Focusing On The Future: the Phisix and the Philippine Presidential Cycle

``The typical US investor tends to have about 80 percent of equities in the US. The world of tomorrow suggests a much greater exposure overseas. In general, you should consider holding a third of your equities in the US, a third in industrial countries outside the US and a third in emerging markets.”-Mohamed El-Erian, When Markets Collide: Investment Strategies for the Age of Global Economic Change, co-CEO of bond-investing giant Pimco

Self development author Robert Ringer cites the work of the late Alvin Toffler in the landmark book, the Future Shock, where Mr. Ringer wrote, ``Toffler believed that at any given time in history, about 90 percent of the population thinks in terms of the past, 7-8 percent have their heads in the present, and 2-3 percent are focused on the future.” (highlight mine)

Applied to the markets, since only 2-3% think in terms of the future while 97% are merely trend followers or momentum players then getting “ahead of the curve” translates to focusing on the possible outcomes in terms of the future and positioning ahead.

Getting Ahead of the Curve: Focus On The Longer Horizon

Thus to be able to acquire such an edge we need to understand how to use information. Josh Wolfe of the Nanotech section of the Forbes magazine tells us of the three sources that we need to focus on:

From Mr. Wolfe (underscore mine),

``Remember this: there are three sources of edge for you as an investor: informational, analytical or behavioral. Having an informational edge—a legal one at that—is very hard today because bits of information are distributed (via bits of optically propelled 0s and 1s) faster and wider than ever before. If the world is flat then information spreads across it (through Cisco routers) with nary a ripple (like Crisco on a pan). And sad but true: those lacking assets connecting them to info (logins, laptops, and lit fiber) lack assets connecting them to investors. You need basic infrastructure for basic trade and e- infrastructure for ETrade.

``Now “analytical” edge is more valuable than informational edge because fewer have it. Scarcity has value. You and I can get the same information but I can analyze it differently, attributing different meaning and weight the duration or magnitude of information or expectations differently. Maybe I can analyze it better. But more investors and more funds means more efficiency and less edge. And many market players competing to surgically excise (and analyze) truth from information means you get paid less to be a “surgeon” in the stock market ER.

``Know this: the best way to have analytical edge is to have a longer time horizon than the rest of the market. If the market discounts intrinsic values to the quarter, having a variant perception a year out can help you find undervalued stocks. My friends at Fund-of-Funds say so. Yet, shockingly: they do as they do not as they say. They manage their hedge fund managers to the month (with monthly reporting)—the unintended consequence? Their hedge fund managers shorten their own time horizon to manage against redemptions and fund withdrawals—inadvertently eroding away their edge. But alas, lamenting “short-termism” seems to be the only long-term rant that stays the course.

``Thus behavioral edge is the one remaining true source of edge. Edge can come from understanding social psychology, the madness (or wisdom) of crowds and individual cognitive and behavioral biases. If you guessed “none” instead of “nine” you thought appropriately more like a sociologist than a mathematician.

In essence, Mr. Wolfe suggests to us to have access to the right information by having the appropriate infrastructure, to know how to process such information by adequately analyzing them in the context of the big picture and to understand social psychology and the cognitive or behavioral biases to take advantage of market sentiment.

The Phisix And The Philippine Presidential Cycle

For instance 2 years from now the Philippines will undergo another national political exercise known as the Presidential elections.

While much of the public have been speculating on who will be running under what party, we are interested to know how the Phisix responds to the election of a NEW president as shown in Figure 6.

Figure 6: Presidential HONEYMOON

The blue arrows in Figure 6 demonstrate of how the Phisix responded during the last 3 Presidential election years which spanned over the past 22 years or since 1986. All of them have been positive.

In 1992, when Fidel V. Ramos assumed the presidency under the bull market cycle of 1986-1997, the Phisix soared from about 1,100 to 3,200 in 1994 (about 190%). Of course this didn’t happen in a straight line. 1992 had a mid year correction but the HONEYMOON prompted bullmarket was jumpstarted anew when the New Year ushered in.

1998 was a baptism of fire for Joseph Ejercito Estrada, having been elected to the presidency a year after the Asian Financial Crisis imploded. The Phisix responded with a late but fierce HONEYMOON-Technical oversold bounce which resulted to a gain of about 127%. Unfortunately, because the bounce signified as a countercyle amidst a secular downtrend, the advances were momentary and lasted only NINE months.

The controversial reelection of the incumbent president Gloria Macapagal Arroyo came amidst the backdrop of a booming global equity markets. The Phisix jumped from around 1,430 in April to 2,130 in February 2005 for a 48% gain in less than one year to reflect the GMA HONEYMOON.

However, 2005 saw the US dollar stage a massive rally amidst another political controversy which hounded the presidency-the Hello Garci Scandal, thus the Phisix traded sideways for most of the year until the last quarter.

By 2010 Global Markets Could Be In A Recovery Phase

Of course, we should mull over on whether the external environment would be supportive of such HONEYMOON. On whether the banking crisis in the US would have been on a mend or if it could still be undergoing adjustment pangs as shown in Figure 7.

Figure 7: PIMCO Emerging Markets: Average Crisis Durations

According to Michael Gomez, Executive Vice President of leading global investment management company PIMCO in a recent article, ``Unfortunately for the U.S., the fallout is usually both lengthy and costly: historical evidence suggests that banking crises in developed countries take, on average, between four and five years to resolve. As Yogi so famously said, “It ain’t over ‘til it’s over.””

If we are to base the present crisis from the inflection point of the US real estate sector, then the reckoning period for the advent of the crisis could be pegged at February of 2007, see Figure 8.

Figure 8: stockcharts.com: US Real Estate Led Crisis

The NYSE Real Estate index (main window) turned nearly a quarter before the Dow Jones Financials (top minor pane), Banking Index (mid minor pane) and the Mortgage Finance Index (lowest pane).

So if it should take the average crisis in the US to be settled in a timeframe of four to five years, then 2010 would already mark the late phase of the crisis which could translate to a bottoming or consolidation of the US equity markets. At best, it could also start to exhibit some signs of recovery!

Another, if it takes 3.7 years for all countries to resolve the present crisis and 3.3 years for emerging markets based on the PIMCO studies of banking crisis, then it also means that most of the world economies would also be on the process of a recovery by 2010!

This posits for a possibility of strong kick during the presidential honeymoon phase, which also means that 2009 could translate to a springboard for a powerful presidential honeymoon cycle momentum in 2010.

Overall, the prospects of a recovery in the Phisix looks likely a sooner than a later proposition.

Crash and Meltdown Alerts

However, as a word of caution these three months are likely to reflect the most vulnerable months of global equity markets. Some institutions like the Royal Bank of Scotland and Morgan Stanley have issued crash or meltdown alerts last June.

It is not for us to agree or not with such dire outlooks. We have spilled so much ink on these horror stories. While I don’t share the outlook, it can happen. The important thing is to observe HOW OUR PHISIX WILL REACT if these events do occur and not to run to the hills to seek refuge.

At the interim, if the PRESENT DIVERGENCES in the Phisix-US/global markets CONTINUE TO MAKE A SIGNIFICANT HEADWAY even amidst the prospects of a “perfect storm” then investors could possibly start to price in with confidence the belief that we could depart from the rest of the global markets affected by the debt bubble bust stigma.

The best is to see the Phisix consolidate with an upside bias on a gradual scale regardless of what happens elsewhere. A sharp upside climb risk a volatile and deep decline that could wipe out all gains accrued. A good example would be President Estrada’s honeymoon.

Thus, we should see a meaningful yearend rally to mark the transition from the bottom towards a recovery probably from mid October thereafter-assuming no major crashes to impact us. Then 2009 should see a marked improvement from 2008.

On the worst outlook, a global crash could possibly bring our call for this bottom phase to a test.