The Phisix is UP 9%, It’s EASY Money Out There!

``People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.”- Edwin Lefevre, Reminiscences of a Stock Operator

AT the week’s close, the Phisix is up by an astounding 9.6% even as the year has just completed its first chapter.

Yet compared to our region we curiously ranked only 5^th behind the streaking hot Vietnam’s Ho Chi Minh Index 42.94%, which is a mile ahead of the pack, followed by Pakistan’s Karachi 100 15.43%, Bangladesh’s Dhaka Index 13.49% and Malaysia’s KLSE 10.33%. This phenomenon of global capital in search of yields is simply beholding.

Noticeably, except for Singapore’s STI which is likewise up 7.7%, the best performer among our more mature counterparts, it is the “exotic” bourses that have so far provided investors abroad with sterling gains, while other contemporaries have been notably down such as South Korea’s KOSPI, Thailand’s SET and Indonesia’s JKSE, the latter of which outpaced the Phisix last year.

Well of course, our present market performance suggests that we are one of the favorite flavors of today’s cross-border capital flow dynamics. Yet like all other markets, we are subject to the caprices of shifting sentiments, especially considering that the Philippine market has been structurally bolstered by foreign money since the onset of the cyclical reversal in 2003. To ignore this fundamental framework is to engage in wishful thinking.

While it seems that “everyone” today has convincingly turned bullish on the Philippines as a consequence of its inflating asset prices, I remain a short-term skeptic albeit a long-term optimist in the face of a mostly speculative onslaught of global money in the search for diminishing sources of above par returns. In the words of the Bond king, William Gross in his latest outlook (emphasis mine), ``Prices are increasingly being determined by value insensitive flows and speculative leverage as opposed to fundamentals.”

Going back to Philippine stock market internals, I have reverted to my sentiment indicators such as total number of trades and number of daily traded issues as a measure of investor psychology, where present activities possibly denote of emerging indications of “euphoria”.

Figure 1: Rising Number of Trades: Spikes Denotes of Market Tops

As the Phisix ascends, it is natural to expect of accelerating trends in the number of activities in support of an escalating volume turnover. This simply is a demonstration of the bullish outlook represented by “actual” money placements by investors in the bidding up of domestic asset prices. Here money and not words do the talking. In Figure 1, the green line signifies the growing number of trades over the present cycle in support of a rising Phisix.

However, what concern us are the abrupt spikes in the volume, which may be reflective of “manic episodes” by speculators in the market, as reflected by the two pink arrows in the same chart in the past. In the past two weeks, PSE data reflects of several instances of volume surges, a possible manifestation of a probable interim “top”.

When the going gets easy, the proclivities for speculators or the average investors is to amplify on trading activities as profits appear to be “too easy to secure”. In behavioral finance, this could be classified as optimism bias or ``demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions” [wikepedia.org] or sheer overconfidence or the ``tendency to overestimate one’s own abilities”. In short, sucker’s monies are being lured into a trap of speculative frenzy.

Figure 2: stockcharts.com: Phisix: The Allure and Pain of Sucker’s money?

IN keeping a historical perspective as a possible reprise to present events we can see in Figure 2, the results of the past spikes! As easy money gets enticed into the market on the account of the expectations of a perpetuation of the recent momentum, as in the March 2005 and May 2006 case (two blue horizontal arrows), the following “repricing” sets in the angst of sucker’s money following the sharp declines (downtrend lines). Could we be facing the same pattern anew?

Figure 3: Daily Traded Issues: Intensifying Broad based activities signifies speculative biases

As we have observed in the past, broadbased activities have also been growing, reflecting similar signs of investor’s restiveness to prop up EVEN third tier or highly speculative issues, another manifestation of overconfidence or the speculative bent of the market participants as shown in Figure 3.

The scale of present activities has now surpassed that of the March 2005 and May 2006 peaks, where in the past became temporary inflection points. Could today’s upsurge in broad market activities be another signal that our market has entered into the “manic” stage where the day of reckoning for the sucker’s allure could be nearing?

If I may add the gains of today’s market have been more significant than the gains accrued in March 2005 or May 2006, such that in the context of a possible interim trend reversal, the likelihood is that of a sharper decline than in the recent past. That is if we take into the grounds of market cycle probabilities.

Activities in the financial markets defy real life experiences; where in the real world buyers and sellers would haggle intensely or seek a compromise to attain perceived beneficial values, in the financial marketplace, investors either frenetically bid up or dump securities (“like there is no tomorrow”) especially accentuated during major turning points. An analogy would be like in a tiangge, where one would bargain for items being on sale, whereas in the financial markets, as in today’s conditions, share prices are determined by buyers aggressively meeting up the seller’s price.

The public inveigled by “stories” on many fronts, many if not most of them are highly irrelevant to the prices of the underlying securities, are prompted to take action merely on the account of “social” or “peer” pressures or the crowd effect or herding behavior. A good example would be the mining sector, issues with “claims to mining rights” have been outperforming those with fundamentals, just how relevant are these “claims” to their underlying share valuation is anyone’s guess [claims do not signify the commercial viability of reserves], but apparently not from a fundamental standpoint. In short, it’s all about rampant speculation.

In addition, have one considered lately that activities in the financial markets are premised upon obtaining securities in the hope that another party would take upon a similar position but at a price better than one had acquired? Such concept is nonetheless called the Greater Fool Theory, which investopedia.com defines as ``A theory that it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger fool) who is willing to pay the higher price.”

This phenomenon can be gleaned from market participants with very short-term time horizons as they attempt to chase prices in the hope that a greater fool will be out there to imbue on someone else’s folly. As the legendary and most successful stock market investor Mr. Warren Buffett once warned, “the dumbest reason in the world to buy a stock is simply because it is going up”, for the speculating public today, it is the reverse, the dumbest reason is for one to be left out of fad.

While everyone would have whatever justifications to be bullish in today’s market; namely, “cheap”, “growing earnings/revenues/production...etc” [as if earnings really mattered in pricing securities-am speaking domestically; in 2002 no one wanted to talk about anything about the stockmarket], proposed “backdoor” listings, rumored mergers and acquisitions, proposed expansions, better “economic outlook” due to “reforms” and other pabulums; the Philippine market is factually driven by foreign money and most probably fostered upon the account of a global inflationary [exploding money and credit] environment.

All these are presently being manifested in the world asset markets with the Philippines as part of the beneficiary of the “financial globalization”, this report from Bloomberg’s Oliver Biggadike on the present surging liquidity (emphasis mine), ``Domestic liquidity expanded 21.4 percent in December from a year earlier, following November's 18.5 percent gain, Tetangco told reporters last night. Money supply, which grew 16.1 percent in October, is expanding on record remittances from overseas nationals and investment in the country's stocks and bonds.” [I have long argued that the rise of the Peso has been mostly determined by portfolio flows and regional support at the margins...need I say more?]

As recap, market internals appear to highlight signs of a developing mania which could be indicative of a nearing inflection point, however, manias can last longer or intensify more than one can imagine. In manias, the greater fool theory is the prevalent theme as market participants become more emotionally attached to the present gains of the market as a permanent feature of the market’s landscape. Any “stories”, however irrelevant, are used to justify activities to scoop up share prices regardless of valuations, hoping that a greater fool will be willing to pay for it on higher prices.

Finally, since the Phisix has been driven by foreign money, any catalyst to a possible “culmination” or “climax” could, in most probability, come from external sources as that of the May 2006 incident. Whether the Phisix would suddenly become “expensive” in the foreign fund’s point of view or a global readjustment in the risk premia or an abrupt surge in the downside volatility could trigger a shift in psychology and cause a “repricing of some assets” as warned by Jean-Claude Trichet, president of the European Central Bank. Politics as some may suggest would have little impact on today’s capital flow dynamics unless it threatens the very nature of its functionality, as explained last week.

Be careful out there.