Phisix: Back To The Global Divergence Mode

``In the short run, the stock market is a voting machine and long run is a weighing machine. Five years from now and 10 years from now we will see that we could have made some extraordinary buys. I do know that the American economy will do well, and that people that own a piece of it will do well. But they shouldn't do it on leverage, and that's what people have learned in this period. "-Warren Buffett (at a CNBC interview with Becky Quick)

Following the bloody carnage in the global equity markets during the previous week, the Phisix reverted to its “divergent” mode by recovering most of its losses. The Philippine benchmark was up by 5.46% over the week, even amidst a mostly dreary global outlook and was one of rare bright spots in the Asian market alongside Vietnam (+10.19%) and China’s Shanghai (10.54%).

What seems to have driven the Phisix to stoically climb to the upside, amidst the interim weakness in most of the global markets, has been an erosion of foreign selling. Curiously enough, we even saw select blue chip buying by foreign money, albeit they were seen sporadically selling over the broad market to account for a minor net inflow of Php 188 million over the week.

Of course one week does not a trend make. But as what we have been saying before, if the estimates of foreign liquidation relative to the previous years of inflows have been accurate, then the pressure from another round of AIG-type of forcible liquidation has probably peaked and should be declining. And if we continue to see this trend reinforced, then the threat from any future selling pressures is likely to emanate from local retail investors who are the easiest to be swayed or spooked by media reports. Thus, perhaps the diminishing trend of foreign selling plus future risks of “contagion dynamic” from local retail investors are likely to be indicative of the bottoming process we have long talking about. And a bottom process entails rangebound trading or gradual confidence building recovery.

As we have repeatedly argued, the Phisix doesn’t share the same problem with most of the world. In fact, the Phisix sorely missed out (or is it serendipitously?) the real estate boom during the last few years. The contagion linkage the Philippine has with the world is through the trade, remittances, the booby traps from toxic US instruments held by some financial institutions and financial flows.

One year into the crisis we have yet to see any material deterioration from these external channels. Ironically, what has sharply impacted the local economic growth data has been the “rising food and fuel” component or imported “cost push” inflation. With food and fuel prices down, the risk towards the extended impact from the latter influences could be seen as likely to diminish which in essence should support “growth”.

Albeit, with the recent jump of oil to above $100 ($106 as of Friday) had been mainly on the account of the weakness of the US dollar rather than from demand recovery as industrial metals and the Baltic Index continue to soften see figure 3. In other words, oil and gold have been the beneficiaries (safe haven?) of the growing anxiety over a massive scale of US intervention to rescue its financial system.

As this Bloomberg report avers (highlight mine), ``Domestic banks are cutting trading with international firms in the interbank market, according to Zhuang Zhiqiang, a trader at Xiamen International Bank Co., which is partially owned by the Asian Development Bank. The move aims to control risks after the bankruptcy of Lehman Brothers Holdings Inc. stunned domestic investors, said Zhao Qingming, an analyst in Beijing at China Construction Bank Corp., the nation's second-largest lender. We've turned more cautious,'' said Zhuang, who is based in the southern Chinese city of Xiamen. ``Bank officials are worried about settlement risks as the ongoing crisis has weakened people's trust in U.S. banks.''

Figure 3: stockcharts.com: US Dollar Driven Oil Rebound!

Now with some Asian countries beginning to tow the line of monetary policies directed at resuscitating growth, where according to a Bloomberg report, ``Taiwan cut borrowing costs on Sept. 25, joining China, Australia and New Zealand in easing the price of money this month,” we are likely to see some of these effects via a recovery in the second quarter of 2009 barring a crash of the US economy.

We just hope that our central bank will not get cowed by pressures from our politicians and to remain focused on fighting the “ravages of residual inflation” by continuing to tighten.