Strange times are these in which we live when old and young are taught in falsehood's school. And the one man who dares to tell the truth is called at once a lunatic and fool. -- Plato
Up, up and away!
The Philippine Phisix only posted a marginal .24% gain this week. But on a weekly basis the local benchmark soared to an all-time high.
Such marginal gain reflects on this week’s sharp volatility, specifically the difference between the spike during the two post-election trading sessions and the subsequent profit taking at the close of the week which ended up with a residual net gain.
Year-to-date the Phisix has returned a fantastic 25.24% as of Friday’s close. We are fast closing in on the 32.95% annual return of 2012. Yet there are 7 months until the end of the year.
At the current rate of return of about 5% gain per month, if sustained, would translate to a 10,000 Phisix by the end of the year or at the first quarter of 2014.
The steepening of the ascending slope suggests of the deepening convictions of the bulls of the trend’s sustainability. Such convictions have now been strengthened by even more price increases.
But this seems to have morphed into more than just a reflexive feedback loop between expectations (shaped by prices) and outcomes (influenced by expectations); some people in social media have already been exuding an aura of invincibility by hectoring on very rare bearish international reports.
As I have said before[1], markets have hardly been pricing about “cheap” or “expensive” but about electrically charged emotions: Greed and Fear.
Sectoral returns have been demonstrating such dynamic.
Bulls have been swamping into popular investment themes, while the bears have frantically been smashing down what seems as ‘politically incorrect’ issues.
Bull markets tend to lift all, if not most issues, but apparently not this time.
Also, the annual rotational pattern has been broken. Instead of an alternating leadership as during the past 6-7 years, the mining sector has gone completely in the opposite direction of the general markets.
The decline in the mining issues has not been proportional. Some issues fell of the cliff where losses account for an astounding 50-70% from their recent zenith.
Such dramatic selloffs and declines already exhibit a state of depression with hardly any “corporate fundamentals” to account for. Others have been down by 20-30%. I may add that the biggest losers have been those with operations within the Benguet area, so I am wondering whether domestic politics may have been aggravated the dour sentiment which has been partly imported.
So, on the one hand we see intensive yield chasing phenomenon. On the other, we see panic. Greed and Fear.
But what should concern serious participants is not the “fear”, but the dominant “greed” as manifested by a ballooning mania.
And I wouldn’t exactly characterize “greed” in the conventional sense, but rather greed in the context of expansive risk appetite as consequences from various social policies.
The public has been motivated to speculate from easy money policies and from implied guarantees on the financial market, thus the market has responded in such rampant and destabilizing manner.
When we tax something we get less of it, but when we subsidies something we get more of it. So this applies to stock markets too: Current policies subsidize or reward “greed”, and at the same time, punish “prudence”.
Even the Jaime Caruana, the chief of the Bank of International Settlements, or the central bank of all central banks, have come to recognize and warn about this[2].
Global Equity Markets Melt-UP
Year-to-date, major global benchmarks have seen a return of a RISK ON environment as the levitation of equity markets has been accelerating.
The above table doesn’t give justice to the overall representation of the other bourses. This is due to the distortions from the magnified gains by Japan’s Nikkei which diminishes what should have revealed as outsized gains for developed economies and ASEAN equities
In the behavioral science field, this is called the perceptual contrast effect[3], where people’s judgement are shaped by perceptions framed from relative immediate or visible comparisons
Nonetheless, gains of major developed economies and ASEAN nations have been mounting while the BRICs seem to be recovering except for Brazil.
In observing price trends, the melt up in equity markets have become global.
The US major benchmark, the Dow Jones Industrials, as well as, Germany’s DAX index has shown upside acceleration.
As of Friday’s close, the Dow Industrials has been up 17.2% year-to-date while the German DAX has been up 10.32%. In 2012, the Dow yielded gains of 6% while the DAX 29%.
As I have recently pointed out[4], the surge in the DAX comes in contrast with Germany’s struggling economy. Germany managed to eke out a .1% growth during the first quarter of the year. Whereas the overall direction of growth since 2011 has been on a downtrend, yet the German DAX seems on a melt up mode.
This Isn’t Your Daddy and Grand Daddy’s Market
The most striking parallel universe phenomenon would be in France.
French financial markets will tell you of a booming economy:
The equity bellwether the CAC 40 has racked up gains of 9.89% year-to-date and was up 15.23% in 2012. Interest rates as measured by the French government 10 year yields[5] have been drifting at multi-year lows (see lower window).
So OECD France has a booming bond and the stock markets almost similar to the emerging market Philippines.
Ah, but France is not the Philippines. Ironically the French economy slipped into a recession in the first quarter of this year. For most of 2012, France has also been in periodical recessions. Yet the market booms. France was even downgraded by Moody’s last November[6]. But the stock and bond markets have ignored them. And this is why the French equity market seems in melt up mode even as the stagnating economy seems to intensify.
And given that the French economy has been hocked to the eyeballs with debt, as debt-to-gdp has been ballooning[7] since 2009, one would expect that the extended recessions would have amplified credit and market risks that should have roiled the financial markets.
But no, this time is different.
Bad news is good news. More signs of economic troubles translate to more prospects of accommodation from central banks. The more the bad news, the better for the financial markets.
In addition, central banks policies appear to have jaded the market’s perception of risks. French interest rates have gone down partly because of Japan government’s aggressive pursuit[8] of doubling her monetary base via “Abenomics”, where Japanese insurance and banking firms sought higher yields[9] (if not safehaven) from French bonds as shown above.
The Swiss National Bank (SNB) may have also been a party[10] to subsidizing the French government through accumulation of French bonds.
Or it could be that French institutions with international exposure could have been downsizing partly by selling their holdings abroad from which they repatriate to buy French bonds for reserve requirements purposes.
Charles Gave of the Gavekal Research opines[11]
France has a large financial sector, with huge international positions. Some entities may be selling international holdings which demand large reserve requirements. The proceeds are then brought back in France to buy French government bonds—against which there are no reserve requirements.
As I earlier said, current developments reveal that there hardly has been anything fundamental in the traditional or conventional understanding from which current markets operate on.
This isn’t your granddaddy or your daddy’s financial markets.
Or take a look at three national benchmarks above.
All of them are apparently in a melt-up mode. Year-to-date the chart at the left has yielded 45.63%, the center 29.45% and the right 61.92% as of Friday’s close.
The melt-up for these three bellwethers has a common denominator: they have been spiked by strong monetary forces.
Argentina’s Merval[12] (center) and Venezuela’s Caracas[13] (right) have both been enduring hyperinflation but in different phases[14], their stock markets are proving to be partial safehavens. On the left is Japan’s Nikkei[15]. Japan’s Nikkei 225 has skyrocketed from the government’s plan to double her monetary base which is really is in the direction of Argentina and Venezuela except that Japan policies are in an embryonic phase.
Thus the conventional and popular wisdom where today’s market has been one about growth, or fundamentals or political salvation will be proven wrong in the fullness of time.
Again this isn’t your granddaddy or your daddy’s financial markets.
[1] See Phisix 7,000: Why Asia’s Rising Star is a Symptom of Mania April 29, 2013
[3] ChangingMinds.org Perceptual Contrast Effect
[5] Bloomberg.com France Govt Oats Btan 10 Yr Oat
[6] Guardian.co.uk Moody's downgrades France's credit rating to AA1 November 20, 2012
[7] Tradingeconomics.com FRANCE GOVERNMENT DEBT TO GDP
[8] Zero Hedge We Found The 'Other' Greater Fool May 13, 2013
[9] Businessinsider.com European Government Borrowing Costs Are Plunging — And It's All Thanks To Japan April 8, 2013
[10] Wall Street Journal Button-Down Central Bank Bets It All January 8, 2013
[11] Zero Hedge Charles Gave: "Get Out Of Banks, Get Out Of France - Get Out Of The Euro" May 16, 2013
[12] Bloomberg.com Buenos Aires Stock Exchange Merval Index
[13] Bloomberg.com Caracas Stock Exchange Stock Market Index
[14] See Inflation and Price Controls: Latin America Edition April 19, 2013
[15] Bloomberg.com Nikkei 225
1 comment:
You write Ironically the French economy slipped into a recession in the first quarter of this year. For most of 2012, France has also been in periodical recessions. Yet the market booms. France was even downgraded by Moody’s last November[6]. But the stock and bond markets have ignored them. And this is why the French equity market seems in melt up mode even as the stagnating economy seems to intensify.
Robert Wenzel write The Eurozone economies: it's not pretty ... http://tinyurl.com/mghy5ob ...
The EuroZone is in the down phase of the business cycle and government regulations make it difficult for startups in most EZ countries to launch, regulations in most EZ countries also make it risky for established firms to hire. Further, unemployment packages make it attractive for most to stay unemployed once they are laid off. Thus you have economies that look like this. Unlike the European Central Bank, which has been doing only very modest money printing, the Fed has been flooding the markets, which has caused, yet another manipulated boom in the housing sector and stock market, that will, soon enough, experience another bust.
I comment that the chart labeled “sustained pain” shows divergence between the US and the Eurozone economic GDP, commencing in the third quater of 2011, largely due to anti competitiveness, national wage contracts, banking insolvency, as well as socialist clientelism. Federal Reserve money printing operations stimulated M2 money growth in the US, which in turn greatly rewarded investors in Retail, XRT, Homebuilding, ITB, Biotechnology, IBB, IPOs, FPX, Dynamic Media, PBS, Pharmaceuticals, PJP, US Infrastructure, PKB, and Consumer Discretionary, IYC, as is seen in their ongoing combined Yahoo Finance chart.
Bloomberg reports China small cap bubble seen bursting by UBS analyst Chen. Chen Li, the UBS AG strategist who predicted the tumble in China’s smallest shares two years ago, says the companies are poised to retreat again after valuations rose to the biggest premium over larger stocks since 2010.
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