticker says that my short term outlook could be wrong.
As student of the financial markets, we are taught to accept and endure mistakes as an integral part of investing, and to avoid from engaging ourselves in defending vanity, as market guru Peter Lynch has taught us, where he says, ``The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.”
This analyst began his crusade as a technician, long before graduating ourselves into a macro observer. Where in reality the market militates on a diversity of forces, to my mind, rigidly looking at the technical aspects in determining one’s investing decisions has been rather ONE-dimensional, operating in the misplaced assumption that technicals captures the entire breadth of investing psychology. Technicals are preferred tools of brokers whose economic objectives are mostly distinct from investors.
Besides, in the markets, it is not about being right but being profitable that truly counts. In whatever investing style one undertakes, success has been a matter of adhering to discipline.
So far our successes have stemmed from looking at several dimensions, most importantly with respect to macro developments in conjunction with multifarious market signals and market cyclicality over a longer span of time horizon. As you perhaps noticed, we rarely engage in short-term predictions.
With regards to technical aspects, looking at the Phisix today shows some signs of bearishness as revealed by a semblance of “topping” formation of a “Head and Shoulders” pattern. However as mentioned above, we will also assess on the other facets to determine the probability weightings with regards to the market’s outcome over the interim.
We will not belabor the significance of the Phisix’s strong correlation with global equities, in the face of escalating trends of global financial integration as discussed ad nauseam. However, Figure 1 shows that with reference to the developments with MOST global markets, the Phisix appears to have momentarily “DIVERGED” from the general trend.
Figure 1: Stockcharts.com: Divergent Phisix or a BLIP?
For instance, our point is to PROVE that following the “Shanghai Surprise” at the end of February, markets in GENERAL have been recovering, where some indices have even set new record HIGHS.
The Dow Jones World index at the bottom pane and the JP Morgan Fleming Asia Equity at the upper pane has both been treading on record territories aside from depicting conformity with the apparent inspirational “leader”, the Dow Jones Industrial Averages (center line chart), as shown by the blue arrows.
It is noteworthy to emphasize that EACH “undulance” or the peak and troughs from the major to the minor ones appears to have been in CLOSE UNISON. Our question is, if the Phisix has played out a mostly similar rhythm with the rest of global equity bourses since 2003, could this “divergence” last or is it merely a blip?
Now let us examine the recent activities. The holiday-abbreviated Phisix have been the worst performer in a mostly buoyant
Considering that foreign money have DOMINATED trading activities and had been the MAIN CATALYST towards “significantly” most of the Phisix’s advances since 2003 could they be instigators of the present decline?
Foreign money unusually accounted for a LOW of 28.61% of the week’s turnover; this had been due to the humungous special block sales at San Miguel last Friday. And YES while Thursday’s (Php 58.097 million) and Friday’s (Php 10.064 million) declines had been spearheaded by foreign selling, over the week foreign money STILL registered (Php 1.069 billion) of NET foreign INFLOWs. In short, the degree of the outflows had been INCONSEQUENTIAL compared to the degree of the inflows over the week.
Moreover, during Thursday and Friday’s retracements noticeably foreign selling had been concentrated on FEW or SELECT issues, as measured by two successive days of selloff and relative to the respective volume turnover; namely PLDT (-6.25%), MEGAWORLD (-1.37%), RIZAL COMMERCIAL Bank (-9.8%), UNIVERSAL ROBINA (unchanged) and PNOC EDC (unchanged). The rest of the Phisix components have either shown minor outflows or to the contrary of our expectations, INFLOWs amidst the carnage.
Now in the perspective of the broader market, the spread between foreign inflows and the outflows or the “NET inflows” had been the LARGEST since advent of 2007, which includes the depressed sentiment of Thursday (40:29) and Friday (51:25). This certainly is not a convincing sign of a reversal of sentiment by foreign investors, is it?
What this simply tells us is that foreign money has NOT initiated last week’s decline but local players.
Figure 2: Studying Elections 2004; Election Jitters suggests a buy?
PERHAPS election day jitters. As the national and local election day approaches, one should expect this major political variable to preponderate over the airspace and nonetheless serve as an excuse or justification by mainstream analysts to explain on the activities of the market.
Figure 2 likewise shows us that learning from the last electoral experience, in 2004, possible election jitters COULD HAVE triggered (we forgot the conditions which lead to this) a short-term decline, from April 28 to May 19th where the Phisix lost 9% (see blue circle). Yet over the following months Phisix worked to regain all such losses and by September had been trading above its April high. Could it be that local investors today are figuring out the same scenario today?
Yet, as the same experience shows, a knee jerk selloff under a bullish backdrop presents as BUYING opportunities instead of selling on crowd following “sentiment”.
Figure 3: US Dollar driven Phisix
The Phisix has sizably OUTPERFORMED when the US dollar as measured by the trade weighted index backslides. In Figure 3, it is conspicuously shown that as the US dollar declines (signified by the red trend lines at lower pane), the Phisix rises sharply (red trend lines at center window).
Notice too that when the US dollar staged a substantial rally in 2005 as denoted by the blue trend line, the Phisix has traded mostly sideways, as represented by the blue box.
Well, with the US dollar breaking DOWN from its CRITICAL support level, it could be expected that such added liquidity should serve as support to global asset classes including that of the Phisix and to other Philippine asset classes.
Dr. Ed Yardeni of the Oakwood associates underscores our view of such accommodative stance in favor of global asset classes (emphasis mine), ``...foreign central banks are already increasing their purchases of US Treasuries and Agencies to avert a precipitous drop in the dollar. The growth of FRODOR--foreign official dollar reserves--rose to 20% y/y last week, up from 13.3% late last year, and the highest since January 2005. In other words, the latest bout of dollar weakness is once again causing central banks to pump up the pace of global liquidity, which is why commodity prices are taking off again. Indeed, the CRB raw industrials spot price index is now a whopping 32% above its previous cyclical peak during the global boom of the mid-1990s! The IMF’s data show that non-gold international reserves rose to a record $5.15 trillion in January, more than doubling since the start of the decade. Emerging nations held a record $3.71 trillion in international reserves in January, up 24.8% y/y. International reserves held by industrial countries were unchanged at a record high $1.44 trillion, 6.3% above a year ago.”
So AGAINST a backdrop of combined bearish indications from the technical viewpoint and potential seasonal (remember Wall Street’s longstanding axiom “sell in May and go away”?) weakness to even possibly localized anxiety as the “election jitters”, we should view ANY selling amidst a weakening dollar (on continued premise of global search for yield) as prime conditions for BUYING OPPORTUNITIES.
Of course, anything can happen to the markets over the short-term, but given the strong correlation of the US dollar and the Phisix, as well as the internal dynamics of the Phisix (dominant foreign buying), it is likely that the present divergence may well be a blip.
And it is also important to remind ourselves that ANY risks that are most likely to emerge could EMANATE from exogenous factors, as evidenced by the May 2006 shakeout and the recent February “Shanghai Surprise”. As they may be caused by events in the US, such as withdrawn liquidity from the subprime mortgage fallout or geopolitical policies and reactions thereof (as protectionist measures against China or a military strike on Iran) or a US dollar crash, or possibly (to a lesser degree) in China or other emerging markets (which may cause a domino effect) or unwinding of the of carry trades, however, present day markets appear to have discounted such developments FOR THE MOMENT.
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