Commodities Rise Amidst Market Turmoil; Gold Nears a Breakout

``Like dogs chasing their own tails”, it is understandably difficult to maintain a long-term view when, faced with the penalties for poor short-term performance, the long-term view may well be from the unemployment line". Seth Klarman The Margin of Safety (1991)

Figure 2: PSE Weekly declines in Percentages by sectors.

Well last week’s market action in the Philippine Stock Exchange certainly did not reflect on a limited scale of finance-based selling if such should embody subprime based apprehensions. But rather, what transpired was an across the board frenzied bloodbath, as shown in Figure 2.

The PSE had the worst week in terms of selling magnitude as depicted by its market internals since I started collating PSE data since mid 2002. There were 4 declining issues against every advancing ones during the five trading sessions.

While foreign flows registered marginal net inflows of Php 135 million, this was mainly due to the aggregate IPO related Special Block sales, which accounted for about 29% of the total peso volume turnover. Otherwise, market activities accounted for a net selling of P 1.22 billion!

Even as the Phisix dived by 4.73% over the week, reducing yearly gains to 12.4%, the Philippine Peso lost a paltry .07% from Php 45.72 to Php 45.84 relative to the US dollar.

Where we expected the mining sector to possibly provide for some semblance of divergence to a selloff, instead the reverse happened, the public indiscriminately disgorged speculative “bubbles” or Cult Stocks alongside mines with “fundamentals”.

Said differently, Cult Stocks, as defined by Investopedia.com ``A classification describing stocks that have a sizable investor following, despite the fact that the underlying company has somewhat insignificant fundamentals. Typically, investors are initially attracted to the company's potential and accumulate positions in speculation that its potential will be fulfilled, providing the investors with a substantial payout…While most of these cult stocks promise they will be the next big story after they make a new discovery or get the newest contract from the government, most do not provide investors with anything other than the story. (Does this ring a bell???-B. Te) Furthermore, these stocks typically generate very little, if any, revenue at all”, had been treated with a similar status with companies that has cash flow fundamentals!

As a result, the mining and oil sector bled the most by 13.69%. Such imperceptive selling binges speak loudly of how our markets function. Meanwhile the financial sector supposedly the parties affected by the credit woes lost only 5.34%.

Anyway, moving against the public’s consciousness, we see that amidst the global carnage, Gold is now making a renewed attempt to breach its zone of indecision marked by the continuation pattern of the symmetrical triangle shown in Figure 3.

Figure 3:stockcharts.com: Rising Commodities, Falling US dollar amidst Market turmoil

Of course gold has lately tracked the movements of the Euro, and the renewed decline in the US dollar index (topmost pane), where the latter’s rally appears to have lost steam and is once again headed towards the 35-year critical low (which increasingly adds to our global risk profile).

Meanwhile, commodities have largely remained upbeat as shown by the (above pane below the main window) the CRB-Reuters Index and the US WTIC sweet crude bellwether (lowest window), where the latter despite correcting 2% over the week to $75.48 a bbl also remains on a firm uptrend.

Oddly so, while we see the general mining indices abroad trail the overall market sentiment on the account of declining industrial metals, global gold mining indices have remained at the upper ranges of the resistance levels! Similar to the footsteps of gold prices.

Nonetheless, we are not to argue with the market. If mines are susceptible to emotionally charged bouts of panic, then they are unlikely to serve as insurance even if we are to see further strains of overseas-led market distraught. However, such conditions may change once gold makes a massive move to the upside, where foreign buying may spillover to the market and give a lift to these amidst the local punter’s myopia.

As I’ve said before, while mines and the commodities are arguably two distinct animals, since we lack a functioning commodity market (not the spurious type like the commodity market established in the 90s or the US centered defunct Manila International Futures Exchange) to buy the real thing, mining issues then serve as my proxy to ownership in gold. Obviously given the recent rout, the public does not appear to share this view.