``In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed the monetary climate - primarily the trend in interest rates and Federal Reserve policy - is the dominant factor.” - Martin Zweig
I used to bet on horse races. That’s why I can relate some horse racing activities to the markets.
The spectacular ‘come-from-behind’ victory by a 50 to 1 longshot, Mine That Bird, ridden by jockey Calvin Borel, in the 1st leg of the US Triple Crown, the Kentucky Derby, held at Churchill Downs at Louisville Kentucky, greatly fascinated me.
Riding into the last quarter length of the 1 ¼ mile leg, Mine That Bird was nearly at the tail end of the 20 horse pack. Jockey Borel then deftly worked his prized horse towards the middle of the pack going into the top of the stretch, elegantly sneaked into the rail for an unobstructed view and unleashed the animal’s full might towards the finish line to rack up an astounding 6-3/4 length win- a wallop! You can watch it online here.
The wonderful partnership of Jockey Borel and Mine That Bird was significantly unexpected in both the betting world (50 to 1 odds) and even in the race track itself-a pulsating come from behind triumph. And today’s electrifying actions in the marketplace seems to match the same rendition-largely unanticipated by mainstream experts and the consensus and equally the unforeseen in speed and magnitude of market movement.
So if I were a horse race bettor I would have reaped enormous dividends had I made a serendipitous bet on that highly underappreciated underdog.
Applied to the markets, it would seem like another major vindication for us, since we had been expecting this from the start of the year. Not only had we projected a general market improvement but we clearly identified a possible outcome an Asian outperformance! (see 2009: Asian Markets Could OUTPERFORM, Will “Divergences” Be A Theme for 2009?,) See figure 1.
Figure 1: US Global Investors: Asia-Latin American Outperformance
The US Global Investors have basically echoed what we have been saying all along (emphasis added), ``So far this year, emerging markets in Asia and Latin America, as represented in blue in the chart, have generally outperformed those in the Middle East/Africa, and Eastern Europe, in yellow and green respectively. Russia and Israel are exceptions. The market has rewarded better balance sheet fundamentals and smaller external and domestic leverage in Asia and Latin America.”
The Philippine benchmark, the Phisix, surged 6.58% over the week to pad its year to date gains by 19.71%. Despite the strong showing, the Phisix’s gain has been transcended by the outstanding run in Singapore (16.56%!!!), Hong Kong (12.04%!!), Taiwan (9.87%!) or even our ASEAN neighbors Thailand (7.33%) and Indonesia (7.69%).
Of course, we are nearly halfway through the year, which means we are still far away from the homestretch, where fluid real time developments may alter present actions, either by further reinforcing our view or going against it.
But almost every indicator has now turned towards a possible fulfillment of our yearend expectations, including my last technical yardstick: the 200-day moving averages, which have become evident in a majority of Asian markets [see Asian Markets: Crossing the Bull Market Rubicon?]!
Moreover, 2010 is the Philippine Presidential election year which has been cyclically strong over the years [as discussed in Focusing On The Future: the Phisix and the Philippine Presidential Cycle].
So general market improvement PLUS next year’s Presidential honeymoon argues for more upside for the Phisix going towards the post elections in 2011.
Of course, like every trend, there will always be intermittent bumps. But what would matter would be the general or the primary trend.
Nonetheless, if the Phisix does end the year above 2,500, we may expect a full recovery (Phisix 3,800) by the end of 2010 or even an attempt at the 5,000.
Horse Racing In the Domestic Market, Noises Over Signals
And even the domestic horse racing mentality has left the starting gates! See figure 2
Figure 2: PSE’s Bull Market Breadth The Advance Decline Ratio, Traded Issues
Where your favorite sell side and mainstream analysts will constantly bombard you with the drivel that stocks are driven by “fundamentals e.g. earnings”, we have argued based on Edwin Lefèvre’s premise from his classic “Reminiscences of a Stock Operator”, ``In a bear market all stocks go down and in a bull market they go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing.”
Mr. Lefèvre, who in behalf of the legendary trader Mr. Jesse L. Livermore, wrote from an empirical standpoint of how markets generally operated.
Nevertheless, we found that his underlying observations have been backed by theory from Mr. Fritz Machlup of the Austrian School of Economics that inflationary policies has had greater impact to stock prices as discussed in Are Stock Market Prices Driven By Earnings or Inflation? and in Phisix: The Case For A Bull Run. This is most pronounced in the Philippine Stock Exchange whose market has been “underdeveloped”.
Notice that the bullish breadth in the Phisix has now been established as seen from the substantial improvement in the advance decline spread (more incidence of positive spread-see left pane), which means today’s market has seen more advancing issues against declining issues. This week, advancers outnumbered decliners by nearly 2.5 to 1.
To add, the number of traded issues (right pane) has conspicuously picked up (red arrow). This translates to the marked broadening of gains in listed issues in the Philippine Stock Exchange.
In other words, as we predicted, even the second and third tier issues have joined the roster of advances. Incidentally, the top 10 gainers over the past sessions appears have been dominated by “speculative” stocks rather than blue chips or Phisix component issues.
In the rapidly shaping “rising tide lifts all boats” environment, which includes “shell” companies, does this landscape then extrapolate to an abrupt shift in earnings expectations to simultaneously turn positive?? The obvious answer is NO. The answer why this phenomenon has been happening is mainly about the percolation of the inflationary driven speculative spirits.
This simply reveals how the world operates.
While truth is a rational subject of interest by anyone or by everyone, it’s always about truth in the way people opt to see or expect them to be, no matter how skewed their version of truth is. As Jeffrey Tucker on a blog article A Tribute to Jack Kemp wonderfully expressed, ``In this world, no matter how firm your credentials, no matter how much capital you have built up over the years, no matter how much press you have received in the past, once you start saying things outside the mainstream, or the mainstream shifts below your feet, you are suddenly a nonperson”.
Being a nonperson is not the issue here. Aside, I am also NOT saying that I have grasped the monopoly of mundane truths. But from the market’s perspective, where there has been little evidence of correlation-causation from so called micro-fundamental driven markets (especially evident in the Philippine setting), the conventional mindset have been apparently molded by mainstream practitioner’s fanatic devotion to peddling noises based on false premises as seen on their literatures, which have only increased the public’s risk profiles.
And poor understanding of markets consequently prompts for wrong impressions and lackluster participation from the general public.
For us, what is crucial is for everyone to comprehend on the evolving market cycles in order to weigh on the risks prospects from which determines our survivability and profit opportunities.
And this requires us to operate under the understanding of the fundamental truisms of winnowing noises from signals, than one based on charades.
