Monday, February 20, 2012

New Record Highs for the Philippine Phisix; How to Deal with Tips

I worry less about small failures, more about large, potentially terminal ones. I worry far more about the "promising" stock market, particularly the "safe" blue chip stocks, than I do about speculative ventures-the former present invisible risks, the latter offer no surprises since you know how volatile they are and can limit your downside by investing smaller amount. I worry less about advertised and sensational risks, more about the more vicious hidden ones I worry less about terrorism than about diabetes, less about matters people usually worry about because they are obvious worries, and more about matters that lie outside our consciousness and common discourse (I also have to confess that I do not worry a lot - I try to worry about matters I can do something about) I worry less about embarrassment than about missing an opportunity. Nassim Nicholas Taleb The Black Swan The Impact of the Highly Improbable

Rampaging stock market bulls has propelled the local benchmark, the Phisix to another milestone record high!


Friday’s electrifying breakout anchored by a 2.4% advance, largely influenced by developments overseas, essentially pushed the Phsix farther away from the 13 month consolidation level (green channel). This seems to reinforce the new support level, which formerly was represented by the resistance level (upper green horizontal line).

Of course, price charts merely function as guides, as they are ultimately driven, not by patterns, but by the value-scale time preference exhibited by the marketplace or by market participants acting through the price mechanism.

The Global Boom Phase

It is important to keep in perspective what has been driving actions in the stock markets.

Where the mainstream associates today’s milestone feat to ‘economic growth’, ‘earnings growth’, ‘confidence’ to the political affairs or to some other bunk, it is worth accentuating that what has been happening in the Philippines has not been an insulated event but a global phenomenon.


The exemplary performance by the local bellwether has not even kept pace with the remarkable advances by many of the world’s bourses.

While the Phisix has assumed on the leader’s role relative to the performance of our nieghbors or the ASEAN-4, we even trail the returns of another ASEAN member particularly Vietnam’s 14.72% on a year-to-date basis.

The exceptional gains by Hong Kong and India as indicated in the above table as one of the top performers in the world, has also outclassed the Phisix.

Yet most of Asia has been up by over 10%, except for China, Indonesia, Malaysia, Australia and New Zealand. Only Sri Lanka, Bangladesh and Mongolia registered losses over the same period.

And of the 71 international bourses on my radar screen, 42% have posted gains of over 10%. Such broad based bullishness has simply been astounding.

Intensifying Local Boom

In the local markets, again, the bullmarket sentiment has not been limited to select issues, particularly to heavyweight components of the Phisix, but to the broader market.

While we should be expecting a natural profit taking process or a countertrend to occur anytime, overbought conditions in a bullmarket may remain extended.

Such dynamics may be taking place.


The recent decline in the advance-decline differentials (averaged weekly) seems to have augured for a retracement. However, Friday’s intense rally may have deferred anew what should have been a normal profit taking sequence.

The market’s sentiment can be measured by the trading activities or internal market actions.


The average daily traded issues, which has been ascendant since November of 2011, has also been exhibiting signs of exhaustion. Friday’s rally has not alleviated the weekly decline.

So far market breadth seems indicative of a coming salutary profit taking cycle.


This week’s rally has evidently been led by the service sector via gains of the major telecom issues. The property and the financial indices, took second and third spot, have similarly bolstered the gains of the Phisix.


On a year-to-date basis the property and the financial sector continues to widen their lead relative to their contemporaries, whose gains have mostly been responsible for the outstanding returns of the Phisix.


And if we are to look at the biggest companies within the Phisix basket, whose ranking are based on free float market cap, the actions of the heavyweight basically confirms the standings of the sectoral performances.

Property issues led by Ayala Land [ALI] have taken the commanding lead, along with SM Primeholdings [SMPH] at fourth spot.

Meanwhile, the financial sector has been powered by BPI and MBT at third and fifth spot respectively. Ayala Corp, the mother unit to ALI and BPI, at second place has also been buoyed by the gains of the sizzling hot subsidiaries.

And in evaluation of the above dynamics there are several things to keep in mind:

One, the gains of the Phisix hasn’t been limited to Phisix based heavyweight components but manifested on the overall markets. This means that market’s attention has been percolating into second or third tier issues.

Two, the rotational process has been in progress, where past laggards are today’s darling and yesterday’s favorites have become the du jour laggards. Such dynamics are being exhibited in the actions of the Phisix heavyweights, which have been confirming the sectoral rankings. The interchanging gains with the Mining industry[1] relative to the other capital intensive sectors of the property and telecoms, along with financial sector, which functions as the financial intermediaries of these industries, signify as symptoms of a mounting inflationary boom. In short, the real relative effects of monetary inflation[2] are being likewise being demonstrated in the actions in the stock markets, here and around the world.

Also the rotational process extrapolates to the shifting market’s attention from heavyweights to second or third tier issues and vice versa which can also be a dynamic found within specific sectors.

The bottom line is that for as long as the monetary inflationary push persists, the Phisix will continue to ascend, but the distribution of gains will vary in terms of degree and of timing seen from sector to sector and from heavyweights to tiered issues.

Inflationary Credit Fueling the Boom Phase

There is another very important aspect to remember in the environment where everybody is a genius.

To quote the legendary trader Jesse Livermore via Edwin Lefèvre in the must read classic Reminiscences of a Stock Operator[3], (emphasis added)

The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it.

Sustained broad stock market gains will not occur if funded by savings alone. Since savings are limited or are scarce, market will then reflect on offsetting actions—i.e. gainers would be counterbalanced by losers, where net gains will only emerge from dividends. It is under such environment where earnings would truly matter.

Austrian economist Fritz Machlup provides the economic underpinnings to Mr. Livermore’s empirical observation[4] (emphasis added)

A factor which is capable of evoking expectations of a rise in security prices is a reduction of the interest rate. In so far as this reduction occurs merely as the result of an increased supply of intended new savings, the likelihood of a long-lasting upward movement of the market is rather meagre.

In addition, since stock markets operate on the principle of pricing, then any increase in the demand for stocks through higher prices would likewise entice more supply (more listings). This would again entail offsetting actions under a savings only financed milieu

Again from Mr. Machlup continuing from the same paragraph,

It is easy to see that if dividend prospects are unchanged increased and the rate of interest is reduced, security prices will rise, and it is more than probable that a sufficient amount of security sales from "final sellers' (unloading by temporary holders and new issues) will be quickly forthcoming: comparatively small offerings of securities will suffice to absorb the increased supply of new savings and to drain them off to other markets. For no matter how the supply of money capital derived from current new savings may fluctuate, it is scarcely conceivable that the total supply of money capital can ever rise to unexpected dimensions as the result of an increased flow from this source. If the public devotes only its new savings to the securities market, and the new demand at once causes some groups of securities to become "firmer," it will not be necessary for the purchasing power of the public to be withdrawn from the commodity market until it has "run through'* all the securities quoted on the exchange and has adjusted the prices of securities, one after the other, to the new market conditions.

In the present world, boom conditions spread from the markets to the real economy.

Yet the boom phase of the business cycle, as reflected in the actions of the stock markets requires continuous infusion of credit to facilitate an increase in demand for stocks.

Mr. Machlup further explained[5],

If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and amortization current amortization allowances is fairly inelastic, and optimism about the development of security prices, would promptly lead to a "tightening" on the credit market, and the cessation of speculation "for the rise." There would thus be no chains of speculative transactions and the limited amount of credit available would pass into production without delay.

And such a boom can only happen when interest rates have been tampered with to produce a negative real rate environment.


Today’s boom can easily be traced to seemingly coordinated policies by global central banks to allegedly fight economic downturn with an environment of negative real rates.

Zero interest rate policies (ZIRP) have become the conventional creed utilized by central bankers as shield against the publicized menace of recessions. In reality, these measures have been designed to buttress and preserve the beleaguered banking system from a collapse.

Interest rates today on a global scale have been approaching the 2009 levels[6], although policy rates directives of emerging markets have been less aggressive compared to crisis afflicted developed economies[7].


This week, we see the same patterns of credit easing policies in some of the major economies. Sweden cut interest rates[8], China pared down the banking sector’s reserve requirements for the second time in 3 months[9] and importantly, the Bank of Japan (BoJ) surprised the markets by aggressively expanding quantitative easing (QE) which according to them is slated to be completed by the end of 2012[10].

While the markets were palpably surprised by BoJ’s announcement, to the contrary we had expected this, as I wrote last week[11]

…politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

This serves a reminder that central banks are politically influenced and that any talks of the completion of QE should be taken with a grain of salt. Political agents change their statements almost as fast as they change their underwear.

So credit easing measures will continue, with pretext of economic doom as cover for their actions.


And yet the actions of central bankers have been percolating into to the real economy, through the commodity sphere. Oil has broken out of the consolidation- quasi cup and handle formation while Natural gas which has been on a decline, largely influenced by the Shale gas revolution has suddenly surged. If the uptick in natural gas prices continues in spite of the expansion of the Shale gas output, then we could be seeing seminal signs of what Ludwig von Mises calls as the “crack up” boom or the intensifying symptoms of monetary disorder.

Jesse Livermore’s Investing Tip: Don’t Listen to Tips!

In a bullmarket, everyone’s a genius. That’s because ascendant prices will varnish many mistakes used in the evaluation stock price trends. Tersely put, many will be right for the wrong reasons. And the natural ramifications from easy money made from a bull run will be overconfidence, embedding of wrong analytical methodology (where many analyses are really just heuristics) and greater risk appetite.

Since broad market gains are the character of the typical bullmarkets, issues which are commonly deemed as ‘speculative’ or ‘third’ tier or in local colloquial terminology known as ‘basura’ issues will be imbued with magnificent gains symptoms of which we are seeing today.

The common conventional attribution for spectacularly performing speculative issues are that they are being spurred by undisclosed or yet to be disclosed insider activities which have been channeled as rumors, gossips or insider tips.

In reality while there may be some truth to such insider based plans and developments, the causal linkage between price actions and insider activities have not been straight forward. Such rumor based price action relationship hardly exists during bear markets.

Insider tips usually signify as available bias or looking at current events or scouring for any “available” seemingly plausible information to explain the market’s actions or the post hoc fallacy.

And insider tips are ultimately dependent on general market sentiment.

In short, negative real rates or the increase in people’s time preference have impelled market participants to look for all sorts of justifications to buy into the markets.

Another important factor is that insider tips can be subject to the machinations of stock market operators.

Again from the profound wisdom of the celebrated trader Mr. Jesse Livermore via Mr. Lefèvre[12] (bold emphasis added)

Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tipseeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn't, better luck with the next. I am thinking of the average customer of the average commission house. There is a type of promoter or manipulator that believes in tips first, last and all the time. A good flow of tips is considered by him as a sort of sublimated publicity work, the best merchandising dope in the world, for, since tip-seekers and tiptakers are invariably tip-passers, tip-broadcasting becomes a sort of endless-chain advertising. The tipster-promoter labours under the delusion that no human being breathes who can resist a tip if properly delivered. He studies the art of handing them out artistically

And relying on tips to goad for a buying action equally requires dependence on tips on how to close the transaction. More from Mr. Livermore[13].

A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don't believe in tips. If I buy stocks on Smith's tip I must sell those same stocks on Smith's tip. I am depending on him.

Also relying on tips would seem like depending on the advice of quack doctors on your health. Yet again Mr. Livermore[14],

I have said many times and cannot say it too often that the experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 per cent safe. Wall Street professionals know that acting on "inside" tips will break a man more quickly than famine, pestilence, crop failures, political readjustments or what might be called normal accidents.

These seem like common sense and easy to observe advise that has been hardly practised by most participants. And the reason for this is due to our intuitive attachment to emotions which embodies our human frailty[15].

There are many thousands of people who buy and sell stocks speculatively but the number of those who speculate profitably is small. As the public always is "in" the market to some extent, it follows that there are losses by the public all the time. The speculator's deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal. Accidents which knock carefully conceived plans skyhigh also are beyond regulation by bodies of coldblooded economists or warm-hearted philanthropists. There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous

Despite enrolling in the school of hard knocks, many fail to heed on such fundamental lessons.

Finally, for investment success, the proof of the proverbial pudding is in the eating. Mr. Livermore’s priceless counsel[16],

Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

Mr. Livermore’s line of thinking emanates from an empirical or pragmatic point of view which unknowingly to him, his ideas have been backed by sound economic theory.

Mr. Livermore’s emphasis on gains comes in form of capturing magnitude and not on the frequency. And this is the opportunity that buy-and-hold in a conditional bull market or the boom phase of the bubble cycle offers.

Prudent investing means to manage one’s portfolio under such direction.

[1] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[2] See Phisix and the Rotational Dynamics, January 30, 2012

[3] Lefèvre, Edwin Reminiscences of a Stock Operator p.255

[4] Machlup Fritz The Stock Market, Credit And Capital Formation, p.90

[5] Machlup, op. cit. p.92

[6] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[7] Emerging Markets Monetary Policy Rate Indicator, February 18, 2012

[8], Sweden Abandons Rate Rises as Euro Crisis Hits Nordics: Economy February 16, 2012

[9] China Cuts Bank Reserve Reqs; Exports ’Grim’, February 19,2012

[10] Danske Research Nerves on edge, but brighter outlook Weekly Focus, February 17, 2012

[11] See Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions, February 13, 2012

[12] Lefèvre op.cit. p.166

[13] Lefèvre op.cit. p.27

[14] Lefèvre op.cit. p.256

[15] Lefèvre op.cit p.245

[16] Lefèvre op.cit p.55

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