Sunday, January 13, 2013

Blazing Start for 2013: Phisix 6,000!

I have already made my case for 2013 last week. 

To summarize, ultimately the direction of interest rates will likely drive the direction of the Phisix where higher rates may put a lid on the gains of the Phisix while continued low rates may inspire a blowoff phase.

Yet the direction of local interest rates in 2013 will not be limited to domestic events as they will most likely be influenced by the external environment and by the collaborative efforts by central banks

I also believe that low interest rates will persist, at least until the first quarter. This means that the momentum from the yearend rally will likely be carried over the same period, but of course subject to sporadic profit taking.

As I previously noted[1],
This week’s fiery opening has essentially signified a carryover from last year’s final quarter blitzkrieg (right window), a thrust which may last until the first quarter..

Global equity markets have remained buoyant, even if many major emerging markets, such as the BRICs and ASEAN have begun to manifest signs of profit-taking (this week). The chart above, shows of the weekly performance via the blue bars and the year-to-date or two week performance through the red bars.

Obviously given the trailblazing start, the huge two week gains and signs of overextended run, a short profit taking phase should be a natural consequence…unless we have already reached a blowoff phase.

Mining Index: Head Fake or Dominant Theme for 2013?

I also noted that 2013 will be dominated by the mines

Again from last week
for as long as the inflationary boom remains, I also expect a rotation towards last year’s laggards: the mining sector and possibly the service industry.
I’d like to refresh a perspective which I have been pounding on the table since the latter half of 2012.


The idea is that the mining index (blue) has been in alternating leadership with the Phisix (red) for the past 6 years or since 2007. The mines had two successive year of gains in 2006-2007

Of course, this hasn’t just been about patterns. This has been about the relative price effects of money creation and credit expansion or the Cantillon Effects applied to the stock markets.

The narrow breadth of the Philippine stock market, where only 344 companies are listed according to[2], amplifies the effects of the inflationary boom via rotational patterns.

Specifically, industries which recently outperformed eventually encounters a year-long reprieve and industries that have underperformed become the next market darlings. The eventual result: the rising tide lifts all boats or that price levels of publicly listed securities generally increase overtime, but again the relative difference lies in the degree of increases and the timing.


For the past 2 weeks the local Mining index bannered the Phisix (blue-weekly gains) to fresh record highs (8.78% gains in 2 weeks).

The holding industry, one of last year’s best performers, remains resilient and has managed to grab the second spot. Nonetheless another 2012 tailender, the service sector, has narrowed the lead of the Holding industry, and placed third.

Remember, the two former laggards were last year’s politically persecuted industries: The mining industry, particularly, for environmental issues (tailing spills, EO 79) and taxes (excise taxes), while the telecoms (as the industry’s heavyweights) had also been pressured for higher taxes (through the proposed SMS Tax). Telecoms account for about 64% of the service industry index.

The markets may have begun to discount the posturing for political uprightness by Philippine authorities through sustained media assault on these industries, perhaps due to the coming national elections in May

The market could be also be saying that a political comprise or accommodation may be in the pipeline for the contending parties, or that the sheer inundation of money in the system, has been enough to negate or benumb the markets to the political risks involving these industries.

Aside from the potential political accommodation, mainstream media’s take on the mining industry will likely be predicated on the return of foreign investments and of a ‘recovery’ of ‘demand’ via global economic statistical growth.

Here, I am predicting how mainstream media and their preferred ‘experts’ will depict on the mining resurgence, if sustained. These are the likely narratives that will be used. 


To validate the assumption of the supposed recovery of global growth, mainly from emerging markets, we need to see a broad based rise in prices of metals and other commodities. Also industrial metals should outperform gold and or the precious metals group.

The recent the global asset boom may have partially created such impression as industrial metals (GYX) have now outclassed gold.

But of course, this has been more about the mirage from the tsunami of money unleashed by global central banks, and likewise, the domestic counterpart.

For me, given the absence of an active and liquid physical metals spot or futures commodity markets in the Philippines, the mines signifies as the best alternative or hedge against the growing risks of price inflation or even stagflation.

Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets[3]. Yes some Fed officials have openly been chattering about risks of price inflation!

Gold prices may not immediately rise, or may even fall in the interim—for the simple reason –gold have risen for 12 straight years!!! This simply is regression to the mean or a normal function of the market process.

However if gold’s real economic activities continues with its current record breaking pace, then bullish pressure building underneath today’s politically constrained prices will eventually be vented on the marketplace—once such pressures become powerful enough to force upon a fissure or a valve or an outlet to release them.

And this is what differentiates between value investing marked by “sit and wait” based on fundamentals compared to the ticker tape mentality, which is based on impulse and skewed towards momentum or price chasing punts.

And given the 2013 sturdy recoil from last year’s selloff, like the Phisix, I expect the natural process of profit taking in the mining sector to occur over the interim. And this should serve as an opportunity to enter.

Of course, two weeks may not make a trend. And I could be wrong, where the recent rebound may be all about an oversold bear market bounce or a head fake. But of course, such perspective essentially ignores the real drivers of today’s boom.

[1] See What to Expect in 2013 January 7, 2013

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