Glorietta 2: Event Driven Reactions Are Short-Term Oriented!

``Prices are not driven solely by real-world events, news and people. When investors, speculators, industrialists and bankers come together in a real marketplace, a special, new kind of dynamic emerges-greater than, and different from, the sum of the parts. To use the economist terms: In substantial part, prices are determined by endogenous effects peculiar to the inner workings of the markets themselves, rather than solely by the exogenous actions of outside events.”- Benoit Mandelbroit, The (Mis) Behaviour of Markets

The public tends to equate bombing incidences to affect the markets negatively. While in many instances such observations have proven to be accurate, the connections have not been CATEGORICAL.

For instance, the December 30, 2000 or the series of “Rizal Day” bombings, which resulted to 22 fatalities and over 100 injuries, the Phisix reacted with a 3% decline during the following trading session.

On the other hand, the much deadlier February 27^th Superferry bombing which according to wikipedia.org had been the “worst” terrorist attack in the Philippines that accounted for 116 deaths, was largely ignored by the markets; the Phisix even registered a marginal gain of .8% during the next trading day!

We see the same reaction across the globe.

In October 12^th 2002, the bombing of Indonesia’s tourist haven of Bali killed 202 of which 164 were foreigners, saw its main benchmark fell 10.3% in the next session. Madrid’s March 11, 2004 coordinated bombing in its commuter train system which accounted for a death toll of 191 and over 2,500 injuries, also suffered 3.5% loss the day after.

Just last Thursday, a day prior to the unfortunate Glorietta 2 incident, Pakistan’s former Prime Minister Benazir Bhutto’s return from exile was met by suicide bombings which claimed 133 lives. Meanwhile, Pakistan’s Karachi 100, which had been on a sizzling hot winning streak, simply shrugged off the event to even post a measly .2% advance on Friday.

As a possible clue to how the local market would respond, the Philippine Peso had enough time to reflect on last Friday’s day of abomination, since the bombing occurred at around 1:30-40 pm while the domestic currency market closed at 4:30 pm.

The USD-Peso opened higher at 44.15, compared to Thursday’s 44.05 closing. In the wake of the Glorietta 2, the Peso stormed to a high 44.355 but eventually closed at 44.24 or .4% higher than Thursday. In short, while such terrorist actions negatively affected the markets as a knee jerk reaction, such events tend to get DISCOUNTED going forward.

Figure 1: Previous Bombing Incidences and the Phisix

In Figure 1, the previous bombing encounters, marked by the green arrows, shows of the disparate reactions by the Phisix over different time frames, the purpose of which is to prove the LASTING effects of the perceived “event” based determined market reactions.

The 2000 Rizal day bombing saw a one day decline, but surged over the quarter following Ex-President Estrada’s ouster, and massively declined going to the end of the year (down by about 37%).

In contrast, the February 2004 Superferry bombing registered slight one day gains, was mixed over the quarter but was significantly higher at the end of the year (up over 20%).

No, Rizal day’s bombing was not the causative agent for the year end decline of the Phisix. By looking at the big picture, one would understand that the 2000-2002 as the LAST LEG of the Phisix BEAR market cycle which COINCIDED with the decline in US markets and its ancillary economic RECESSION. The Rizal day bombing was an unfortunate incident that was eventually glossed over by the market.

A similar reaction can be viewed from the US. The infamous 9/11 2001 incident occurred when its markets had already been cascading, this we discussed in our September 17 to 21 edition (see Comparing Past Outcomes From FED Actions Is A Gambler’s Fallacy). The shocking event aggravated the prevailing dour sentiment and steepened the market’s decline instead of prompting it.

Incidentally, both markets (US and the Phisix) bottomed in late 2002 to 1^st Quarter of 2003 and interestingly, rose almost synchronically until recently.

The same dynamics goes with 2004 Superferry incident; the year end gains had been confluent with the STRENGTH in the global markets. All the negative reactions arising from the bombing incidences of Bali or Madrid or the rest of the world have proven to be BUYING opportunities since all of the equity yardsticks had been significantly higher today relative to the occurrences of such incidences simply because global markets have surged!

True enough, while the odds are strongly tilted in favor of a significantly lower Phisix (give or take 3% down) on Monday’s opening, or of any markets subjected to terrorist’s activities, the dominant sentiment which will determine long term investor returns will be established by much larger and far more complex factors than simply than the aftermath of Glorietta 2.

Unless one is privy to the plans by criminal perpetrators, no one can accurately predict when such events will happen and correspondingly take requisite actions. A rational investor would instead ascertain variables which should determine the longer horizon of the market’s direction rather than ridiculously attempt to “time” the markets over the short run. In short, investors should weigh on the risk-return tradeoffs in determining their decisions rather than be held hostage to emotional vagaries.

Lessons:

1. “Events” based market reactions are largely knee jerk reactions and dissipate over the longer period.

2. The markets have NOT been EVER been SINGLE variable determined over the broad picture. While one factor (as events) could outstrip the others into influencing the short term activities in the markets, many long term variables determine directional flows of the each of the markets (currency, commodities, bonds, stocks etc.). Paraphrasing Warren Buffett mentor Ben Graham, over the short term the market is a voting machine, over the long term a weighing machine.

3. Investor’s returns are determined by the appreciation of and corresponding action in terms of long term cycles and trends.