``The closer you are to the truth and the facts, the more of an edge you have. The further you are, the more risk and higher probability of a telephone game of distorted information and stacked assumptions—each precariously dependent on all the priors.” -Josh Wolfe Nanotech
Well, much of the present euphoria has actually been the same phenomenon worldwide, as global equity assets persist to outperform.
Analyst Gary Dorsch, recently observed that bubbles have been brewing in Shanghai Tokyo and London, in a Kitco article he wrote (emphasis mine),
``But what disturbs Chinese government officials are signs of a speculative bubble in the stock market. Investors opened 50,000 retail brokerage accounts a day in December and mutual funds raised a record 389 billion yuan ($50 billion) last year, quadruple the 2005 amount. January turnover was five times early 2006 levels. Beijing is now ordering banks to prevent retail borrowing for stock investments....
``The Chinese stock market has now become the most expensive in Asia, trading at 40 times 2005 earnings, compared to 16 in Hong Kong. The high P/E ratio is supported by expectations of 25% earnings growth for 2006 and 2007, from the possible new tax policy and new accounting standards starting from 2007. However, if 2006 corporate results fail to meet strong expectations, Chinese investors could easily dump inflated stocks, and send the overall market into a tailspin.”
Well it’s not just in China, in Vietnam, the rush into equities have spawned a nationwide mania, writes the Financial Times (emphasis mine),
``After watching the formal stock market's main index soar by 249 per cent over the last 13 months, Vietnam's emerging middle class is in the throws of stock market mania and students, civil servants and state enterprise managers with cash to spare are all rushing to buy shares and dreaming of windfall profits....
``Until recently, Vietnamese tended to put what savings they had into more traditional assets such as gold or real estate. But in the past year the number of trading accounts in the Vietnamese stock market has almost quadrupled from 32,000 to about 120,000.
``Brokerages are mushrooming, with 56 now licensed, up from 16 early last year. All kinds of companies are trying to get a bite of what they see as a lucrative business with one state garment maker, Vinatex, recently declaring it would open a stock-broking arm.
Figure 2: Bloomberg: Ho Chi Minh Index
Speculation knows no boundaries. Figure 2 shows of how success relatively attracts more money, the Vietnam Ho Chi Minh Index up 332% in about two years have been enticing novices and punters to take on “dreams” of a windfall.
Once again to quote the Financial Times, ``“It's a frenzy," says Jonathan Pincus, the UN's chief economist in Hanoi. "All the chatter in Hanoi is about people investing in the market. I don't know if anyone knows what these companies are worth, but they are buying the paper." Well one should know of what comes after manias.
At least here in the Philippines, there has been to a lesser degree similar evidences that would YET suggest of a manic intensity with a similar degree, although we are definitely headed into that direction. As I have been saying repeatedly, Manias can last longer and intensify more than one could ever imagine.
Well of course global liquidity is the main reason for all these.
For instance, we mentioned that marketplace liquidity has been growing even locally. Recently, a publicly listed broker CITISECONLINE <COL> announced that it would begin offering margin facilities to its clientele base backed by a P 200 million bank loan.
Anyway, what I am trying to say is that rising collateral values, increasing pressure from clients, attempts to gain market share and the prospects of more commissions would eventually lead brokers to offer margin facilities to their clients as the upward trend of the Phisix gets more entrenched.
Such facility will add to more liquidity in the marketplace as levered money gets recycled back to the markets in search of better returns. With levered money, volatility of asset prices increases and so as with the risks associated with it.
This, in effect, is what we’ve been seeing in the world marketplace.
Figure 3: The Grandich Letter: US Margin Debts at 2000 levels
In the US markets, margin debts have buttressed the present lofty levels of its equity markets, another potential pin that may cause a serious dislocation. Peter Grandich of the Grandich Letter remarked, ``When stock market players get giddy, they tend to feel it’s a one-way street up and getting highly leveraged is just a way to make more money. They attempt this by borrowing heavily against their existing holdings in order to get more equity exposure. You’ll notice we’re now back to levels last seen in 2000. To those who say the stock market peaked then – good eye.”
Since the US markets have generally been highly correlated with our local market, as well as the rest of the other emerging markets, any disorderly unwinding triggered by these highly levered positions could pose as a significant threat to the present momentum.
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