The Transmutation of Liquidity.

One of Wall Street's favorite aphorism "This time its different" is frequently used in defense of "deficits don't matter" arguments citing the following pretexts; the US as the world's monetary printing press, safest investment haven, foremost beneficiary to the technological evolution in information and communication among others. Yet, hardly one of these apologists have brought up on why and how such deficits persists....particularly the transformation of liquidity through various innovative 'structured finance' vehicles or instruments. This is entirely the kernel of "this time is different" paragon or what allows the deficits to continue; the transmutation of liquidity.

As to its sustainability and or the ability to subvert business or economic cycles, I put this into doubt primarily because business or economic cycles are primarily driven by base human attributes, namely, greed, hope and fear. For as long as investment decisions are molded out of these human traits, cycles will always hold no matter the technological breakthroughs. To quote Ludwig von Mises in Human Action, "Economics, as a branch of the more general theory of human action, deals with all human action, i.e., with mans purposive aiming at the attainment of ends chosen, whatever these ends may be." Ergo, deficits DO matter and cycles WILL NOT end. Like the fear of the realization of pandemics, these liquidity mutations once stretched to the limits will most possibly end up in tears.

Quoted at the Philippine Daily Inquirer

Professor Ciel Habito quotes your blogger in his column today, here is an excerpt:

THE STOCK MARKET AND THE FOREIGN exchange market may be looking upbeat these days, but as I said last week, that shouldn't mean it's time to celebrate, gloat, and/or get complacent. Too many people, specially those in high places, would like us to believe that positive market movements are due to internal developments within our economy. The implementation of the expanded VAT, in particular, tends to be given more credit than it deserves for supposedly lifting market sentiment, and even improving confidence in the economy in general. It should be welcome news if there is indeed stronger confidence from the business community in our economic outlook. But are recent positive market movements in fact being driven by improved confidence due to internal developments within the country?

Fickle funds

Not quite, according to my friend Benson Te, an exceptionally perceptive market analyst whose contrarian analyses have consistently been affirmed and given him gloating rights once in a while. For some time now, he has been pointing out that developments in the domestic stock and currency markets largely mirror the trends in the markets of the entire Asia-Pacific region. One only needs to eyeball the graphs of the Asia-Pacific Dow Jones index and of the Phisix to see how closely they move together.

To read the rest of the article press on this link ...

Thanks Prof. Habito!

Copper To A Lifetime High, But May Fall Warns Dr. Faber

Copper prices soared to a lifetime high despite signs of global demand growth weakness, rising inventories and threats of the Chinese government to dump its reserves into the global market.

Dr. Marc Faber in his latest outlook notes that the declining rate of change of Global Currency reserves and crude oil demand may presage decline in global economic growth, emerging market stocks and industrial commodity prices.

Dr. Copper On A Tear

He also warns that anything could trigger a steep drop in copper prices and expects copper to decline by as much as 40%.

Copper inventories in the warehouses of the Shanghai Futures Exchange jumped another 8,594 tonnes to 73,434 tonnes in the week ended Thursday. That followed a rise in stocks of 31,975 tonnes in the previous two weeks, according to Reuters.

London Mercantile Exchange Copper stocks have also climbed from its recent record lows.

Moreover, the Chinese government has threatened to intervene to contain the price increase of copper. Last week it sold about 40,000 tons in China and has vocally threatened to unload more in London. According to MSN Money Central, China's State Reserves Bureau said this week it would auction up to 20,000 tons of spot copper next week and potentially sell 100,000 tons to try to suppress prices.

However, traders are taking the Chinese threats with a grain of salt. According to MSN Money Central “Many copper participants questioned the normally secretive SRB's intentions and thought the bureau was trying to quell the red metal's momentous rise by jawboning it down.

"It certainly feels like that's what they're doing," said a New York dealer, pointing out that while other regions were selling copper on the SRB's announcement on Wednesday, traders in China were buying it.

"And that made a lot of people very skeptical," he said.”

If Dr. Faber’s projection that world growth is indeed slowing down then in the coming months demand for copper should slowdown too. This means that current prices could have been fueled by speculative funds riding on the coattails of momentum. Hence it would be a propitious time for producers to go on an offtake hedge, considering that copper maybe peaking.

As for Copper investors, David J. DesLauriers of Resourceinvestors.com has this to say, “All of this to say that even if copper falls back to $1.80 or $1.60 or $1.40, it won’t matter, and shouldn’t make a difference to investors because none of these companies saw their shares rally on the way up anyway. Of course, knowing the market, the small producers, near-term producers, and developers will probably get beaten up nonetheless on the way down.”

“It is an unfortunate situation to find in which to find oneself, but companies who only produce copper as a by-product don’t need to share the same discounted-valuation fate – they should hedge, it is the only way to force analysts and the market to ascribe the value.”

Trouble In Paradise?

So you thought the Philippines is in such a mess huh?

Look at the pictures below

Xinhua/AP

BBC

Ah ah not Africa too. This is in France. According to a Xinhua report, ``French President Jacques Chirac has promised arrest, trials and punishment for those sowing "violence or fear" across France after arsonists struck from the Mediterranean to the German border and into central Paris for the first time....Youths set ablaze nearly 1,300 vehicles and torched businesses, schools and symbols of French authority, including post offices and provincial police stations in the tenth consecutive night of unrest across the country...

Incredible anarchy.

The Xinhua report continues``From an outburst of anger in suburban Paris housing projects, the violence has fanned out into a nationwide show of disdain for French authority. The unrest has come from youths, including the children of Arab and black Africans angered by years of unequal opportunities.”

And this has been going on for the 11th day according to the LATimes!

November 7 US dollar from Fund to High Yield Currency?

Key Benchmark Interest Rate			Currency
Country	Nov. 3, 2005	Year To Date Change	Year To Date Change^
U.S.	4.00%	1.75%	-
EURO	2.00%	0.00%	-11.80%
Australia	5.50%	0.25%	-5.52%
China	5.58%	0.27%	2.38%
Hong Kong	5.50%	1.75%	0.26%
India	5.25%	0.50%	-3.98%
Indonesia	12.25%	4.82%	-7.59%
Japan*	0.15%	0.00%	-12.59%
Korea	3.50%	0.25%	-0.80%
Malaysia	2.70%	0.05%	0.62%
Philippines	7.50%	0.75%	2.79%
Singapore	2.38%	0.92%	-3.80%
Taiwan	2.13%	0.38%	-5.46%
Thailand	3.75%	1.75%	-4.77%
*Since 2001, the Bank of Japan (BOJ) has targeted the outstanding balance of the current accounts at the BOJ rather than the overnight call rate. ^Relative to the U.S. Dollar Source: Bloomberg, Bank of Thailand, Bangko Sentral ng Pilipinas, Central Bank of China (Republic of China, Taiwan), The People's Bank of China.

Table from Matthews Funds Asia

According to Morgan Stanley’s Stephen Jen, ``The evolution of the dollar from a funding to a high-yield currency is a monumental shift in the global currency markets. The cost of funding is particularly important for exchange rates. First, it will be much more expensive to short the dollar. Second, with global equity portfolios overweight on non-US equities, the opportunity cost of not hedging against currency risk rises with the cash and short-term interest rates in the US. Third, investor risk aversion is likely to rise. With inflation the main source of risk, I don’t expect to see bonds and equities exhibit as strong an ‘offsetting’ pattern as usual.”

Rising interest rates in the US has definitely provided a boost to the US dollar while closing the yield gap among many Asian currencies. Except for the Philippines which has gained from its domestic interest hikes, as well as formerly pegged currencies as China’s remimbi and Malaysia’s ringgit, it appears that the ‘carry trade’ have shifted from borrowing low yielding Euro and Asian currencies and long Asian equities or dollar denominated assets. The current fund migration towards global equities could be such a result.

Phisix Confirms Peso's Advance!

Today’s superb rally in the Phisix came about as forecasted in my latest outlook, which was principally anchored on the premise that the domestic stockmarket would eventually confirm the Peso’s dramatic rise. As of this writing the Peso was quoted last at 54.74 according to Bloomberg while the Phisix climbed a splendid 46.9 points or 2.39% on the backdrop of Php 1.204 billion turnover. The Phisix is the best performer among Asian bourses today!

Foreign money again was responsible for today’s torrid buying. Capital inflows from overseas investors recorded a net inflow of P 231.813 million with foreign activities accounting for 58.7% of the cumulative trades. Market breadth was essentially bullish with 63 advancers against 14 decliners while 34 issues remained unchanged. In all 111 issues had been traded, which is below the 120 threshold, a statistic I use to measure local sentiment. This suggests that the locals remained net sellers in today’s activities, still skeptical of the day’s positive developments.

Because foreign money were the pillars of today’s ascent, the heavy market caps performed with gusto. Imagine BPI was in the list of top gainers usually occupied by second or third stringers. By jumping 8.65% to 56.5 one of the country’s leading banks landed on the 5^th spot. Other heavy caps performed well except for ALI and SMCB which posted declines.

Naturally various reasons would be floated as to why the Phisix rose remarkably. Most of which will be centered on current events, particularly the implementation of the EVAT. While EVAT for me is essential for the country’s fiscal health, its influence in today’s buoyant trading could be minimal. Instead, the planned reforms to be instituted by the Philippine Stock Exchange could have had a positive impact on foreign funds. In April according to the disclosure, the Phisix will shift from a market based capitalization to free float based. This means that component issues will be selected by the measure of liquidity or tradability. I think that this is an important development because liquidity is an essential consideration in the investment choices of foreign fund managers.

In addition there would be some changes in the component roster comprising the major Philippine benchmark starting December 1. Ginebra San Miguel, Ionics, Philippine National Bank, Music Corporation and JG Summit will be replaced by Banco De Oro, Manila Water, SM Investments, Pilipino Telephone and Philex Mining.

The latest round of foreign led buying resembles the sharp rise of the Phisix last June 2003 or during the onset of the cyclical advance phase. I also think we are in a late in the cycle rally, where the country lagged behind the region’s earlier advances due to political obstacles and is bound to a catch up phase.

If I am right about the Peso and the Phisix, then this is the initial upside leg which could last until the first quarter depending on the intertwined performance of the US and Asian bourses. There are many opportunities still out there.