``Global finance is a dark hole. There are more investors in more countries moving more money into more securities in more other countries than ever before. Herd behavior sometimes overwhelms the natural tendency of markets to self-correct, often harmlessly to everyone but overeager investors. Large losses in one market could trigger selling in others. Confidence and spending could weaken. What's unnerving about the global money bazaar is not what we know; it's what we don't know.”-Robert J. Samuelson, Storm Cloud at the Global Bazaar?
So what else can I say? As the Phisix continues to hug the limelight, I have been watching in awe as it energetically set another milestone; a fresh TEN year high!
Based on present conditions, the momentum going forward appears to be insuppressible as the torrent of foreign money inflows have now been AUGMENTED by considerable money flows from Philippine residents.
We are just a few points shy from an important breakthrough; the ultimate barrier erected in February 3, 1997 at 3,447.6 is merely 58.23 points distant from Friday’s close! Beyond this level represents uncharted territory. And this dam could be broken anytime soon. Even possibly by the time you’d be reading this. While I am delighted to witness the Phisix approach my long term goal of 10,000, the prevailing rhapsodical sentiment represents much of a cause of concern in my view.
The Phisix surged 1.67% over the week, and is up an amazing 13.64% from the start of the year. Market internals continue to manifest record breaking upon record breaking developments.
Figure 1: Local Investor Peso Volume Turnover: Surging Momentum
This week has a different theme though. Where in the past local investors mainly played the supporting role to overseas money, this week they apparently were in control. And as the market continues its upward trek, money from resident investors has gradually been increasing as shown in Figure 1, with the recent volume at its strongest level since the inception of the rally in 2003. For this week, domestic investors had a commanding majority (55.77%) of the aggregate transactions!
You see, when the locals are bullish they tend to fiddle with speculative “illiquid” or highly volatile issues. As testament to the speculative proclivity of the local market participants advancing issues hit another record high (421 over the week)!
And because local investors have been generally ecstatic, trading activities are expected to blossom as they frequently take on short-term positions. Again as evidence to this, total daily trades eked another week of record transactions; the average-an astounding 13,878!
Gadzooks, we are today witnessing another spike or more indications of growing overconfidence! The market is indeed getting quite euphoric.
While this week’s foreign inflows had been the weakest since the start of the year, a tepid Php 959.393 million, the breadth of foreign money flows or issues bought up at the boards have been at the highest level since the cyclical turnaround in 2003! In short, foreign money has also joined the locals in the speculative frenzy.
The penetration level of local investors has been extremely low, despite the recent run-up. According to the estimates of the PSE president last year, as we mentioned previously, only about 1% of our population have investments in the domestic equity market.
Present events indicate that this has been evolving. Where the hunt for higher returns have been a key factor in determining investments worldwide, in the light of further advances of the Phisix and the other Philippine asset classes, we are now witnessing a similar spillover effect to the local domain.
Where the once “risk-averse” public have gradually come to psychologically and socially accept that stockmarket investing as a genuine and legitimate investment channel (instead of gambling arena), this implies a strong support for the Phisix (and the economy) over the long term. I would like to emphasize LONG TERM!
The back of the napkin calculation tells us that if the penetration level of local retail investors would treble or reach 3% of the population or 2.55 million, where each participant would transact P 1m worth a year (P 100k traded 10 times) or in over 240 days (20 trading days/mo. x 12 months), daily volume would translate to about P 10.625 billion a day! Considering the present share of foreign investors of about half of today’s volume, our aggregate daily peso volume should be at around P 20 billion! And this does not yet include local institutional investors. You can just guess estimate the level the Phisix would be in at P 20 billion a day-around 8,000!
From the start of the year, our daily volume averaged about Php 4.462 billion where local investors constituted 45.27% of the accrued transactions or P 2.02 billion. I think this roughly falls in line with the estimated penetration level of local retail investors as quoted by the PSE president.
In other words, while nominal volume has grown, the penetration level has NOT YET grown enough to surpass the levels cited by the PSE president. Over the long run this should serve as ANOTHER BULLISH case for the PHISIX, as we have said before.
HOWEVER, over the SHORT-TERM [pardon my insistence with timeframe references, which in my view signifies a crucial factor in determining absolute returns] with the severe lack of understanding, today’s market participants have been mostly drawn by the prospects of EASY MONEY and by SOCIAL PRESSURE rather than risk-reward/cost-benefit factors.
As an example, some market participants insist of being “cerebral” in their approach towards the market when their influence centers affecting their investment decision making process spring from the analysis emanating from information from either mainstream news/ analysts [momentum or fad based] or stock forums. If successful investing in markets means being “ahead of the curve”, how does one gain from the knowledge or information the public already knows? What distinguishes “noise” from “true” drivers?
There have even been the “personality occults” variable. Because of the relative successes of pushing up of several issues based on the JOCKEYING by some key market personalities, these have been interpreted by some punters as having the magic of “King Midas’ golden touch”, where the future direction of the share prices of some issues on the market is wholly dependent on the “blessings or not” of the market’s version of “King Midas”. In short, stock market “jockeys” and not business viability to some are deemed as critical factors in determining their investment returns! Incredible.
Yet, the gullible public has generally ignored the important truisms of a “rising tide lifts all boats” scenario, or as the legendary trader Jesse Livermore discerningly advised, “In a bullmarket all stocks rise in general”. In its eagerness to speculate [NOT invest] the investing public would consume every story Hook, Line and Sinker on even dubious themes as grounds for their bets.
One must be reminded that while management is indeed essential in determining the success of any business, it is also the long term viability of the business model that matters and not some “castle in the air” models, where short term gains or price-driven momentum advances have been the apparent priority.
Stray no further and recall the Technology bust or the Dot Com Bubble in 2000, where share prices of questionable, capital consuming, non-profitable business paradigms were bidded up to stratospheric levels only to end up nowhere resulting to huge losses by gullible investors (again, people get what they deserve).
In the domestic instance, the 1999 BW Resources Fiasco should refresh our memories. From about 60 cents, the company Greater Resources was transformed to BW Resources which raced to about 107 per share, (premised on a chimera or a fantasy business model-it even topped the market cap of San Miguel, the largest market cap at its peak then!) which was “jockeyed” by known market players allegedly with the support of the political leadership.
At the end of the day, the bubble imploded and its shares prices were brought back to planet earth (from 60 cents to 107 pesos back to 60 cents). Some of the jockeys and the principal of company themselves got nastily burned while many gullible investors, who bought into the fad mostly at the top, today still holds on the issue with enormous losses in the HOPE of its revival (of course, in a reconstituted real estate company).
The important lesson here: People have very short memories. For failing to learn from the mistakes of the past, we would most likely see a repeat of a similar fate...someday. Again in the valued words of Jesse Livermore, ``The stock market never really changes that much. What happened before will happen again and again and again."
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