PNOC’s Debut Lures More Foreign Money; Rising Dow, Buoyant Peso Lifts Phisix

``Each believes easily what he fears and what he desires."-Jean de La Fontaine French Poet (1621-1695)

As of today, the bullish run of the Phisix has been substantially reflective of the performances of the global markets. As the US Dow Jones set new records (+1.12% week-on-week), the Phisix (+.88%) has knocked on the portals of its resistance highs and could go about setting new highs in the coming weeks.

This week’s huge inflows of foreign money (a startling P 12.25 billion!) have been mostly due to the very successful PNOC Exploration listing (+34.375%), an issue whose foreign take up I had gravely underestimated. PNOC’s fundamentals have been very impressive at least, but given the performances of its peers (yes, here I was guilty of extrapolating the past for the future), and the likelihood of the prospects of an interim “top”, I have been wary of the possibility of mistiming. Besides, short term gains are for those with especially high risks appetite!

Further, there have been sporadic chatters about the risks of a huge IPO listing siphoning liquidity out of the market. As I have been arguing about liquidity driven markets, the PNOC experience, which raised about P 16.2 billion from its listing, simply proved that there had been simply too much money out there chasing for returns, both in the domestic and the international sphere, as the Phisix continued its upward trek in contrast to some expectations of a liquidity drain.

Anyway, since successful investing in the market is mostly about opportunities management, there are even more propitious opportunities in the offing given the present secular phase of today’s domestic market.

As an aside, last week I pointed out that while local investors who appear to be on a selling mode, foreign money continued to pile on local assets, where I argued the latter would influence the former. It appears that such observation came true as the number of traded issues and number of trades combined with the general market breadth improved considerably to manifest of improved sentiments from local investors.

Figure 8: Bullish Peso supports the Phisix

Anyway, the continuing bullish case for the Phisix has largely been from the appreciating Peso which closed (+.61%) at 49.365 on Friday to break its 2002 high. Remember that we have been bullish on the Peso and made our case (see November 29 to December 3, 2004 edition The Philippine Peso’s Epiphany?) two years ago or even before mainstream analysts saw the obvious.

The Peso hasn’t been much of a factor to the Phisix until 2005, where as shown in Figure 8, peaks of the Phisix coincided with the peaks of the Peso or troughs of the USD/Peso.

The interim bearish factors for the Phisix today, which as shown above is highly dependent on foreign capital, are mostly due to exogenous risks as mentioned previously, the record low volatility and extremely complacent global investor sentiment and frothy market action, the technically overbought conditions, growing divergences of a Dow Industrials relative to the Transports, and record levels (1987 highs) of insider selling in the US markets.

Aside from of course, fundamental “fat tail” risks from a greater-than-expected global economic growth slowdown, rising tide of protectionism, an abrupt fall or a US dollar crisis, a nuclear war, global pandemic or perhaps a meltdown of global credit house of cards. For the meantime, any reversals could be more cyclically driven than structurally based.

Given the near closing of the season which has likewise underpinned today’s upbeat outlook here and abroad, I would be very cautious about positioning into the market, and surf the momentum instead.

Given too, the periodicity of the rally here and overseas, which is about nearly half a year already, as noted previously, we could be at the near end or at the maturity of the present cycle which heightens our risks profile while at the same time limiting our returns potentials.

Remember that no trend goes in a straight line and today’s bullish cycle could end sooner rather than later.

Yet of course, one cannot discount a speculative blow-off top as a culmination to the present cycle, yet as we surf the tide we need to tighten our stops, especially as the markets gets frothier.