Remaining Neutral But On A Bullish Bias As Market Sentiment Recovers

``Security is the mother of danger and the grandmother of destruction.” -Thomas Fuller (1608-1661), British Clergyman and writer

Yes, market sentiment has unquestionably recovered, with emerging markets and Phisix breaking out into new highs as the US dollar continues to stagger and approach its December 2005 lows, see figure 4. Momentum appears to have now shifted in favor of the bulls.

Figure 4: Stockcharts.com: Falling US dollar

Signs of general recuperation in the US markets plus the faltering US dollar have aided this present momentum shift.

Emerging markets on the upper panel as indicated by the iShares EEM, Asia’s markets as indicated by the JP Morgan Asia Equity index in the lower panel, the Phisix on the Main window synchronically on RECORD territories, most likely prompted by the declining US dollar (upper lower panel).

Yet, we cannot discount the risks that volatility could nudge higher as US markets have YET to clear the hurdle of its recent highs as the case of the S&P 500 and Dow Jones Industrials, see Figure 5.

Figure 5: stockcharts.com: US benchmark breakout imminent?

Albeit, Nasdaq’s recent highs (upper panel below main window) should increase the probability that a similar breakout on the Dow and S&P could be imminent.

In the meantime, component industries represented in the S&P 500 has shown significant indications of healing from those experiencing recent selling pressures such as the S&P Banking Index (lower panel).

Further the significant breakout of Crude oil to the 70’s territory, which apparently has turned out as we had earlier predicted in our April 23 to April 27, 2007 Edition (see Could Brent’s Premium Over WTI Imply a $70 above Oil prices?), could imply that there could be more forthcoming weakness in the US dollar.

Moreover, strong oil prices could also be representative of a pick-up in global demand (indicative of world resilient economic growth) relative to supplies.

We remain on a neutral status but this time with a bullish bias (with selective opportunities), until we see those recent highs by the key US benchmarks surpassed.

On Being Neutral: A Bird At Hand Is Better Than Two In The Bush

``Everybody knows that you need more prevention than treatment, but few reward acts of prevention. We glorify those who left their names in history books at the expense of those contributors about whom our books are silent. We are not just a superficial race (this may be curable to some extent); we are a very unfair one.”-Nassim Nicolas Taleb, Black Swan: The Impact of the Highly Improbable

Our call for neutrality drew some reactions last week. One concerns with how to deal with one’s portfolio. The other reflected on the perception of our “assailing” of the prevailing optimistic convictions.

Extrapolating on the signals of the markets, the mixed messages produced by two important pillars; the lethargic US dollar, as measured by its trade weighted index, in contrast to the emerging indications of the softening by the US markets, have prompted us to this outlook.

In our industry, securities are traditionally rated by the following calls; buy, sell or a hold.

Our neutral stance essentially expresses indecision or ambiguity towards the interim direction of the market, hence is equivalent to a HOLD. And since such incertitude bespeaks of possible signs of emerging risks, then it would do us no harm to take some money off the table until we see better or clearer times ahead. Learning from one of the morals of Aesop’s fables, ``A bird at hand is better than two in the bush”. Having the proverbial “bird at hand” is equivalent to capital preservation.

Since we are not in the practice of financial markets astrology, given our understanding of the present cycle, we manage our portfolio in times of turbulence by raising our cash levels relative to our total holdings. We do not sell ALL until we are faced up with the following conditions; envisage the end of the secular cycle or foresee of deep reversal within the present cycle or react to an unfolding crisis.

Unfortunately for us, our local market is so crude as not to offer alternative instruments which could enable us to benefit from a declining market or take insurance or hedge positions. In developed markets one can short an issue or buy funds that short select issues or industries or market indices, or take advantage of put or call options (basic derivatives) against your positions as a form of insurance.

The assumption of abandoning our position in the marketplace by going all cash presumes great market timing abilities, something that is in practice NOT consistently feasible. Investing decisions based on single minded chart reading is predicated on the trajectories of past performance, which does not always work. Remember Wall Street’s ubiquitous warning, PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RETURNS? And so it is.

US Market Internals Indicate of Prospective Heightened Volatility

``In seeking wisdom thou art wise; in imagining that thou hast attained it, thou art a fool.”--Lord Chesterfield (1694 – 1773), British statesman

The dilemma which we described last week conspicuously manifested itself anew. Where we noted that the reaction of our Phisix would “highly depend on the degree of volatility in the US markets”, our market responded exactly to these events.

When the US markets made significant moves our Phisix followed its footsteps. When US markets closed with minor changes, the Phisix responded to the upside, see figure 1.

Figure 1 Stockcharts.com: Waltzing Phisix and Dow Jones Industrials?

The Phisix (candlestick in main window) has closely tracked activities in the US markets (line chart behind in main window), as much as the other pertinent benchmarks of the iShares Emerging Market (upper panel below the main window) and Dow Jones EX-Japan Asia/Pacific index (lower panel).

These, in my view, have been the push and pull factors weighing on the Phisix, as it struggles to follow the sentiment of the US markets while being buttressed by the declining US dollar, which appears to have recently accelerated (-.52% for the week, 2.1% year-to-date).

Nonetheless, our principal concern, to reiterate for emphasis purposes, is the “degree of volatility in the US markets”.

We broke down the industry components of the major US benchmark the S&P 500 last week and discovered that 6 out of 10 industries comprising about 61% of the index weightings had seen marked deceleration of their price actions.

Meanwhile, based on the Dow Theory, we observed a meaningful divergence where the price actions of the UTILITIES and TRANSPORT indices has deteriorated compared to the Dow Jones Industrials which has managed to maintain its sanguine composure. This digression could be indicative of a looming reversal for the key major index.

Essentially this degeneration in the market internals served as our basis for our bearish outlook in the US markets.

Again, let me remind you that, today’s potential decline in the US markets could simply be a transition to a normal “corrective phase” rather than an unfolding crisis as some bears suggest, unless proven otherwise.

Since we are not into the markets for vanity reasons, we adjust our views as the market depicts to us and react accordingly (where most of the time our reaction is simply to sit, read and do nothing).

We do not engage in wishful thinking or adopt rigid “convictions” as with most of the average investors, since we understand that our emotions are the principal determinant to our portfolio losses. We frequently like to blame/heckle others when we cannot control ourselves.

To quote one of our favorite market gurus Mr. Martin Barnes, managing director BCA Research (highlight mine), ``There are so many forces and imponderables that affect the outlook, that one must keep a very open mind and not get trapped in a fixed mindset. Too many people have locked themselves into either a bullish or bearish view and that undermines their willingness and ability to take account of a changing environment. It is important never to become overly confident that you have it all figured out.”

For this week the only notable change within the universe of benchmarks we previously cited was the Dow Utilities benchmark which has shown some signs of improvement. The rest of the other benchmarks retained their overall tones.

Because we understand the follies of cognitive illusions, we try to avoid from attributing events as having a causal relation to market activities. Instead we let the markets do the talking.

Despite the marginal weekly gains in the major US bellwethers, we noticed of the volatility building from within.

For instance in the past five sessions, the US Dow Jones Industrials sprinted to the positive side marked by notable gains during the early half of the sessions only to end marginally down, except on Wednesday wherein it managed to close significantly up.

In Friday’s session alone, the Dow Jones spiked above 130 points of advance at the first half, only to reverse itself by declining about the same degree (down 130 points) during the latter half; it ended the session 13.66 points down. That was over 260 points swing (from top to bottom to the close)!

These incipient signs of volatilities suggest to us that the US markets could be facing major headwinds which could rattle our own markets if our correlations with the US Dow Jones persist.

Figure 2: stockcharts.com: Declining Breadth in US Markets Foretells of Turbulence

Figure 2 conveys to us the market breadth conditions of the New York Stock Exchange (NYSE) and of the Nasdaq. This is the ratio of issues hitting NEW highs as against issues hitting new LOWS. Fundamentally, this ratio reveals to us of the overall market sentiment underpinning these exchanges.

In the two charts, we can take note that in both NYSE (above) and NASDAQ (below) bourses, the present trend has been that of a DECLINING ratio of NEW highs vis-à-vis the NEW Lows. In other words, market sentiment tells us that the bullish sentiment looks frayed and exhausted. And if history determines future actions, then the continuing downward drift (blue trend line) indicates accelerated deterioration in market sentiment which could most probably lead to equivalent declines in the major benchmarks, as represented by the S&P 500 above (line chart) and similarly shown in the past (blue down arrows).

Of course, we can never count on history alone; but the messages emitted in the context of the different behaviors of these market internal data (component trends, Dow Theory, New high relative to New Low) seems lucidly tilted towards an imminent corrective phase, even as the major benchmarks has yet to break their all important support levels.

One could probably take on short positions on the key US benchmarks if their support levels relent to a breach, where backed by the weakening market internals, could translate to a meaningful decline. To my recollection the US markets haven’t had a 10% correction since 2003, which means a 10% decline will be a norm for any trend.

On the other hand, if the markets remain irrational and does the unexpected; one could take the long end if such indices break above their most recent high. However, I would assign the latter with a smaller probability of occurring. This should apply to our end too.

US Subprime Woes Spreading; Feedback Loop Dictated by Market Ticker

``No matter how hard we try, our perceptions about people will be misguided a significant percentage of the time. Of course, it’s one thing to be off target occasionally but quite another to be consistently wrong. That’s because the foundational principle of all other success principles is having an accurate perception of reality. Which means that great achievements are virtually impossible if one’s perception of reality is perpetually faulty.”-Robert Ringer on Changing Perceptions

We also noted last week that fundamental variables such as the appearance of a contagion of the subprime implosion, new Taxes, and the state of the Japanese Yen could lend to heightened state volatility in the markets today.

BCA Research recently published two back-to-back issues which dealt with the Subprime sector. While the highly reputed independent research outfit acknowledges that yield spreads have widened, they think that the present anxieties over the permeation of the subprime woes are less likely to pose as systemic risks, as shown in Figure 3.

Figure 3: BCA Research: Subprime Weakness and Systemic Risks

Let me quote BCA Research (highlight mine), ``Falling home prices combined with rising delinquency and foreclosure rates have pushed the ABX index spreads (a basket of sub-prime home equity ABS) to new highs. A key difference from the selloff that occurred earlier this year, however, is the divergence between the higher and lower quality indexes. In the first three months of 2007, all of the ABX indexes sold off, up to and including the AAA-rated securities. In the more recent flare-up in spreads, the damage has been more concentrated in the low quality indexes. The market appears to be acknowledging that the latest disruption is more a reflection of credit concerns, unlike the February move, which was also accompanied by (unrealized) concerns of broader financial systemic risk. Bottom Line: the shakeout in sub-prime debt is not over, but may now be contained to lower quality securities, with less risk of a contagion into credit spreads and the banking sector.”

While we’d like to assume BCA’s optimistic position on the overall state of the US credit markets, so far the performances of the financial sector, including that of the banking indices has manifested strains from the recent subprime ruckus, in contrast to their outlook. Besides, understanding how BLACK SWANs or low frequency high impact events unfold, underestimating risks could lead to portfolio disasters.

In fact, the du jour apprehension in the global marketplace has been mainly focused on the valuations aspects of these so-called complex “structured finance” products that have proliferated in the world of finance.

In the US, where $375 billion Collateralized Debt Obligations (CDO) had been sold in 2006, subprime debts comprised 45% of its collateral backings, according to a Bloomberg report. CDOs are bundled pools of assorted debt instruments, from corporate bonds, mortgages, loans and others.

The problem is that such complex and highly illiquid instruments obtain their values not from market based pricing but from ratings issued by credit rating agencies or through “model” based-what the bankers or accountants say it is worth. When the going was good, nobody questioned the way these assets were valued…until now.

As the subprime saga deepens, losses which were once limited to the domain of mortgage lenders, have now appeared in the portfolios of hedge funds, as in the recent case of Bear Sterns and other funds, such as two London based funds-Queen's Walk Investment Ltd. and Caliber Global Investment Ltd., including a hedge fund shut by Zurich-based UBS AG which accounted for 150 million Swiss francs ($122 million) of first- quarter losses (Bloomberg).

In addition, as investors have become increasingly wary over mounting incidences of losses, deals, flotation and offerings have equally suffered such as Dollar General (could scrap its offering), CanWest MediaWorks (reduced its offering) and mortgage fund IPO by the Carlyle Group (reduced its offering). Such are signs of how investors have turned to risk aversion. And risk aversion implies for a prospective liquidity crunch.

Notwithstanding, the emerging risks wherein the escalating losses in the portfolios of hedge funds and other institutions could pave way for a re-rating from credit rating agencies as S&P, Fitch and Moody’s.

Let me quote at length Bloomberg’s Mark Pittman report (highlight mine),

``Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

``The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

``That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.

``You'll see massive losses from banks, insurance companies and pension managers,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody's and Fitch understate the risks of subprime mortgage bonds. ``The longer they wait, the worse it's going to be.''

Could there be a contagion? Of course, such is possible. Losses in a portfolio, especially from the leveraged positions, would imply liquidations in other areas in order to cover or offset such a loss.

Let us take for example the pension industry. According to a Bloomberg’s David Evans, ``Public pension funds have bought more than $500 million in CDO equity tranches in the past five years, according to data from public records requests.”

Equity tranches are known as ‘toxic waste’, because they represent the riskiest composite tranches of a packaged CDO.

According to the same report from David Evans (highlight mine), ``The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.”

And we are all aware how the Philippine government exerted so much effort to keep the US largest pension fund’s investments here intact, which was valued at $78.5 million in 2005 from $12.46 million in 2002 according to Manila Times.

What if, by virtue of this subprime implosion, they experience outsized losses? And importantly, if the accrued losses have been amplified by the use of leverage? Naturally, they could take the route of selling on their other holdings such as their investments in Philippine assets. And this may not be limited to Calpers, as there could be other fund entities with equivalent exposure to Philippine assets affected by the present US subprime epicenter woes.

In short, one could expect the turmoil from the worsening subprime sector to ripple to the Philippine shores if the implosion turns into a rout or into a disorderly manner.

This is where our selling stops should be in place.

This is NOT to say that this WILL happen, this is to say that such events COULD happen and should NOT be discounted. As Nassim Nicolas Taleb wrote of Black Swans, ``ONE single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is ONE single (and, I am told, quite ugly) black bird.” Obviously the subprime debacle is turning out to be not an isolated event. The $64 trillion question is; to what degree the ramifications?

No matter how bullish our convictions are for the Philippine stockmarket cycle, such does not imply that the present trends will not meet speed bumps or be derailed by obstructions enough to shakeout the present prevailing sentiment. This always happens. As we always say, no trend goes in a straight line. Further, in every secular trend there is a counter cyclical trend.

Said differently, those blinded by euphoria today will encounter such periods as their day of comeuppance. Where due to heavy stress over unacceptable losses, such investors will abandon the markets until signs of recovery emerge. Since they operate on hope, the likely response under such conditions would be denial, frustrations and then fear.

This happened before. Remember the Phisix in the last secular advance cycle in 1986-1997 had two major crashes in between (40%+ losses in about a year in 1987 and 1989), but it did not stop the cycle from reaching 3,400 or a gain of about 22 times from trough to peak. And this could happen again.

Such is the reason why we always advise people to treat the present outsized gains as bonus, and not to expect markets to persistently outperform as today. Managing one’s expectations is one healthy way to improve on one’s portfolio performance.

Going back to the fix in “structured products” (derivatives, structured finance); while such innovative tools had been in the past repeatedly argued (especially by regulators) to have aided the capital markets by spreading risks to a wider universe of investors, today there is a newfound perspective; such diversity could in fact be a disadvantage.

Let me quote currency analyst Jack Crooks, ``HSBC Chairman Stephen Green said he was “’worried by the degree of leverage in some big-ticket transactions nowadays’ and felt ‘something is going to end in tears.’” “He also warned that losses could be higher because the parceling out of risk to so many parties across the financial system could make it more difficult to arrange a rescue – a comment that highlighted widespread and growing unease among senior banking executives.”

There you have it; it’s all in the perspective dictated by the ticker. Previously, broader market base was said to benefit investors since they spread risks. That was when the markets were strong where no one seemed to challenge such assertions.

Now that the air has come out of some over inflated markets, the view has changed. Because of the diverse base, rescue packages would be more difficult to address since many parties are involved.

It’s all a feedback loop depending on the angle you chose to take. That fundamentally is how markets operate.

Every Action Has A Consequence; An Equal And Opposing Force

``If you know yourself and your enemy, you will not fear battle. If you know yourself but not your enemy, you will lose a battle for every one that you win. If you do not know yourself and do not know your enemy, you will never see victory."-Sun Tzu, The Art of War

I’d like to show you how the US economy has performed of late.

Figure 4: Northern Trust: US GDP

Consider this: the US markets have performed remarkably (Dow Jones up 7.6% and S&P 6% year-to-date) even as their GDP has been growing on a sub-par basis as shown in Figure 4, profits coming from record highs as well as the decline in the housing industry which is said to contribute to about 23% of its economy.

If one were to believe that financial markets reflect economic conditions then obviously this contravenes such expectations.

Our observation has been that of the explosion of credit in the financial sector which has paved way for the boom in mergers and acquisitions, private equity ventures, structured products and derivatives, as well as, from the current account surpluses of Oil producing and Asian exporting countries which have similarly led to a global financial markets boom.

With the tightening of lending standards, escalating subprime woes, losses spreading to hedge funds and other institutions, increasing signs of investor aversion, potential impact of taxes on US investors, the risks a volatility jump in the Japanese Yen, widening credit spreads and the trend of rising interest rates worldwide, all this could be extrapolated as a potential reduction in liquidity and should spell for a slowdown in the price appreciation of the financial markets in general.

Although barring the specter of a disorderly unwind; I think there will be selective market opportunities.

As to the Philippine setting, last week’s action likewise manifested of a sudden decline of market internals reflective of souring sentiment, albeit the end of the week recovered some of this lost footing.

While I think the falling US dollar and the rising Chinese yuan could imply for continued strength in most Asian currencies (ex-Japan), this should provide for a floor to any interim stress-testing arising from any volatility spikes in the US.

As gyrations in the US markets have shown more influence to our market, it would be best to remain defensive under current conditions and to avoid from chasing speculative issues from which could wither under continued pressure.

Last week was a lesson for punters, as fast as fancy stories can bid up share prices so is with its decline. As a saying goes, every action has a consequence, an equal and opposing force.

Nonetheless, I expect the Asian markets to decouple from the US markets in the future but this has yet to become evident.

Until then, MIND your stops!

Our Phisix Outlook: From Bullish to Neutral

``Faced with the challenges of managing policy in an increasingly integrated world economy, the dominant instinct of officials is often to try to shield the economy from volatility. But the crises of the 1990s helped demonstrate why this approach can be both futile and counterproductive. As economies become more open to capital flows, policies designed to insulate an economy from external shocks, whether they be fixed exchange rate regimes or selective capital controls and restrictions on international transactions, rarely offer durable stability, and they bring additional risks. These risks come in the form of additional distortions that might undermine future growth or magnify vulnerability to future financial volatility. The more promising approach is to invest in the complement of institutions and policies that enable an economy to live more comfortably with openness. Focusing on those measures that will enable an economy to be more flexible and to adapt more quickly to change ultimately will be a more effective policy strategy. It is politically more difficult, but economically more effective than those solutions that seem to offer protection from competition and volatility.”-Mr. Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, Trends in Asian Financial Sectors Conference, Federal Reserve Bank of San Francisco, San Francisco, 20 June 2007.

In this Issue:

Introspection on the US Markets and the Phisix
Deterioration in US Market Internals
Taxing Out the Bulls…
As the Yen hits Milestone Lows, We Monitor for Emergent Volatility
Our Phisix Outlook: From Bullish to Neutral

Introspection on the US Markets and the Phisix

THE performance of the Phisix remains remarkable so far, up .81% for the week and up 24.7% year to date. As we have always asserted, this has been so NOT MAINLY because of locally driven factors but because global conditions have prevailed which has been similarly manifested by a mostly buoyant activities in world equities. In our view, it has been the global central banks’ inflationary bias that has determined today’s financially driven asset based world economies.

Where today’s financial markets reflects heightened financial interlinkages and have grown increased correlations relative to its contemporaries compared to the previous years, it has become an imperative to examine the performances of the present stewards in today’s market actions.

Again, US markets has served as a sort of an “inspirational” pacesetter to global markets as much as to our own Phisix. While indeed the US markets have spearheaded a global rebound since February’s “Shanghai Surprise” as reflected by the advances of its key bellwethers such as the Dow Jones Industrials up 6.8%, S&P 500 5.9%, Nasdaq 7.2% based on Friday’s close, this confounding optimism comes curiously in the face of an economic “slowdown”.

What has been observed is that despite the unraveling bust in the real estate sector and continued concerns over the possible ramifications of the subprime mortgage woes, the continued levity in the financial sector has helped buttressed sentiment in the equity benchmarks, giving a picture of a largely unscathed economy, until today…

Figure 1 S & P: Sectoral Breakdown of the S & P 500

According to the sectoral breakdown of the industries of the major broad market barometer in the market value weighted S&P 500, the financials constitute a hefty 21.6% weighting in the index’s universe. What this means is that banks, investment houses, brokers-dealers, mortgage entities, insurances and other financial services represent the largest market cap weightings among US industries.

Figure 2: Yardeni.com: Profits from Financial versus Non-Financial

The significance of the financial sector has not been solely in terms of market value. Relative to corporate profits as shown in Figure 2 courtesy of Yardeni.com, the financial sector signifies about two-fifths of profits generated by Corporate America (All Corporations-Nonfinancial corporations).

Recently, the US financial markets was said to have been rattled by concerns of the recent spike in treasury yields, possibly signifying rising interest rates, as well as, persisting concerns of a possible diffusion by the deterioration in the finances of the housing related sectors. As of late, according to implode-a-meter.com 86 US lenders have now gone kaput.

To add to the lingering anxieties over the broadening of the housing epicenter based tremors, the current brouhaha over the failing hedge funds and Collateralized Debt Obligations or CDO’s appears to have signaled the proverbial “canary in the coal mine” as epitomized by the Bear Stern’s case where the investment house had been forced to bail out one of its two collapsing hedge fund due to substantial losses in the complex portfolio of structured finances (mostly from CDOs).

Lest we fall for the common man’s confirmation bias folly, or a cognitive bias which tends to show how we interpret events to confirm our preconceptions, we’d rather let the market to do the talking.

Deterioration in US Market Internals

Figure 3: Stockcharts.com: Financials Rolling Over?

Earlier we have shown the importance of the US financial sector to the US economy (relative to profits) and to the equity markets (relative to market value weightings). In Figure 3, the charts of the 4 financial benchmarks, S&P Bank Index ($BIX-lowest panel), Broker/Dealer Index-AMEX ($XBD-upper panel below the main window), Dow Jones US Mortgage Finance Index ($DJUSMF-upper window), and DJ US Financial Services Index ($DJUSFI-Center window) appears to be indicating an all important turning or inflection point.

The Bank and the main Financial Index has depicted lower highs and are at present working to test on critical supports, while the Mortgage Finance have broken critical support and appears to be rolling over, whereas the Broker/dealer index is drifting within the support areas.

Figure 4: stockcharts.com: More bad news?

Notwithstanding, we see other sectors of the S & P 500 (center window) likewise in rapidly deteriorating mode, particularly the S&P 500 Consumer Discretionary Sector Index which represents 10.5% of the index ($SPCC-upper pane below the center window), S&P Healthcare Index 11.9% of the index ($HCX-lowest window) and the Dow Jones Utilities 3.7% of the index ($UTIL- above pane).

Even the consumer staples 9.6% of the S&P benchmark (not shown in the chart display), which traditionally represents defensive plays (food/beverages, prescription drugs, tobacco and households products), have been shown on a downdraft much earlier than the recent actions in the major benchmarks, alongside with the Telecom services (3.7%).

Likewise, the Dow Jones Transports, a third component in the Dow theory, where the activities of the Utilities, Transport and the Industrial Averages have been used as indicators to either confirm each others actions in support of a trend or deviate to possibly indicate of an inflection point, has been shown in divergence with the Dow Industrial Averages and seen headed south. If such theory holds its utility then the declining Utilities and Transport are indicative of a declining Industrials.

On the other hand, the sectors keeping up the major bellwethers at their present elevated levels are the Energy (10.1% of the index), the Industrials (10.9%), the Info tech (14.9%), and the Materials (3.1%) sector.

In short, of the ten composite industries of the S&P 500, 6 industries representing a significant majority led by the financials, or 61% of total index weightings are presently showing signs of marked deceleration based on price actions.

So what we are so far witnessing are indicators of degenerating market internal actions which could lead to further selling pressures. As to whether the abovementioned fundamentals have prompted these remains to be seen.

Taxing Out the Bulls…

In addition, there could be other fundamental variables that could weigh in for the advantage of the bears. A much less talked about issue by the marketplace is that of taxation.

One of the structural boosters to the recent bout of buying has been due to the “shrinkage” of equity supplies brought about by the private equity boom, the supposed participation by sovereign wealth funds and massive buy backs from US corporations.

One taxation headwind entails a potential curb to the present pace of buyback based on the amended regulation that would close the circumvention of a tax law covering present repatriated earnings.

There have been some foreign subsidiaries of US companies like IBM that have taken advantage of certain legal loopholes to avoid on paying regular corporate taxes on repatriated earnings (IRS section 367 B) known as “Killer B” transactions which it had used to buyback shares.

Recently the US Internal Revenue Services (IRS) discovered the leakage and acted to plug on it, according to Gwen Robinson, whose article was posted at the FT Alphaville (highlight mine), ``On May 31, the IRS announced plans to issue regulations making companies pay US taxes when they buy back their stock, even if the shares are purchased by an international subsidiary. It said the planned ban on the practice would take effect that day, even though the regulations would not be finalised for some time. The new regulations would treat funds used for buybacks as repatriated earnings, making them subject to US corporate tax rates that are usually higher than international rates.”

Simply stated, by lifting the tax incentives to use repatriated earnings to buyback shares, the issue of equity supply shrinkage as a booster to the markets via buybacks from foreign subsidiaries of US companies could have been effectively reduced.

And as if by sheer coincidence we see MOST of the weaknesses from the US markets coming off after the IRS announcement. This is not to imply that the tax laws had CAUSED the decline, but instead to point out that such actions COULD have contributed to the apparent weakness seen lately.

Then there is another tax aspect. This one had been more visible than the “Killer B” transactions as it takes on the much ballyhooed private equity industry.

The US Congress recently proposed to tax the private equity industry that availed of special capital gains tax rates from “carried interest” provisions, as if direct its target to the recent Blackstone IPO.

According to the CNNMoney (highlight mine), ``Carried interest is a portion of the profits from an investment that's paid to the manager. In the private-equity business, it's often used to compensate managers for investing alongside their clients in a buyout.”

Mr. David Kotok of Cumberland Advisors says that such law/s will unduly undermine the incentives for private equity transactions, another pillar for today’s rising markets, quoting Mr. Kotok (highlight mine), ``Private equity deals are measured by the net present value of the exit strategy. Tax rates are a huge part of that calculation. Hence, this tax change is big and it reduces the present value of any future transaction.”

Adds Mr. Kotok (highlights mine), ``Markets are affected even if this never becomes law. The reason is that there is no way to know if it will pass and therefore any new private equity deal may be subject to the new tax structure. Our system exposes taxpayers to taxation once the law is introduced. If it is passed in the future, the date of introduction can govern the start of the tax impact and not the date of passage.”

With governments attempting to tax at everything that seems profitable, it wouldn’t be long where a series of unintended consequences could arise.

As the Yen hits Milestone Lows, We Monitor for Emergent Volatility

Finally there is the issue of the collapsing Yen.

Figure 5: Jack Crooks: Milestone Low Yen on Huge Open Interest Level

The Yen recently hit milestone lows relative to other major currencies. Against the Euro, the Yen fell into an all time record low level. Against the British Pound, the Yen fell to a fifteen year low, while vis-à-vis the US dollar the Yen fell into a four and a half year low.

This has been astounding in spite of the record trade surpluses and foreign exchange reserve buildup. It is remarkable how Japanese resident investors in search of higher returns have invested enormous amounts overseas compounded by the “carry trade” phenomenon which has led to such disproportionate decline to their currency.

While a declining yen could imply for further marketplace liquidity brought about by increased arbitrage to “riskier” assets, as Jack Crooks of the Black Swan Capital points out, the huge open interest in the bet against the Yen makes it appear as if there is no way for the Yen to go but DOWN!

Open Interest is the total number of futures or options on futures contracts that have not yet been offset or fulfilled for delivery (cme.com).

The significance of an open interest in the futures market is that it reveals the prevailing investor sentiment. According to George Kleinman, editor of Commodities Trends is that (highlight mine)``The size of the open interest reflects the intensity of the willingness of the participants to hold positions. Whenever prices move, someone wins and someone loses; the zero sum game. This is important to remember because when you think about the ramifications of changes in open interest you must think about it in the context of which way the market is moving at the time. An increase in open-interest shows a willingness on the part of the participants to enlarge their commitments.”

In Figure 5, courtesy of Jack Crooks, Yen’s record low decline against the US dollar has been accompanied by a huge spike in open interest.

In other words, investors have taken the decline of the Yen as a ONE WAY BET. And as a market saying goes, when everyone thinks the same then no one is thinking.

One way bets implies that an inflection point is imminent; this should also hold true with regards to the Yen. And a volatile yen could easily translate to equally volatile markets worldwide if one goes by the past behavior of a rising Yen. Recall the May 2006 and Feb “Shanghai Surprise” volatility? They were accompanied by a spiking Yen.

Our Phisix Outlook: From Bullish to Neutral

The coming week could be very interesting indeed. We could probably see a continued selloff in the US markets or a rebound off from the lows or a period of indecision or consolidation with a downside bias.

However, with the sentiment momentum going for the bears, aside from the deterioration in US market internals, and fundamental obstacles to the present bullish drivers, I am inclined to take the position that the US markets could try to ingest more profit taking sessions over the coming week or so.

Note, there is a difference here; I am predisposed to view of the any downdrafts as mere corrections or profit taking than a crisis at work, until of course proven otherwise.

As for the Philippine market context (as well as for most of its neighbors), there are two opposing forces at work.

On one hand, the bearish side is that as mentioned above, declining US markets could imply for a “short-term” spillover into the global markets. This would highly depend on the degree of volatility in the US markets.

However, the present market reactions have been distinct from the past. During the past encounters of volatility, we saw the US dollar firming, a broad “risky” asset class selloff (emerging markets, junk bonds and commodities) and a rally in US treasuries (declining yields).

On the other hand, the bullish premise for the Asian markets remains as formerly argued, the softening US dollar.

Today, we see a semblance of the “stagflationary” outcome similarly seen in the 70-80s, while one week does not a trend make, last week’s actions showed that infirmities in the US equity markets (Dow Jones Industrials and the S&P 500 down 2% over the week while Nasdaq down 1.44%), have been conjoined with a stubbornly high US treasury yields (drifting at the upper range; or at 5.138% from last week’s 5.17%), rising oil prices (WTIC over $69), relatively high commodity prices and most importantly a falling US dollar.

Another interesting aspect is the potential for a divergence to emerge, where Asian markets may continue to rise amidst a struggling US market, which actuality is long term expectation. Be reminded that the divergences could emerge only under the premise of orderly developments and not from excessive volatilities.

Where in the past the Phisix fell hard and steep as the US markets got clobbered, recently we have encountered sessions wherein steep declines in the US markets resulted to marginal declines in the Phisix.

With two contrasting forces, it would be difficult for us to make a short term call on the overall direction of the market.

From our end, we shift our outlook from bullish to neutral stance for the time being and would remain vigilant as to any incidences that may reflect an adverse “tailed event”.

Mind your stops.

Philippine Stock Exchange: The PUBLIC’s MILKING Cow???!!!

In this issue

Philippine Stock Exchange: The PUBLIC’s MILKING Cow???!!!
HOW HUMAN PSYCHOLOGY DRIVES the BUSINESS CYCLES
How to benefit from STOCK TIPS and stop blaming others!
NO REGRETS, I SHOULD HAVE….
Wake Me UP from MY Nightmares Please

First of all I’d like to greet all fathers a Happy Fathers day (Including my thoroughly missed Dad who now sits with St Peter.)! This issue is dedicated to all you fathers….and of course to the loving mothers in support of us.

``Ain't only three things to gambling: knowing the 60-40 end of a proposition, money management and knowing yourself.”- Walter Clyde Pearson Tennessee Poker champ

I watched in HORROR when a TV news documentary portrayed the stock market as some sort of variant strain of a “milking cow” for the public last Thursday.

The prime time news documentary highlighted a twist of fate by an “accidental” stock investor who happened to turn into a “millionaire” over a short period of time.

The featured “heroine” swaggered about her “garbage-to-gold” experience by having her 40,000 pesos investment converted into 1 million pesos or an amazing 2,400% return!

And after the initial success, she unabashedly declared herself to have been transformed into a “basura queen” (master of “penny” stocks or highly speculative issues), where her virtuoso performances has enabled her to luxuriate on a new lifestyle.

While of course, the show “feigned” to secure a “balanced” commentary from a high profile mainstream analyst, which ostensibly proved to be greatly inadequate (how does one explain a relatively complex dimension in a few seconds?), the media’s message has been inexorably predetermined; the stock market is today’s du jour source of easy money!

Because we frequently decry news reports as habitually attempting to simplify events in order to sell SENSATION to the public rather than objective reportage, the TV program obviously failed to point out major inconsistencies into the allegations of the featured protagonist.

While it is true that there are many issues that has performed superbly; similar to or even over the degree of the returns cited, and likewise it is true that our hotshot has had indubitably achieved her millions by surfing today’s rising tide, one significant source of inconsistency is her changeover from a chanced “passive” investor to a “momentum trader”.

She claims that it was years before when she placed 40,000 pesos into the market and suddenly “realized” that it had evolved into 1 million pesos, from which according her words, ``once a “basura” issue turned into “fundamentals”” (whatever that means).

Obviously it was the passive “buy and hold” approach which delivered to her such magnificent gains, yet upon the realization that she could reap a windfall from the market, adopted herself into a self declared “momentum” trader, ergo her self baptized “basura” queen.

Our experience is that momentum trading while pulsating and electrifying as the ticker goes, hardly delivers the meat, as timing the markets or securities fluctuations over the short-term is proven to be a futile exercise. Notice, in today’s trending market, most of what we’ve sold, in the assumption that it would go lower, we’d have to buy back higher.

Such conflicting behavior leads us to question on the validity of her claims. If she realized that her bonanzas came from a passive approach and NOT from timing the markets, it would be quite obvious that she’d chose the former path, right? Apparently not.

In short, our stockmarket ace has been nothing more than a fortuitous investor metamorphosed into a stock punter, buoyed by the rising tide, glorified and extolled by media. Is it a wonder why we Filipinos have been sooooo obsessed with the EASY money dependency culture?

Once again playing your skeptic, could it be instead the 40,000 pesos represented the residual value of a previous losing investment in the past which resulted to her initial passivity? And with confidence rediscovered by virtue of the stock’s recovery and attendant ego magnified by the recent astronomical gains, have turned our superstar into a chronic “exuberant and unrepentant” gambler?

What we understand is that media didn’t ask for evidence through confirmation receipts to back such claims but rather relied on personal declarations as a truism and as basis for their presentation. And as we know, it is the nature of people to brag about their victories (real or imaginary) and shun the ignominy of setbacks. In the words of Plato, ``Wise people talk because they have something to say; fools, because they have to say something."

Given the benefit of the doubt that we take such portrayal on face value, again we would like to point out of the emergent perils symptomatic of the cyclical transitions as manifested by burgeoning risk appetite, excessive optimism, overconfidence, euphoria and excitement, all of which are part and parcel of what shapes our economic, business and even financial markets cycle as shown in Figure 1.

Figure 1: Death Cross Trader: Human Psychology underpins the Financial Markets Cycle

Market cycles are mostly determined by human psychology where in the Philippine setting, the cycle has evidently evolved from a period of despondency in 2002 into today’s incipient manifestation of optimism.

Eventually, optimism will be replaced with widespread excitement and thrill until finally euphoria permeates, where everyone would think that the markets can do NO wrong.

As for our superstar, we believe that she is indeed serendipitous enough to capitalize from the fledging optimistic phase, despite her “euphoric” demeanor. However, once the euphoria spreads to the general public, much like a bush fire to a forest fire, greatly abetted by media then it would be a principal concern for us.

Yet, like in all cycles, a significant majority would end up losing MORE than their accumulated gains from the markets, as cyclical downturns will in most instances catch most investors off guard, aside from of course the added use of leverage in order to amplify their positions to maximize gains.

1997 should be a good reminder, where the Phisix fell from about 3,400 to nearly 1,000 or about 70% loss fueled by the Asian crisis. Legendary trader Jesse Livermore describes the human nature best in the face of stock market investing ``The stock market never really changes that much. What happened before will happen again and again and again."

As for media’s oversimplification this highly important quote from my favorite iconoclast Mr. Black Swan himself, Nassim Taleb in his latest book, Black Swan, The Impact of the Highly Improbable,

``The problem of overcausation does not lie with the journalist, but with the public. Nobody would pay one dollar to buy a series of abstract statistics reminiscent of a boring college lecture. We want to be told stories, and there is nothing wrong with that-except that we should check more thoroughly whether the story provides consequential distortions of reality (highlight mine).”

In other words, investors have to learn how to fend for themselves in winnowing and filtering the validity of data presented and its utility to the decision making process and understand media’s role in sensationalizing information. Borrowing the aphorism of sixth-century B.C. Chinese Philosopher Lao-tzu``He who conquers others is strong; he who conquers himself is mighty.”

HOW HUMAN PSYCHOLOGY DRIVES the BUSINESS CYCLES

As for human psychological phases transmitted into business/economic cycles, we observe similar curve patterns as shown in Figure 2.

Figure 2: Wikipedia.org: The Business Cycle

Business cycles run under the overinvestment and underinvestment themes.

During an economic downturn or the contraction phase, market clearing forces the previous excess investment to be liquidated, hence are backed by psychological characteristics as the benign “anxiety” phase, working its way into a deeper “denial” phase then to a more desperate “fear” phase. In Wall Street, this stage is called as the “Descending on a ladder of hope” phase.

Eventually, the bullish stragglers “capitulate” and then turn despondent which lead towards a cyclical trough or a period of underinvestment.

On an economic expansion phase we see old investments recover from depression which results to extraordinary large profits.

The allure of large profits entices new investors to eventually hop in and provide for competition. As the gains become more entrenched and pervasive, the economic cycle or the “recovery phase” accelerates in momentum. Here we find positive human traits as hope and relief prevail over the economic landscape and the financial marketplace. In Wall Street this phase is known as “Climbing the Wall of Worries”.

As advances or progress get embedded, the self feeding cycle leads to prosperity, where optimism intensifies. At the height of such optimism investors would likely miscalculate the demand in the marketplace and overestimate on the perceived future gains which eventually results to investment excesses. And then cycle revolves.

I have shown you some examples of how the long cycles playout in the previous outlooks as in May 21 to May 25, 2007 Edition (see Profiting from Markets by Understanding How Cycles Determine Trends).

Of course, there are other major contributory factors to the economic or financial market cycles such as regulatory policies, technological advances, demographic trends and etc.

However, I find the monetary inputs from governments as one major influence factor. From the Austrian Economics point of view, business cycles are wrought by the interventions of the government in the marketplace by the use of monetary policies, which brings about distorted signals and induce entrepreneurs to miscalculate, thereby resulting to malinvestments or the boom bust cycle.

According to Mises.org’s Dan Mahoney, ``Time preference is the extent to which people value current consumption over future consumption. The key point of the Austrian business cycle theory is that interventions in the monetary system—and there is some debate over what form those interventions must take to set in motion the boom-bust process—create a mismatch between consumer time preferences and entrepreneurial judgments regarding those time preferences.(highlight mine)”

There is also the issue of excessive leverage in the financial system (again monetary induced but this time through the credit system) which eventually contributes to the boom bust dynamics.

As discussed in our March 5 to March 9, 2007 Edition see US Markets: Risks of Ponzi and Speculative Finance, Hyman Minsky’s Financial Instability Hypothesis enunciated on the evolving structure of the credit markets, first shaped by stability and ultimately gradating to one that destabilizes.

Mr. Minsky identifies the three income-debt relations for economic units as hedge financing, speculative financing and finally Ponzi financing. Where the credit structures are initially founded to fulfill all obligations (hedge) then progressing into payment on income accounts on interest only leaving out the principal (speculative) to a more severe form of debt structure by pyramiding where both principal and or interest cannot be complied with by cash operations but instead rely borrowing to finance the outstanding liabilities (Ponzi).

Subsequently, Ponzi schemes signify an offshoot to overinvestments and collapse by its own weight.

How to benefit from STOCK TIPS and stop blaming others!

Yes today’s optimism has unassailably filtered into the general public. In fact, I have received many queries from different quarters over the different avenues (coming from those who knows or have an inkling on what I do).

And many investors perceive today’s market as astonishingly almost “risk free”. How circumstances have changed, radically from 5 years ago.

Nevertheless in most instances, I am asked of WHAT particular issue to bankroll them. In fact, some of my encounters include expectations of incredible outsized returns, even prior to last Thursday’s TV documentary, which had been picked up from their social circles.

When I try to explain that investing entails risks and opportunities management, which highly depends on their risk profile, their expectations on returns and time preference, I usually get a cold shoulder. Instead, I am thought to be self-indulgent.

How difficult it is for the public to understand that investors operate on risk-reward trade off. That trying to predict markets over the short term is tantamount to horse racing. To quote Dr. Marc Faber, ``Concerning the timing, I am the first one to admit that to press a button and say this is the low and press it again and say this is the peak, is very difficult. I am not sure if anyone has successfully managed to do that. I always look at what is the risk and what is the reward of an investment.”

Again, as an analyst-trader/investor we work on the crude probabilities of the market’s directional flow and act accordingly to its cyclical progression. We are not in the works to predict the future as clairvoyants.

While we may have our predilections over (investment themes as published in our outlook) some issues, we don’t know and can’t predict on which issues will be tomorrow’s darlings. Yet, this is what is expected of us; to deliver tomorrow’s returns. In today’s market, select companies have reached BILLIONS in market capitalizations which does NOT even have a million pesos worth of assets! If markets are a mystery, so be it. We won’t be lulled into taking inordinate risks.

Our predisposition has been mainly to position on our investment themes and wait for their maturity and anticipate the cyclical if not secular (long term) transitions rather than trying to second guess who tomorrow’s favorites are.

It is in the same tradition, Edwin Lefévre writing in behalf for Jesse Livermore in the must read Reminiscences of a Stock Operator warned that people do not want to think or work but only wish to be “spoon-fed” or given stock tips.

For instance, if I give you a tip and since your entry position has been directed by me, then it should follow that your exit position should likewise be based upon my tip to ensure the efficacy of my “tips”. In short, since your position depends on me, such “tip based” trade serves to measure the tipster’s or my accuracy in determining the trade’s outcome. That should be the protocol.

Yet, when we get tips that end up with bad results we usually engage in finger pointing. Why? Because we usually don’t follow this route, we end up heeding the tip but usually become unaware of our exit points. Even if a tip does accurately move according to the direction of the tipster’s advice, but since the exit position had not been determined, then the burden of success of the trade has essentially shifted from the tip giver to the tip receiver. And when the security or the markets in general move against your positions, the inability to establish exit points parlay to losses, from which we tend to blame the tipster. Is this fair? Obviously not.

Why? Such is known as a psychological delusion called Transference, which according to Author Robert Ringer (emphasis mine),

``the act of looking to others, or to “uncontrollable” circumstances, for the source of one’s problems. When you insist that something is not your fault, what you are unwittingly saying is that you cannot change your situation because you have no control over it…

``Even when you suffer as a result of someone else’s bad behavior, you do yourself no favor by blaming your pain on that person. There is a difference between engaging in transference (blame) and trying to analyze the reason you incurred the problem.

``There is always a reason for a bad consequence, but a reason is far different from an excuse. An excuse is nothing but a clever way to escape accountability. The fact that someone was dishonest with you could be a legitimate reason why you were harmed, but it is not a valid excuse for abusing your own Machine.”

Since most in the investing public have either been dismissive or ignorant of the dynamics that stockmarkets operate under human psychology as its main driver, one of our reasons in not giving out specific stock tips, aside from abiding by Jesse Livermore’s rule, is for our investors to pay heed to the lessons of cognitive illusions.

Any tips that you desire to heed should include an entry as well as an exit point, to lay the burden on your tipster. Otherwise we are ACCOUNTABLE for our actions and NO ONE else!!!

NO REGRETS, I SHOULD HAVE….

Further, in relation to cognitive biases, you should be familiar with these very common phrases:

I should have bought at the bottom; I would have gained a remarkable….
I should have sold at the top, I would have bought myself some brand NEW….
If I held onto this issue I would have been a ….
If I shifted to this issue I would have gained more than…

One of the reasons why the investors are hesitant to act on making important decisions is the fear of regrets. And those fears as encapsulated above are specific examples. It is known as the REGRET THEORY, where according to changingminds.org (highlights mine),

``People know that when they make a decision they will feel regret if they make the wrong decision. They thus take this anticipated regret into account when they decide. This is probably what makes them loss-averse.

``When thinking ahead, they may experience anticipatory regret, as they realize that they may regret in the future. This can be a powerful dissuader or create a specific motivation to do one thing in order to avoid something else.’

Again, it should be emphasized that the essence of investing is about anticipating returns as a trade off in relation to risk based on one’s risk profile, returns expectations and time frame preference. All other aspects naturally become subordinate to these.

Let’s make an example; stock XYZ in 2002 was worth 1 peso at its low and fortunately enough we were able to acquire them at 3 pesos in 2004. Today, stock XYZ is worth 8 pesos. What do we do now?

Let us assume that 5 years in the future the stockmarket peaks and by then stock XYZ will be worth 40 pesos. Then, in the next 5 years the falling market will drag stock XYZ back to the 5 pesos level.

Easy to say, since by virtue of fait accompli allows one to know where to exit, simply is because the past is unchangeable.

However, given today’s predicament, where the secular/cyclical climax has yet to be determined…what does an investor have to do? Cheer prices up to 40, then “deny-until-death” that prices have been in decline and finally revert to its near long low at 5 pesos?

Such would mean reaching the top and the bottom without taking ANY action, prompted by the fear of opportunity loss. In the end, all that cheering and sulking will end you up with a probability of net loss due to inflation. So what good does inactivity or directionless trade/investing make?

Let us further assume that stock ABC in 2002 was worth 1 peso. And that today it is worth only 2 pesos, far from the returns provided for by XYZ. However at the peak of the market cycle stock ABC will end up at 70 pesos per share higher than XYZ only to fall back to 3 pesos at the trough of the cycle 10 years from now, which is lower than XYZ.

Again under the present circumstances, what does an investor do? Maintain position and ignore or effect a switch? At what instance does one decide to take a shift?

These questions are difficult to answer because the future is unknown. We can only make our estimated guess of the market’s future whereabouts and act on contrived possibilities and their respective probabilities.

In essence, prices are relative; it will not always go up neither will it go always down unless under certain exceptions-fundamentals take it to the bin (e.g. insolvency) or to heavens (revolutionary discovery).

However, the general trend determines the price path, as we previously argued which is etched by the secularity/cyclicality of the financial markets and/or economy. Regrets on taking action will only compound to one’s miseries. Nor would we like to live in fantasy land.

The key point for an investor is to have specific goals and contingent plans to work with and apply action triggers under conditions operating under perceived possibilities.

Wake Me UP from MY Nightmares Please

Going back to the elements of horrors which affected me as impelled by the TV news documentary:

1. Bubble Risks.

If media barrages the public with constantly misleading depiction of the stockmarket, we could likely see an emergent bubble in the near future as the clueless throngs will dash into the market to gamble, ala China. Think of maids, drivers or janitors joining the mad rush to speculate on the markets.

This would either bring an abrupt end to the present cycle or create huge price swings or gyrations, enough to send us to the ICU.

2. Security Risks.

Criminal elements could target the industry mainstays, associated professionals and participants or investors known to have reaped a windfall and officials in publicly listed firms.

3. Political Risks.

Self righteous political personalities including their conduits could utilize the pretext of mounting inequality to slap legislative actions against the financial markets industry, such as levy additional taxes, impose capital controls, curb investor rights and access to financial markets in the name of wealth redistribution.

Wake me up from my nightmare please.