Will Frothy Bond Markets Drive the Phisix Higher?

The Philippine equity benchmark, the Phisix seems to be knocking on the gateway of another milestone high, as I noted two weeks back[1],

One must be reminded that bubbles come in stages. So far the Philippines seem to be at a benign phase of the bubble cycle.

Again bubbles will principally be manifested on capital intensive sectors (like real estate, mining, manufacturing) and possibly, but not necessarily, through the stock markets.

This means that for as long as the US does not fall into a recession or a crisis, ASEAN outperformance, fueled by a banking credit boom and foreign fund flows operating on a carry trade dynamic or interest rate and currency arbitrages (capital flight I might add), should be expected to continue.

And again I will maintain that ASEAN’s record breaking streak may be sustained at least until the end of the year 2012.

Friday’s substantial decline in the US stock markets may put a start-of-the-week dampener on the current momentum. However this seems unlikely a hurdle to the Bernanke-Draghi inspired Christmas or year-end rally particularly for the record setting ASEAN bourses as shown above [Philippine Phisix PCOMP orange, Indonesia JCI green, Thailand SET yellow, Malaysia FMKLCI red].

Emerging Market Bonds Outperform Equities

The price actions of the bonds of emerging market should give us a clue.

The zooming pace of the JP Morgan USD Emerging Market Bond Fund (EMB) appears to be accelerating.

In the bond fund, the Philippines and Indonesia have been among the major components of with 6.81% and 6.56% share of the pie in the total portfolio[2]. This implies that the ASEAN bond markets have been outperforming their respective equity peers.

A further clue can be seen in what appears as emerging bond markets (EMB) eclipsing the gains of emerging equity (EEM)[3] counterparts.

As caveat, the country based distribution of weightings of the bond and equity indices have been different. This means that we can’t entirely depend on its accuracy when making a comparison.

Nevertheless, for local bond currency market, the huge jump in the share distribution of the real estate (18% in June vis-à-vis 13% December 2011) and infrastructure-based industries (from insignificant to 6%) gives further evidence of the business cycle in progress.

As per the largest issuers by sector, banks and financials remain the largest but have lost 3% of the share of the pie. This is followed by the rapidly growing real estate sector and holding companies.

And for the share of the ownership of investors by type, based on % of local currency denominated government bonds issued, banks and financial institutions have been the largest, albeit on a steady marginal decline in terms of trend over the past 7 years.

Other major investors, according to the Asian Development Bond includes[4]

1) BTr-managed funds which account for Bond Sinking Fund (BSF) Securities Stabilization Fund (SSF), and the Special Guaranty Fund (SGF),

2) contractual savings and tax-exempt institutions (TEIs) which represent government pension and insurance funds (e.g., Government Service Insurance System [GSIS], Social Security System [SSS], and Philippine Health Insurance Corp. [PHIC]), private insurance companies, and tax exempt funds and corporations

3) custodians which are BSP-accredited securities custodians for investor-clients and lastly

4) other government entities such as government-owned and -controlled corporations (GOCCs), and various corporate and individual investors.

The apparent boom in emerging market bond markets may have been partly reflected on the sectoral returns in the equity markets.

The financial sector, property and holding companies—which have been heavy on both—have returned a whopping 42.54%, 40.95% and 33.32% respectively; on a year-to-date basis (see light maroon bars).

Except for the service sector, the nearly broad based weekly gains (dark maroon bars) for the rest of industry compounded on the outsized year-to-date returns (see light maroon bars).

Bonds are Less Risky or a Bubble?

The positive flows into the bond markets have not been limited to Asia, this has apparently been true even in the US, where fund flows have mostly been concentrated on fixed income related investments such as ETFs and “hybrid” balance funds with income orientation as retail investor flee equity markets[5].

Yet the idea that bonds are relatively “less risky” represents charade bestowed upon by global central bank’s tsunami of monetary inflation and financial and banking regulations that have biased towards incentivizing financial and bank institutions to hold bonds[6].

For instance, Japan’s central bank, the Bank of Japan (BoJ) recently warned the banking and financial industry of their high sensitivity to interest rate risks; where for every 1% increase of interest rates, large banks and regional banks could suffer losses of ¥ 3.7 trillion and ¥3.0 trillion respectively[7]

But the supreme irony has been that the BoJ themselves have been responsible for putting at risks the domestic banking system through their pronounced policy of supposedly fighting deflation through inflationism via asset purchases. The BoJ’s balance sheet[8] now accounts for about 30% of the IMF’s estimated economic growth rate.

Reports also suggest that the BoJ may even add to their monetary easing efforts[9] on October 30^th

Noticeably Japan’s outward investment flows, which are at near record levels[10], have supplanted China, despite the streak of failures where the batting average of outward FDIs have been unfavorable and the losses have been substantial.

About 26 trillion yen ($330 billion) have accounted for the lost market value from the 10 biggest overseas purchases by Japanese companies from 2000 to a year ago. Apparently the batting success average of Japan’s outward Foreign Direct Investments has been 1: 5 or 20%, where two posted gains while eight companies suffered losses during the said period.

And of the two winners, one is from Kirin Holdings whose acquisition of 48% of San Miguel Brewery [PSE:SMB] in 2009 has tripled in value[11].

I have been pointing out here that beyond the mainstream’s false notion of Japan’s deflation bogeyman, monetary policies, policy or regulatory (regime) uncertainties, interest rate risks and credit risks have all compounded to haunt Japan’s increasingly crony based political economy, prompting resident investors to take larger and unnecessary risks abroad for either survival or to seek out higher returns[12].

Going back to the fund flows in the US, ironically, despite the sustained outflows in the equity markets and last Friday’s slump, the US major bellwether the S&P 500 ended the week marginally on the positive note (dark violet bars).

Yet major global equity markets, led by the S&P 500, have mostly been significantly up on a year-to-date basis (light violet bars).

This fantastic but unsustainable run in the bond markets, which has exhibited symptoms of bubble dynamics, will unlikely persist.

We can either expect a shift out of bonds and into the stock markets or that the bond markets could be the trigger to the coming crisis.

In my view, the former is likely to happen first perhaps before the latter. To also add that triggers to crisis could come from exogenous forces.

Central Bank Actions Rule the Day

So far, steroids from central banks aimed at supporting the asset markets will continue to distort market price signals. And this time I am not alone saying this.

This recent commentary from Financial Times[13] seems highly relevant to the current state of affairs (bold emphasis mine)

Much of the blame for this tends to be attributed to the fact that markets now move to a drumbeat of statements from politicians and central bankers, such as the head of the US Federal Reserve. “All 500 S&P companies have the same chairman and his name is Ben Bernanke,” says Jurrien Timmer of the Fidelity Global Strategies Fund.

It is also true that securities within markets, as well as far-flung debt and equity markets have been trading more “in sync” with each other: the willingness of investors to take on risk being a common factor behind price moves.

The conditions of a parallel universe—where markets have become seemingly detached to economic reality—which I have been pounding on the table since, has even been recognized by the chief executive Mohamed El-Erian of PIMCO one of the largest fixed income firms.

At the Financial Times Mr. El-Erian writes[14] (bold mine)

Essentially, the Fed is inserting a sizeable policy wedge between market values and underlying fundamentals. And investors in virtually every market segment – including bonds, commodities, equities, foreign exchange and volatility – have benefited handsomely. In the process, many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there. 

Central bank action, both real and perceived, rules the investment day, and will continue to do so for now. This is also the case in Europe.

And if central bank actions have truly become the rule for the investment world, then to what degree of relevance does traditional or conventional knowledge apply on pricing and valuing stock markets in the current setting?

Another commentary from the Lex Column of the Financial Times nails it[15],

Perhaps the most horrifying thing about the current combination of sales deceleration, margin contraction and high valuations is that it might not even be a sell signal.  The central banks of the US and Europe may well keep investors trapped in risky assets indefinitely. Those who look at the fundamentals and flee to cash had better be patient.

In reality market participants are being sucked into the vortex of speculative mania, which means another round of intensive build-up of misallocated resources or malinvestments and a future bust. We are in a boom phase of a bubble cycle.

FED policies have begun to diffuse into the US property markets which have shown significant broad based recovery[16]: particularly in existing home sales, housing starts, new home sales, building permits, builder confidence, to even a decline in shadow inventories, and signs of the inflection point of real estate loans at ALL commercial banks.

The assumption that FED policies have been successful would signify as presumptive or short sightedness or even blind belief of the capabilities of bureaucrats.

People forget that costs are not benefits. What seems as a boom today will ultimately end in tears. And bubbles, which have been growing in scale and frequency, once pricked will lead to massive capital destruction that would take years to recover especially when interventions delay them and or even make them worse.

General destruction of wealth and wealth generating activities can never be a benefit even from the Pareto optimal perspective. 

The recovering US real estate industry is being buttressed by the improving state of credit as seen by the annual % change in consumer loans and commercial industrial loans at ALL commercial banks. (Source St. Louis Fed)

Yet once the colossal excess reserves by depositary institutions held at the US Federal Reserve flows into the system, the US and the rest of the world will be faced with the risks of price inflation.

And price inflation or the market’s recognition of the unsustainability of the fiscal positions of US will likely serve as the proverbial the pin that would perforate and end the inflating bubble.

For now, the US asset bubble will likely be sustained.

Miniature Stock Bubble: Alcorn Petroleum

At the local markets, as pointed out last week, inflationary booms titillates the gambling ticks and speculative adrenalin of many participants. Punters and tyros will be seduced to the allure of easy money based on dramatic price surges, and eventually, fall prey to gruesome price collapses.

And the imprudent and those bearing the entitlement mentality will pass the blame on ‘manipulation’ or ‘fraud’ to the markets and call for regulations without accounting for the incentives brought about by bubble policies on people’s behavior.

Let me quote anew the great libertarian economist, journalist Henry Hazlitt[17]

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

More regulations will not solve the behavioral imbalances caused and rewarded by antecedent immoral policies.

Over the past two weeks Alcorn Petroleum [PSE: APM] has skyrocketed to close on Friday by an eye-popping 600+%!

The company officially disclosed that they “cannot confirm” the rumored backdoor listing by allegedly the other “retailing” businesses owned by the same of owners, although the firm “appointed a financial adviser” to submit recommendations[18]. If the rumor involved different parties then such denial would seem sensible as negotiations involve the risks of transaction failure. But in this case, the parties supposedly are the same owners.

The company also referred the excessive price fluctuations or movements to a possible “oil exploration play”. Alcorn Petroleum has a 9.32% participating interests at the Service Contract 51- covering the East Visayas Basin.

Yet since the other partners in the same service contract[19] have had mixed performance this week, particularly, Trans Asia (+5.79%) [PSE: TA] and PetroEnergy [PSE: PERC] (-.84%) one can hardly impute an oil exploration play to the astronomical price surge of APM.

Whatever the reasons behind the price spike, prudence dictates that such huge series of price surges characterizes bubble dynamics which overtime typically ends up with huge frustrations for those left holding the proverbial bag.

Property giant Century Property Group [PSE: CPG], which got listed through the backdoor from the buyout of East Asia Power Resources in August[20] of last year, had seen a similar stratospheric surge as many jumped in on the rumored backdoor play.

However when the rumor became fact, CPG retrenched most of its accrued bottom-to-peak gains. As of Friday, CPG’s prices have been down about 62% from its zenith closing price.

Today’s bullmarket, and partly CPG’s financial heft, have essentially provided support to her current price levels. 

CPG’s tale is unlike the sordid experience of another stock bubble in 2000, which again involved another backdoor listing play, particularly Philweb [PSE: WEB] through formerly listed South Seas Oil[21]. Not to mention the BW Resources scandal in 1999.

In the backdrop of a bear market and upon the realization of the deal, WEB virtually gave back all its 1,000++% gains or returned whence it came from. And many punters who took part in the play had about a decade or more to recoup part of their losses (that’s for those who can’t accept their mistakes).

WEB’s experience seems to parallel the Thailand episode during the Asian Crisis as previously discussed[22]. Bubbles take time to heal whether seen from a macro or micro level.

The bottom line is to apply the Duck Test[23] for suspected stock bubbles: if it walks like duck, swims like a duck and quacks like a duck, it must be a duck.

These are the issues to avoid and to ignore.

This wisdom quote from author C Joybell C should apply to stock picking as well

Choose your battles wisely. After all, life isn't measured by how many times you stood up to fight. It's not winning battles that makes you happy, but it's how many times you turned away and chose to look into a better direction. Life is too short to spend it on warring. Fight only the most, most, most important ones, let the rest go.

Today’s bullmarket should come with a lot of opportunities without having to expose oneself to enormous risk. And all it takes is emotional intelligence[24] and self-discipline[25]

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[1] See Phisix-ASEAN Bellwethers at Fresh Record Highs, October 8, 2012

[2] iShares.com J.P. Morgan USD Emerging Markets Bond Fund us.iShares.com

[3] iShares.com MSCI Emerging Markets Index Fund us.iShares.com

[4] ADB, Asia Bond Monitor, Asianbondsonline.org September 2012

[5] Zero Hedge R(osenberg) & B(ernstein): Two Ex-Merrill Colleagues, Two Opposing Outlooks, One Permabull Rebuttal, October 19, 2012

[6] See How Capital Regulations Contributed to the Current Crisis December 5, 2011

[7] Wall Street Journal Japanese Banks Face Huge Rate Rise Risk, Warns BOJ, October 19, 2012

[8] Pedro Da Costa Central bank balance sheets: Battle of the bulge Reuters Blog April 12, 2012

[9] Asahi Shimbun BOJ mulls further monetary easing, October 18, 2012

[10] Zero Hedge Forget China; Japan Is 'Taking Over' The World Again October 15, 2012

[11] Bloomberg.com Softbank’s Son Seeks to Skirt Cross-Border Failure History, October 17, 2012

[12] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012

[13] Dan McCrum End to ‘alpha’ spells trouble for fund managers Financial Times September 10, 2012

[14] Mohamed El Erian Beware the ‘central bank put’ bubble Financial Times, October 10, 2012

[15] Dave Glen Markets Remain Bid Despite Weakish Fundamentals September 18, 2012

[16] See US Federal Reserve Policies Re-Inflate US Property Bubble October 20, 2012

[17] Henry Hazlitt What You Should Know About Inflation p.18 Mises.org

[18] Alcorn Petroleum Re: Comment on Inquirer.net News Article PSE.com.ph October 16, 2012

[19] Business Inquirer.net Drillers settle dispute on farm-in deal August 10, 2012

[20]Business Inquirer.net Century Properties sets backdoor listing on Philippine Stock Exchange, August 18, 2012

[21] Newsflash.org BOI OKAYS REGISTRATION OF PHILWEB AS NEW I.T. FIRM January 29, 2001

[22] See FED-ECB’s Nuclear Policies: Risk ON is Back! September 17, 2012

[23] Wikipedia.org Duck test

[24] See Applying Emotional Intelligence to the Boom Bust Cycle August 21, 2011

[25] See Self-Discipline and Understanding Market Drivers as Key to Risk Management April 2, 2012

Phisix: Bullmarket Reprieve Represents Profit Opportunities

Life in general has never been even close to fair, so the pretense that the government can make it fair is a valuable and inexhaustible asset to politicians who want to expand government.-Thomas Sowell

Since I look at the world events from the big picture perspective, I hardly change on my views unless some random events (for me) should radically alter the embedded trends.

Following the FED-ECB announcements to support asset prices, I hold on to the premise that these actions combined with domestic interest rates are likely to feed through asset prices especially for ASEAN-Phisix markets

As I wrote last week[1],

artificially suppressed interest rates that have brought about a domestic negative real rates regime, as well as, foreign capital flow movements influenced by external credit easing policies (negative real rates and Quantitative Easing), are likely to further inflate bubble dynamics in the country and in the region, far more than their developed economy and BRIC counterparts.

Yet such credit driven boom will be interpreted by the mainstream as “economic growth” when in reality they represent a bubble cycle or systemic misallocation of capital in progression.

One must be reminded that bubbles come in stages. So far the Philippines seem to be at a benign phase of the bubble cycle.

Again bubbles will principally be manifested on capital intensive sectors (like real estate, mining, manufacturing) and possibly, but not necessarily, through the stock markets.

This means that for as long as the US does not fall into a recession or a crisis, ASEAN outperformance, fueled by a banking credit boom and foreign fund flows operating on a carry trade dynamic or interest rate and currency arbitrages (capital flight I might add), should be expected to continue.

And again I will maintain that ASEAN’s record breaking streak may be sustained at least until the end of the year 2012.

Yet such streak will strictly be conditional to the political-economic developments abroad, as well as, on the monetary engagements by major central banks.

It is important to point out that given the fragility of the current external environments shocks, which may be viewed as a random or “black swan” event, should not be discounted.

Nevertheless global markets as indicated by major benchmarks mostly retrenched this week.

The current pullback (dark maroon bars) essentially represents reversals from last week’s material gains (light maroon bars). This is particularly true for ASEAN markets, India, Russia, France and the US.

So far, this suggests of an environment marked by trading range or a consolidation period.

For the Phisix, the current retreat off the recent record highs should be seen as countercyclical correction phase which normally follows a landmark upside breakout. This should be used as an opportunity to position or accumulate depending on the industry.

From a technical support-resistance perspective, the correction phase brings back the Phisix to the former resistance level (about 5,365), currently the minor support level.

Should the profit taking stage continue, then the 5,175-level can be seen as the next stop or the next support level.

Although my guess is that this bullmarket reprieve is likely to be short and narrow

Rotational and Seasonal Forces at Work

I may further that a rotation process typifies this week’s sectoral performance.

The mining index, which has lagged the broader market last week (light violent) and for the rest of the year, has considerably outperformed this week (dark violent).

Rotating leadership has been the crux of the inflationary boom in the Phisix.

As I pointed out last week, I expect 2013 to be the year where the mining index would regain their leadership. The alternating annual leadership since 2007, not only accounts for the normative rotational process, but also of the truism of “no trend moves in a straight line”, and or, the reversion to the mean.

I would add that seasonal factors could also be a factor in play.

The September-October window has been notorious for major stock market crashes[2].

But given that the US Federal Reserve and the European Central Bank’s recent announcement of “unlimited” buying of bonds (estimated at $2 trillion or more), particularly aimed at providing support to financial assets, the likelihood of a nearby crash seems vastly reduced.

Again as pointed out last week, instead what we may be seeing could be the “buy the rumor, sell on news” dynamic. The massive build up of expectations from central bank steroids priced in a boom. The realization brought about by these central banker’s moves to reflate the system may have triggered some profit taking activities.

So “sell on news” could have been compounded by seasonal weakness[3]. This perhaps could be due to back to school expenditures in the US, and for the Philippines, second semester[4].

Yet as October culminates, we should expect an acceleration of the price recovery of the Phisix and ASEAN bellwethers which will likely come in the backdrop of the ECB’s active engagement of asset purchases. This should emanate from the activation or institution of the permanent bailout fund, the European Stability Mechanism[5].

Parallel Universe: Markets and Economic Reality Diverge

Lingering global economic weakness could be a factor too.

However, this seems likely a subordinate force. That’s because massive interventions in the marketplace have spawned a parallel universe—where prices of financial assets have departed from economic reality.

Proof?

The Phisix continues to break into new highs even as a sharp fall in Philippine exports last August will likely to weigh down on statistical economic growth and on earnings of export based publicly listed companies.

Contra mainstream expectations, whom have mostly been entranced by political illusions, the decline in exports validates my prognosis last July[6]. 

Yet no amount of downward revisions of company earnings[7] has put to halt to the year-to-date advances of US equity benchmarks specifically, the Dow Industrials 9.1%, the S&P 500 13.6% and the Nasdaq 16.85% in spite of this week’s substantial 2%+ of losses for each of them.

Similarly no amount of downward revisions[8] has been an obstacle to substantial year-to-date gains of over 10% for industrialized economies of ex-Japan Asia; Singapore, Hong Kong, Australia and New Zealand, except for Taiwan and Korea whom are up by 5%+. For emerging Asia the story has been the same, Thailand, Philippines, India, Vietnam and Indonesia has been on fire with 10-20% gains except for Malaysia (8%+).

This serve as more proof that in a world of fiat money, corporate earnings have hardly been a major factor in determining the price direction of equity markets.

Now that the FED-ECB has thrown the gauntlet for significantly more interventions, mainstream analysts have begun to bloviate about a “recovery” in earnings, i.e. to justify even higher prices.

If downside revisions hardly influenced stock prices to reflect on its “actual” state, the same analysts have now suggesting that “improvements” in earnings will extrapolate to higher stocks. It’s a bizarre twist of logic.

The Asian outperformance has been bruited as sporting a low beta relative to the US S&P and Euro Stoxx[9] which seem to imply of “decoupling”.

This placid state of relative low beta has accounted for the non-recessionary environment for the US. The notion of decoupling in a deeply interconnected world and financial markets resonates Sir John Templeton’s four most dangerous words in investing, “This time is different”[10]

As the Asian Development Bank warns[11],

Yet, the Lehman shock in 2008 and the ongoing eurozone debt crisis have tested the resilience of these markets, and the threat of financial contagion is real. A closer analysis shows that shock and volatility spillovers from both crises to Asian markets are quite significant.

Finally the main empirical evidence on why ASEAN has been relatively outperforming the rest of Asia…

…can be seen from ASEAN’s credit growth[12], where ASEAN has surpassed the region’s industrialized and major emerging market counterparts.

As I have repeatedly been pointing out, these have been the outcome of lesser fiscal baggage, which brings about more traction on the negative real rates imposed by their respective central banks, and from the steep yield curve, which induces the banking system to issue more credit to take advantage of the spread.

All these constitutes as main ingredients to a credit bubble.

The Progressing Inflationary Boom, Political Feel Good But Cruel Intentions

Internal market indicators remain buoyant

Despite this week’s retrenchment in major Phisix weighted issues, broadbased sentiment have been perking up behind the scenes.

The weekly averaged daily trades have been rebounding. This means either that there have been more market participants or that current participants have been trading or churning their accounts more frequently. To do so suggests of confidence in the marketplace.

The rebound in daily trades has equally been confirmed by a bounce in the average number of issues traded daily.

Confidence has also been diffusing to the extent where market participants have been dabbling with third tier issues.

And considering the lack of liquidity, third tier issues tend to generate outsized returns that often magnetize people afflicted with the gambler’s tick.

The supercilious idea by certain bureaucrats that some speculators have formed into syndicates of “trading gangs”[13] to take advantage of others through manipulation of the markets via social media misses the point entirely: Inflationary booms electrify the gambler’s adrenalin or the speculator’s dopamine[14].

Both charts above reveals of the broad based yield chasing phenomenon brought about by negative real rates regime.

Since incentives drives people’s actions, the incentive to punt or to wager has been prompted for by the desire to eke out returns on an environment imposed upon the unwitting public of policies that penalizes savings and rewards irresponsibility and fecklessness.

The narrowing people’s time preferences only encourage wanton wagering.

In reality people’s response to incentives from government’s  manipulation of the marketplace signify as symptoms of the bubble or business cycle in motion.

Read my lips: Don’t mistake effects as the cause; it is government policies that incentivize on most of such malfeasance.

Yet people don’t realize that at the peak of a mania, imprudence becomes the norm. (see above diagrams)

As late economist Lionel Robbins wrote[15],

And if they do not last — and you can see that once people have been seized with the speculative mania it would take a continuously increasing inflation to keep them going — if these conditions do not last, then these mistakes are revealed.

The fact that authorities cannot see these manifests of their cluelessness or of their dishonesty by attempting to pass the blame onto the marketplace what truly has been a policy design, i.e. To promote aggregate demand through consumption and speculation via inflationary “euthanasia of the rentier” policies.

Let me add that if local authorities can’t seem to see this, ironically the IMF has[16]

“It is a concern,” said Laura Kodres, an assistant director in the IMF’s monetary and capital markets department, told reporters in Washington today. “The low interest rates environment has a lot of other effects besides lowering interest rates to consumers.”

“Widespread evidence suggests that a prolonged period of low short-term interest rates encourages excessive risk taking” by financial institutions, the IMF wrote in a chapter of its Global Financial Stability report released today.

If financial professionals are gullible enough to fall into the low interest rate trap, then how much more the retail investors?

Yet pretentious attempts to control prices from supposed unwieldy behavior by the markets through feel good sounding regulations represents as the alter ego of inflation.

As the great Ludwig von Mises warned[17],

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

This week’s substantial retreat by the Phisix has hardly accounted for as a broad market decline. This only solidifies the theory of rotation or relative pricing from an inflationary boom as evident in the stock market.

Many took profits from outperforming Phisix issues and shifted to the mining industry and to other third tier issues.

Nevertheless these signify as signs that market participants still desire to remain engaged with the stock market.

Amidst QE: The Mighty Peso and Prospective Foreign Fund Flows 

Finally it has been clear that local investors have been instrumental in providing most of the support on the domestic market so far.

Typically, foreign funds accounts for about 40-45%

This matches the fund flows monitored by the IMF where foreign fund flows to emerging market bonds and to equities have remained modest through most of 2012.

This dynamic I expect to change soon.

A simple clue can be seen below

I have argued that domestic financial repression policies by developed economies will eventually prompt for more dramatic yield chasing dynamic or euphemism for capital flight on a global scale.

While all central banks have been engaged in either printing money or adding digital entries to their balance sheets, the difference is on the degree.

The highly impressive strength by the Philippine Peso exhibits this seminal phenomenon.

The Peso has been rising against the European euro, the Japanese yen, the British pound and even the Chinese Yuan. I purposely excluded the US dollar since everyone has been fixated on this, as well as, the Swiss franc which has been anchored to the euro. Nevertheless, the mainstream will be surprised to realize that the Peso has been outperforming currencies of major economies; no not because of grandeur accomplishments by political leaders but as consequence mostly from the war on interest rates from monetary actions

I believe that the Japan may spearhead that capital flight to ASEAN[18] 

Considering that the valuations of currencies have to take into account principally the demand and supply as per the great Professor von Mises’ advise [19],

The valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one.

The supply of money remains relatively in favor of the Peso. That’s because the Bangko Sentral ng Piliipinas, or the BSP, does much less in balance sheet expansion than her peers. Oh yes you can ignore or take the verbal waffling or twaddle about the BSP refusing to print money with a grain of salt, unless they obscure or change the definition of money creation. In reality they have been doing as their peers[20].

On the demand side, the underlying and largely ignored credit boom has been painting the Philippines and the ASEAN peers as providing the economic “growth” premium.

Bottom line: Despite the current fragility from global economic anxieties, I expect financial repression in developed economies to funnel significant amount of money into ASEAN region and into the Philippines.

For now, unless stagflation becomes a clear and present danger, expect the Phisix and ASEAN markets to reach new highs until at least the year end, provided no external shocks emerge.

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[1] see Phisix-ASEAN Bellwethers at Fresh Record Highs October 8, 2012

[2] Wikipedia.org List of stock market crashes and bear markets

[3] Business Insider September Is The Worst Month For Stocks — But Do You Realize HOW Bad It Really Is? September 3, 2012

[4] See Austrian Business Cycle and September Market Crashes June 27, 2012

[5] See Europe’s ESM Activated, Expect ECB to Rev Up on the Printing Press October 9, 2012

[6] See I Told You So Moment: Philippine Exports Hit in August, October 12, 2012

[7] Ed Yardeni S&P 500 Revenues & Earnings October 9, 2012

[8] DBS Group Research Economics Markets Strategy 4^th Quarter September 13, 2012

[9] DBS Research ibid

[10] Parkman Bob Consider these 'words of wisdom' about investing SirJohnTempleton.org September 20, 2006

[11] Asian Development Bank ASIA BOND MONITOR SEPTEMBER 2012 ADBOnline.adb.org

[12] IMF Regional Economic Outlook Asia and Pacific Regional Economic Outlook––October 2012 Update, October 11, 2012

[13] See The Philippine SEC’s Phantasm of “Trading Gangs” October 14, 2012

[14] See The Magic of Central Banking Talk Therapy July 28, 2012

[15] Lionel Robbins The Twofold Roots of the Great Depression: Inflationism and Intervention, October 1, 2010, Mises.org

[16] Bloomberg.com Low Interest Rates May Lead to Risky Behavior, IMF Says September 28, 2012

[17] Ludwig von Mises Inflation and Price Control May 27, 2005

[18] See Will Japan’s Investments Drive the Phisix to the 10,000 levels?, March 19, 2012

[19] Ludwig von Mises STABILIZATION OF THE MONETARY UNIT—FROM THE VIEWPOINT OF THEORY (1923) THE CAUSES OF THE ECONOMIC CRISIS p.18 Mises.org

[20] See How True is it that the BSP Refuses to Print Money? October 9, 2012