Sunday, October 05, 2008

Phisix and Asia: Watch The Fires Burning Across The River?

``We want to use cash…there are times when cash buys more than other times, and this is one of those times where it buys more.'' '' Warren Buffett, interview with CNBC’s Charlie Rose

It’s interesting how we Filipinos get to observe the ongoing turmoil abroad from the perspective of kibitzers, especially considering that what used to be known as the most indomitable industry that has now been besieged by the question of survivorship.

Yet, I am not sure if ever our constituents realize the risks conditions and the lessons or opportunities presented thereof. For me, today’s development clearly exhibits that there is nothing called as a guaranteed or risk free investments or a risk free system. Evolving dynamics ultimately cause dislocations for the better THAN for the worse or in Joseph Schumpeter’s words “creative destruction”. Hopefully.

For most of Asia it would seem the same way too. In the “Secrets Of War: The 36 Stratagems” published by an unknown writer during the Ming Dynasty 300 years ago, one of the war stratagems include “Watch the Fires Burn Across the River”, which means to watch over your enemies wreak havoc upon themselves before making your move. As interprets ``This is a kind of long-term, strategic version of the idea behind an inducing move. Before you intervene, see that the flow of the game started by action elsewhere brings the opportunity to its peak.”

It is a wonder if the rest of Asia, especially if our leaders have these on their thoughts or if Asia itself has been greatly impacted by the ongoing ruckus.

Circumstantial evidence tells us we could be in the former state than in the latter.

As an example, in terms of corporate Mergers and Acquisition, the credit crisis induced global economic slowdown has filtered into the scene with a broad based weakness EXCEPT for Asia. According to a news report in Bloomberg, ``Companies announced takeovers valued at $2.37 trillion in the first nine months of the year, down from the record $3.29 trillion in the year-earlier period, according to data compiled by Bloomberg. The value of U.S. mergers dropped 35 percent, while dealmaking in Europe and the Middle East declined 28 percent, the data show. Only takeovers in Asia, excluding Japan, increased, showing an 11 percent gain.” (highlight mine)

So maybe Asia’s business sector are indeed watching over the extent of the ongoing spillover damage and taking up defensive positions by either consolidating nationally (e.g. Li-Ka Shing on Bank of East Asia) while taking advantage of the bear market and/or awaiting the right moment to grab opportunities overseas.

If the US took the hegemon away from the UK after the latter had suffered immensely from harrowing years of devastation wrought by World War II, could Asia be in a seemingly parallel position in terms of fortuitously eluding the systemic calamity of a banking crisis besetting the West?

Phisix: Another Divergent Week

Back to the Phisix it has been a delight to see our Phisix ignore the deteriorating sentiment seen in the US and elsewhere. But it isn’t so for most of Asia. Although we are not sure if this tranquility signifies as the proverbial “calm before the storm”, albeit there is a good chance that the recent developments has been part of the growing “divergence” trend.

Here is what I wrote last week in Phisix: Back To The Global Divergence Mode, ``But as what we have been saying before, if the estimates of foreign liquidation relative to the previous years of inflows have been accurate, then the pressure from another round of AIG-type of forcible liquidation has probably peaked and should be declining.”

Present comment: The Phisix fell mildly by 1.19% amidst a global rout.

Again from last week, ``And if we continue to see this trend reinforced, then the threat from any future selling pressures is likely to emanate from local retail investors who are the easiest to be swayed or spooked by media reports. Thus, perhaps the diminishing trend of foreign selling plus future risks of “contagion dynamic” from local retail investors are likely to be indicative of the bottoming process we have long talking about.”

Figure 6: PSE: Lull in Foreign Selling (left), Spike in Number of Trades (right)

Present comment: Last week’s action seem to validate our prognosis: One foreign buying propped up the Phisix and two, the spike in number of trades clearly points to domestic retail investors in panic!

Two weeks doesn’t a trend make but we seem to be moving in the right direction!

Figure 7: Phisix in Rangebound Trading

Lastly, again from last week, ``And a bottom process entails rangebound trading or gradual confidence building recovery.”


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