Phisix Best Week of the Year; Identifying A Market Bottom, The Phisix-Peso Tango

``In these circumstances, I wouldn't try to be too clever. You don't see market timers who own yachts. If you pack up now, chances are you'll miss a good part of the next bull market. A large part of the gains are always made in the first few months of one, when market-timing investors are still on the sidelines… Bear markets are the hardest kind to invest in. But they can also be the most rewarding.”-David Dreman, chairman of Dreman Value Management of Jersey City, N.J.

The Phisix had its best weekly performance, up 5.16%, for the year and since the first week of October 2007.

It’s been a while since we have seen this kind of positive market action. And this has pleasantly brought some smile on the faces of those enduring the agony of the present bear market cycle. But of course, the harsh reality is that one week does not a trend make. And it will take awhile for us to establish the much awaited recovery.

And as a reminder, market bottoms are cyclical phases always seen from the privilege of the hindsight. Yet in anticipating such a cyclical transition means understanding probabilities- that the prospects of further losses is much less than the prospects of further gains. But the underlying lesson brought forth by today’s market condition is all about patience, discipline and comprehending the risk-reward tradeoffs. To quote again Roman poet and author Ovid, ``Everything comes gradually and its appointed hour.”

As we repeatedly have been saying, our thought is that a market bottom would perhaps manifest itself through a combination of several indicators:

1. mending MARKET INTERNALS,
2. improving TECHNICAL PICTURE,
3. reversal of FOREIGN FUND FLOWS,
4. possible SIGNS OF DIVERGENCES relative to US markets, and lastly,
5. an acceptable FUNDAMENTAL “story” for the investing public.

It seems we are seeing some of these happening today.

In addition, of course, the Phisix won’t be a standalone when a full recovery becomes evident. This week’s bullish rendition was equally reflected in a majority of Asia’s market, although perhaps the most valid interpretation could be that these reactions mainly reflect a technical rebound from severely oversold conditions unless proven otherwise.

Nonetheless, optimistically we are seeing some bottoming ‘characteristics’ in the markets of Vietnam, China (Shenzhen & Shanghai), Singapore and Japan (Nikkei 225 & Topix), where base formation- “consolidations” or higher lows are the common traits in the technical picture of these benchmarks. We need to see further sustainability of such trends.

On the other hand, we are leery of V-shaped bounces as they are commonly features for ‘bull traps’.

If we use the ‘appeal to authority’ as an argument for a bottom, then the buying activities of guru George Soros in India, the bullish “calls” of Templeton Asset Management’s Mark Mobius, the legendary Jim Rogers and of the US key investment bank Merrill Lynch of Asia could be seen in the light of “positive” indicators.

Moreover, one of the idiosyncrasies seen in the Phisix is that the recent actions have once again coincided with the turning point of the Philippine Peso as shown in Figure 1.

Figure 1: Phisix-USD/Peso Correlation: Surging Peso Equals Rising Phisix?

Since the US Dollar/Philippine Peso (green line) began to converge with its neighbors in 2005, the Phisix (black candle) has shown some interesting correlations. The red block arrows points to major inflection points: when the Phisix troughs, the USD/Peso peaks and vice versa. Although this correlation hasn’t been in lockstep or 100%, we appear to be seeing the same dynamics occurring all over again!

This could be due to foreign capital determined Peso dynamics. It has been our thought that foreign money has driven the Peso at the margins more than much ballyhooed remittances. This is not to suggest that remittances have no contribution, of course they have, but foreign capital (portfolio and direct investments) could have functioned as more of the impetus in the pricing of the Peso than other factors.

For instance, the rally seen this week alone was not entirely a Phisix-Peso interplay but likewise seen in the sovereign debt market. Philippine 10-year Peso and US dollar denominated yields fell significantly by 46 and 47.2 basis points respectively, based on ADB’s AsianBond Online. This means that the Philippine bonds staged massive rallies (which I suspect comes mostly from foreign capital).

Although such foreign inflows hasn’t been reflected in the Phisix yet-if we consider board trades or foreign trade NET of special block sales. Yes, special block sales from Petron (from the tender offer) altered this picture on the aggregate.

But, overall if the financial picture continues to show improvement we will eventually see foreign inflows back in spite of (or probably due to-aside from other variables) Bangko Sentral’s Rate policy actions. As the Economist pointed out, which we had a cursory explanation in our recent post Burgernomics: Where is the world’s most Expensive and Cheapest Big Mac? Peso one of the world’s cheapest., high interest rate emerging market currencies have remained largely unscathed (Brazil’s real and Turkey’s Lira) despite the present “risk averse” conditions.