``As government has destroyed one business opportunity after another, perhaps we should not be surprised that investment money has left domestic production and was diverted to financial markets. Investors want a return, and government agents and the political classes seem determined to destroy free markets — and the opportunities they present for economic growth.”-William L. Anderson, One Cheer for Paul Krugman, or Why the Bubble Economy?
Meralco is in a SEMINAL bubble.
The Case For A Brewing Bubble
The Lopez owned utility firm skyrocketed 40% last week and is 111% up on a year to date basis.
Meralco’s free floated market capitalization share to the Phisix index has leapt to 5.48% as of Friday’s close from less than 1% share late last year and has catapulted to the FOURTH spot among the top weighted issues, following PLDT
Meralco’s outperformance seen in its soaring share prices coupled with the languid performances of the price values of the traditional heavyweights- such as BPI, AC, Metrobank
This means that a sharp reversal of MER’s share price trend would risks placing unnecessary onus on the Philippine benchmark. And this could unduly influence the overall market especially if it unwinds under today’s melancholic global atmosphere.
Moreover, MER’s weekly traded volume in PESO has accounted for a cumulative 53.3% of the entire trade, 48.55% of the trades at the close of February 27th and 32.37% on the close of February 20th. Previously Meralco had less than 5% share of total trades.
We recall that the last time we saw bubbles with nearly the same magnitude was in BW Resources (1998-1999) and Philweb (2000) days see figure 5.
Figure 5: Philweb (red), BW Resources (blue) Bubble and Phisix (black) Bear MarketIf memory serves me right, the controversial BW Resources (blue line) corralled about 70% of the entire market’s PESO traded volume during its zenith, and in fact, fleetingly displaced San Miguel Corp
Incidentally, both bubbles- BW Resources which today is listed under a new management Sun Trust Realty (of the Megaworld
Although one may argue that the scale of price increases may not be similar YET, where BW (approx 5,000%) and Philweb (estimated 1,200%), whereas MER’s prices has only increased by about 200% (based on June 2008 trough), the common feature of ANY bubble is the transition from a MANIC phase to a BLOW OFF phase characterized by parabolic movements in the underlying share price trend (see figure 6).
Meralco seems to be in a manic phase. And we hope to see some temperance rather than a progression to the Blow off phase.
As you would notice in the previous chart, both BW and the Philweb boom-bust cycles have the same dynamics as the typical vicious bubble cycle above. To add, in both times the bubbles went bust, the overall markets suffered dearly.
And attempting to “time” bubbles by the ordinary market participants may only lead to more tears and mental anguish.
King Kong Versus Godzilla
Another common feature of the localized bubble is the “takeover” component which rationalizes the market action.
In BW Resources series, it was the hyped tale of a supposed (but aborted) buy-in of the Macao’s gambling magnate Mr. Stanley Ho.
On the other hand, the surge in Philweb share prices came about over the company’s successful takeover of the Cabarrus owned South Seas Oil and Minerals (formerly SSO), which likewise partially piggybacked on the peaking sentiment of the US dot.com boom.
Of course, one may further argue that Meralco is a cash flow rich utility vastly different from “third tier issues”. But NO economic or corporate fundamentals justify such exuberance except for the same “takeover” story.
The apparent action in Meralco has been allegedly due to corporate maneuverings by rival groups in contest for the management prize.
According to the grapevine, the Lopez camp, which is the incumbent managers with substantial ownership of Meralco is allegedly being aided by PLDTs Manny Pangilanan (with speculations of access to the Indonesia’s Salim group), while at the same time reportedly seeking other allies (Henry Sy?), to fortify its position in the utility company by acquiring shares in the market, against a possible hostile takeover attempt by PGMA ally in San Miguel Corp.
If this floated story is anywhere near correct, then MER, which is a regulation instituted monopoly, whose prized possession is being bitterly contested by politically privileged groups signify an engagement between “crony capitalists” representative of the opposite side of the political fence.
It’s like a King Kong versus Godzilla movie, where one monster eventually wins but the rest of the city is devastated.
This means that joining the bandwagon risks a disaster for most of the ordinary market participant. Why? Since it is a high profile corporate struggle, the flow of information is largely asymmetric. Movements of share prices tend to favor insiders and their affiliates who seem to be “gaming” the issue.
Yet even insiders can’t be assured of their newfound paper wealth. If we learn by history, in the BW case, allegedly some insiders or even the BW owner Dante Tan, reportedly lost a fortune in the pointless exercise to buttress a deflating bubble.
In addition, such maneuvers will obviously come to an end, possibly on one or a combination of the following reasons: 1) share price will be high enough to dissuade anyone of the contending parties from further pursuing their agenda, 2) budgets of one of the opposing camps have been drained, 3) political goal accomplished-alliance confirmed and management role retained or successful takeover and or 4) lastly, basic economics-high prices will eventually lure more sellers than buyers.
The Psychology of Bubbles
It is disheartening to see a bubble-like activity emerge anew in an environment resembling a bear market, even when the overall domestic market seems to be on the mend. If history were to rhyme and the MER saga transforms into a full blown bubble which eventually goes bust, then this could extrapolate to additional selling pressures on the local markets anew.
Nonetheless, the vulnerability of the public to get hooked to a bubble is understandable; in a somber environment like today, there is an added desire to squeeze some earnings from momentum driven trades.
Besides, the dearth of trading opportunities in a bear market which have been handicapped by the lack of accessible “short” facilities may have increased participants desire to speculate.
Moreover, negative real interest rates account for as a big incentive to chase yields. When your savings account yields lower returns than the inflation rate, then the temptation to gamble or the appetite to speculate is whetted.
Perhaps these are some of the reasons why a localized bubble coincides with a bear market here.
But unknown to most participants, bubbles operate similar to getting finagled by a Ponzi scheme like the recent Bernard Madoff or Robert Allen Stanford case or the US real estate-securitization cycle.
Such fraudulent conducts or unsustainable trends require exponential acceleration of fresh flow of money from new entrants, whom are seduced with records or appearances of sustainability of past performances-persistent high yields or strong capital returns-even when the underlying business model is questionable or flawed or even non-existent.
In short, most people buy on emotions and not on rationality.
Yet, the more the entrenched the trend, such as the dot.com or US Real Estate, or the more “socially” known people are involved, the greater the attraction to join the bandwagon, such as the Bernard Madoff case.
This is a cognitive bias which humankind in general won’t overcome-the Herd mentality- simply because it is hardwired into our genes. Our ancestors didn’t have the privilege of rationalizing and used intuitions or mental short cuts rather than risks becoming the next meal for carnivorous predators such as tigers and or lions.
But we don’t live in primordial times anymore. We have advanced and will continually do so but our instincts remain.
Worst of all, having a PhD or even an army of highly decorated or awarded professionals does not guarantee protection from fraud. Again as in the Bernard Madoff case, it had among its victims Banks, Insurance companies or hedge funds [see Madoff Ponzi Scam and Boom-Bust cycles].
Yet this world appears to be more fixated with academic and professional credentials whose rich “quantified” trainings or experiences haven’t reduced their ability to read through risks. Thus, the perpetual cycle.
Actually, it is the process ability from emotional intelligence that distinguishes plain academic or technical expertise from being streetsmart or market smart.
Conclusion
The present price actions in Meralco appear headed towards a full blown bubble.
We hope to see the issue make a gradual ascent instead. Moreover we hope that the positive sentiment from its recent activities spillovers to the general market which should reinforce the case of a general market turnaround thereby strengthening the case for MER’s sustained long term uptrend. For a boom to be sustained this requires a recovery in the general market sentiment, especially for the largely underdeveloped liquidity and sentiment sensitive Philippine equity markets.
On the other hand, a bursting bubble, which implies a decline in a similar degree to the preceding upside momentum, will only dampen sentiment as losses are likely to be swift and severe.
In learning from the lessons of history we understand that a bubble bust risks undermining the progress in the local market. This happens even if the bubble is a residual specific risk or is based on a particular company, mainly because the bubble has commanded a substantial share of the market’s attention. Thus, a bubble works like a temptress-they are seductive but fatal.
Unfortunately markets don’t operate on hope.
Applied to the analogy of Dante Alighieri’s who wrote in his classic "Divine Comedy"…
“Before me things create were none, save things
Eternal, and eternal I endure.
All hope abandon ye who enter here."
Therefore my advice, caveat emptor.
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