World Equity Markets on A Bullish Juggernaut, Phisix to Follow?!

``If you board the wrong train, it is no use running along the corridor in the other direction.”- Dietrich Bonhoeffer German theologian

WHILE the domestic stock market appeared to have partially responded to our forecasts of a “global contagion” influenced domestic meltup, this only came after wild swings during last week’s activities.

The Phisix was up 1.17% amidst streaking hot Asian indices as the Peso streaked to a new six year high at Php 47.51 against a US dollar.

The wild swings in our market has been coincidental to an apparently much wilder roller coaster activities in China, whose composite indices fell by over 4% last Thursday but ended the week still with significant gains, the Shenzhen up 5.85% (!!!) and Shanghai 1.87% after an equally strong rebound on Friday.

As we have previously noted, despite the uninspiring or tepid fundamentals, global markets have justified the present loose (inflationary) conditions as beneficial for equities and the rest of the asset classes. This has been greatly aided by the continuing swoon of the US dollar (as measured by the trade weighted index).

And such asset friendly financial market conditions means that in spite of credit (mortgage) growth slowdown seen in the housing sector in the US, there have been signs that more leverage taking activities have shifted to the other sectors.

Let me quote another favorite analyst Mr. Doug Noland of the Credit Bubble Bulletin, ``It appears obvious to me that rampant Credit excess runs unabated. Household debt growth may be moderating, while corporate borrowings are likely expanding at low double-digit rates. But it is the growth in financial sector borrowings that holds the key to liquidity puzzle. The leveraging of existing securities (there’s $45 TN of Credit market debt outstanding) – by hedge funds, in broker/dealer and bank “trading accounts” – is likely a major source of current liquidity excess.”

And such excess liquidity has certainly fired up the US markets to a blast-off stage...

Figure 3: stockcharts.com: US Equity Markets in OVERDRIVE!

We have previously shown how the US Dow Jones Industrials have served to inspire global indices. This time the uptrend has accelerated into a broad market run, as shown in Figure 3, where the S&P 500 (main window), the Nasdaq (highest pane), Russell 2000 (above pane) and Dow Transports (lower pane) have ALL conspired to surge beyond their recently established highs (blue arrows).

Such broad based advance can hardly be deemed as an “isolated” event. And in my view taking a bearish stand against such a vigorous “momentum” would be suicidal for one’s portfolio. Of course, over the short-run the markets may retrace, but given the present pace of advances, the odds are that the emotional impulses will continue to spur prices into a maximum overdrive.

As we have previously presented, the global financial markets have mostly tracked the directions of the US markets.

Last Tuesday, April 17^th the widely followed Canadian independent research outfit BCA Research, came up with their own bullish outlook as emerging markets broke out as shown in Figure 4.

Figure 4: BCA Research: Emerging Market Equities: Breakout!

Notes the BCA Research (emphasis mine), ``...many EM currencies are likely to appreciate further against the U.S. dollar, which will help bring down EM bond yields. In turn, this provides a bullish equity environment. Lower interest rates will further stimulate domestic demand, benefiting domestically oriented sectors and helping encourage P/E multiple expansion. Emerging market banks tend to perform particularly well during times of a falling U.S. dollar, and banks in Asia and Eastern Europe currently appear attractive.”

And such variables COULD HAVE fueled the bourses of our Southeast Asian neighbors to almost simultaneously SET new RECORD highs, as Indonesia, Malaysia and Singapore (except Thailand-still hobbled by political direction on its capital flows), as shown in Figure 5, as well as most of other East Asian neighbors as Taiwan, China, Australia and Korea (Hong Kong and New Zealand at resistance).

Figure 5: With Jakarta Hitting FRESH Record Highs, How Long Before The Phisix Catches Up?

With Indonesia’s Jakarta Composite Index (red candle) on a winning streak into FRESH record highs, the odds are that over the near term (possibly in a week or two), the Phisix (blue line) could likely breach its very own 10-year hurdle following the global juggernaut.

The Economist wrote a dampener following Indonesia’s recent foray to new bullish grounds (emphasis mine), ``Three times since the start of the year it has suffered sharp falls, partly as a result of contagion from problems in other markets (although to be fair, most other Asian markets have suffered similar fates). But Indonesia remains a high-risk market, and it is inherently vulnerable during bouts of global or regional market turbulence. Moreover, the very scale of the JSX Composite Index's gains also makes a corresponding downward correction that much more of a worry. In the 24 months to March, Indonesian equities rose by around 80%, compared with a median of around 45% in ASEAN. Valuations may also be on the high side. The average price-earnings (P/E) ratio of the JSX is currently 20.2, lower than China (22), New Zealand (22.5) and Japan (26.6) but higher than in most other Asian markets. In Singapore the average P/E ratio is 15.3, and in Thailand it is 10.4, although this probably indicates that political instability has lowered valuations.”

Last week, using the Zimbabwe experience we wrote on how monetary processes or inflationary policies can distort market prices and even climb amidst deteriorating economic conditions. And as global asset markets trek higher on grounds of loose money conditions which allows for more inflationary (leverage) undertaking, consumer price inflation continue to manifests itself in varying degrees most notably in Canada (highest in 8 months), China (highest level in more than two years on jump on food prices driving concerns over “exporting inflation”) and the UK (highest in 14 years, which prompted Bank of England governor Mervyn King to write Chancellor Gordon Brown for an explanation).

This makes us likewise recall billionaire philanthropist George Soros’ ``Theory of Reflexivity” where he says that the prevailing bias may impact not just market prices but also the fundamentals, from which becomes a self-fulfilling prophecy and eventually leads to a boom-bust sequence.

While the bears could be right where sometime in the future a liquidity crunch may ensue which could put a grinding halt and possibly reverse the present trends, for the moment market actions have NOT been favorable to undertake positions against the present trend, as the global money machine appears to be working in full throttle.

As always, it pays to consider a contingency plan under potential TAIL EVENTS from which the practical ways would mean risking only the amount one can afford by “position sizing” and by strictly “enforcing your stops”.

When our short term view matches our long term outlook, we tend to become emphatic on our calls.

Remember markets may remain irrational more than we can remain solvent and designing portfolio profitability should always factor in such anomalies.