Asian Markets Jump on Rumors of US$106 Billion Railway Stimulus

Asian markets posted strong gains today led by Chinese Equities.

It appears that steroid addicted markets has found another inspiration from rumored or unofficial plans for a railway stimulus by the Chinese government.

From Bloomberg:

The government may spend more than the originally planned 650 billion yuan ($106 billion) on railway construction this year, the China Business News reported today, citing an unidentified person close to senior government officials. New high-speed rail lines could help reduce over-capacity in industries such as steel and cement, the Shanghai Securities News reported today, citing railway officials.

The Shanghai composite leapt by 1.95%. ASEAN markets spiked too.

The floated rumors are signs that the policies of the newly installed Chinese officials will hardly distinguish from the previous administration in terms of bailouts and rescues, except via the form of interventions. Policies to "reduce over-capacity" will extrapolate to short term gains that would lead to capital consumption and that will exacerbate on the current unsustainable imbalances.

But the good news is that the Chinese government has also liberalized caps on lending by the banking system last Friday. This should be positive over the long term growth. 

But this will hardly resolve on the current debt based malinvestments and the runaway property bubble brought about by the previous policies which has prompted a shift towards the huge $2.4 trillion shadow banking system.

One thing seems clear, there has to be promises for more inflationary interventions by global governments to guide the markets higher. And this collective jawboning-the-markets communications strategy appears to have become a daily activity.

Yet, my question is will these constant promises of easy money policies experience diminishing utility or diminishing returns? We will see.

Nonetheless, interesting developments.

Asian Stocks: Bad News is Good News Redux

Here we are again, Asian stocks supposedly have risen due to bad news being interpreted as good news. (Below is a run down on Asian stocks as of this writing from Bloomberg)

First the bad news…

Fresh report says China’s manufacturing has contracted

This from Bloomberg,

In China, the Purchasing Managers Index fell to 49.2 in August from 50.1 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Sept. 1. It’s the first time in nine months that the measure has fallen below the 50 level that signals contraction.

A separate report released today by HSBC Holdings Plc and Markit Economics showed China’s manufacturing contracted last month at the fastest pace since March 2009.

China should “decisively” expand the strength of its policy fine-tuning based on economic developments and market changes, according to a front-page commentary published in China’s People’s Daily newspaper.

Next, more negative data from other Asian economies…

In Japan, a report showed companies’ capital spending gained less than expected. In South Korea, inflation slowed to the weakest pace in 12 years last month. Australia’s retail sales fell in July by the most in almost two years. In New Zealand, a gauge of the country’s terms of trade dropped for a fourth consecutive quarter.

Now the supposed good news… (bold added)

Asian stocks rose, reversing earlier losses, as economic reports from China, Japan, South Korea and New Zealand fueled speculation that central banks will boost stimulus measures…

The MSCI Asia Pacific Index added 0.5 percent to 118.32 as of 1:44 p.m. in Tokyo after earlier falling as much as 0.5 percent. U.S. Federal Reserve Chairman Ben S. Bernanke said on Aug. 31 that further monetary easing is an option.

Bernanke “is defending the case that quantitative easing and unconventional policy have been effective, and that could be a controversial statement,” said Tim Leung, a portfolio manager who helps manage about $1.5 billion at IG Investment Ltd. in Hong Kong, referring to the Fed’s large-scale asset purchases. “If in the future the economy is not performing as good as they expect, they still have room” for more stimulus.

I’d say that for China, the today’s reaction seems more of a dead cat’s bounce than from “bad news is good news” phenomenon

China’s Shanghai index has been under pressure for the past few weeks, so today’s bounce should come as a natural response. But this may have been misinterpreted by media

But I don’t think this applies with the rest.

What really has been happening is that the seduction of marketplace from promises of central bank steroids has been intensifying. As I noted last night,

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

Yes central banks will either have to deliver on their promises soon enough, or that financial markets will react violently if expectations have not been met or if economic data continues to exhibit pronounced deterioration.

A quote from the same Bloomberg articles gives a clue on the diminishing returns from central bank promises.

“It’s going to be difficult for the market to keep rallying on the promise of QE and other measures without some improvement in the data,” said Donald Williams, chief investment officer at Sydney-based Platypus Asset Management Ltd. that manages about $1 billion.

Inflationism distorts the pricing system which eventually spawns bubble cycles. The above accounts accounts for anecdotal evidences.

Bad News Is Good News: Global Markets Rise on MORE Stimulus Expectations

Bad New is Good News.

Global markets continue to ascend on EXPECTATIONS of MORE bailouts. [yes markets have been enchanted by the Bernanke Put- pattern of providing ample liquidity to protect the asset markets]

From the Bloomberg,

U.S. stocks advanced, sending the Standard & Poor’s 500 Index to the highest level in more than a month, as investors speculated the Federal Reserve will announce more measures to stimulate the world’s largest economy…

Signs of slowing growth amid Europe’s turmoil could mean the Fed, which began a two-day meeting today, could extend its so-called Operation Twist, according to JPMorgan Chase & Co. (JPM) and Jefferies & Co. The program involves selling short-term debt and buying longer-term bonds. A more aggressive response could be warranted if the Fed see high costs in a slowdown of growth.

Fed’s Options

The central bank may expand its balance sheet, extend Operation Twist and/or lengthen its short-term interest rate guidance beyond late 2014, Goldman Sachs Group Inc. chief economist Jan Hatzius wrote today.

“A decision not to ease is tantamount to a tightening,” he wrote in an e-mailed report to clients today. “At this point we’d be quite surprised if we saw no easing.”

Expectations for further policy action gave stocks their first back-to-back weekly gain since April on June 15. The S&P 500 earlier this month was on the brink of a so-called correction, or a 10 percent drop from a recent peak, on concern about a global slowdown and a worsening of Europe’s crisis.

Markets have constantly been fed with the forging of new deals and from vows of a backstop from policymakers to mitigate or curb the crisis.

The US Federal Reserve’s FOMC concludes their periodical meeting today and will be announcing their actions.

As pointed out above, the markets have already been pricing in, or have been frontrunning, a supposed new easing program from the FED.

Earlier, emerging markets including the Philippines through the IMF, has also promised contributions to assist in the rescue of Europe’s political and banking class. This serves as an example of the ‘poor’ (Filipino and EM Taxpayers) rescuing the rich.

Now the it’s the G-20’s turn to make the next round of pledges.

From another Bloomberg report,

Euro-area leaders at the Group of 20 summit pledged to “take all necessary policy measures” to defend the currency union and boost protection of the region’s struggling banks, according to the final statement issued at a meeting in Mexico.

With contagion from the debt crisis rippling through the world economy, participants at the G-20 summit in the beach resort of Los Cabos backed measures to spur growth and cut budgets in Europe while saying the U.S. will “calibrate” the pace of its spending cuts to avoid a “sharp fiscal contraction” in 2013.

At the end of the two-day summit, the leaders of advanced and emerging economies said Europe is taking steps toward closer economic union “that lead to sustainable borrowing costs.” The G-20 also backed Europe’s plans to move toward a more integrated banking industry.

Talks among G-20 leaders at Los Cabos were dominated by the crisis in 17-nation euro region and its threat to the world economy. Bond yields in Spain, the region’s fourth-biggest economy, rose to a euro-era record yesterday, above the 7 percent level that led to bailouts in Greece, Ireland and Portugal.

The group welcomed the plan to rescue Spain’s banks and the European Union’s efforts to build up its crisis defenses, including the European Stability Mechanism, the region’s permanent bailout fund scheduled to start up in July.

Pledges upon pledges upon pledges.

Again market dynamic becomes a question of the FULFILLMENT or NON-FULFILLMENT of such expectations. Eventually markets will DEMAND not merely promises or assurances but ACTION.

Oh by the way, technician Carl Swenlin, at the stockcharts.com Blog says that the markets deserve a cautious stance, than blindly fixating on the bullish reverse head and shoulders pattern

My problem is that, being a person who likes things to be nice and neat, I wanted the right shoulder to be more even with the left shoulder. But no. What we have is a formation that is very lopsided, but I think it is close enough to be considered a completed reverse head and shoulders pattern. The neckline has been penetrated, so the minimum upside target is about 1430.

Unfortunately, the bullish breakout on the price chart is contradicted by the Climactic Volume Indicator (CVI) chart, which spiked to a level that usually signals a short-term top.

Conclusion: It is possible that Saturday's upcoming elections in Greece may have triggered some short-covering ahead of the weekend, resulting in a rally that may prove to have no legs. The breakout is far from decisive, and the CVI indicates a possible exhaustion climax, so I remain skeptical of the rally.

A REVERSAL of markets expectations, which may be prompted for by the diminishing returns from guarantees and or from dissatisfaction from political actions, can be swift, dramatically violent and nasty.

Be very careful out there.

The Remarkable Phisix-ASEAN Resiliency Amidst the Global Financial Storm

“Keynesians tend to assume that government spending has a big positive effect on economic growth. Others disagree. But if the impact of increasing government spending is large, then the impact of removing it is also. So policy makers better be sure that the boom is around the corner. And all these are just short-run considerations. Here's the real dirty secret of Keynesian policies: They are sure to have a negative effect in the fullness of time.” Kevin Hassett

So how has the global markets affected ASEAN benchmarks and Philippine Phisix during last week’s furor?

ASEAN’s Gradual Discounting of Global Equity Market Meltdown

Except for Monday and Tuesday, where the bears launched a ‘blitzkrieg’ that has resulted to two day cumulative loss of 6.3%, broken down to 2.3% and 4% respectively, the diminishing marginal (time) value of information has stunningly prompted for an exceptional performance by the Phisix and the ASEAN region.

Astonishingly, the Phisix has managed to shrug off or IGNORE the 6% loss by the US last Thursday and went on to even close marginally higher[1]!

The recovery during the last three sessions of the week accrued to a net loss of 2.61% by the Phisix, still significant but the figures hardly reveal everything.

The actions of the Phisix basically have been identical with most of our neighbors.

Except for Indonesia (JCI) which saw a measly .79% decline for the week and while the Phisix (-2.61%) and the Thailand’s SET (-2.86%) fell by more than the US, the latter two still posted positive returns on a year to date basis, respectively 2.87% and 2.84%. Only Malaysia which fell by 2.67% over the week, has been down by 2.3% on a year to date.

Yet there are some noteworthy developments here and in the region:

1. Again Indonesia, Thailand, and the Philippines remain on the positive territory, despite the global meltdown. Only Malaysia among the ASEAN tag team has been on the negative.

2. Regional volatility appears to be decreasing even as global markets continue to roil.

If such trend should persist then convergence in the performance of ASEAN bourses could deepen or could reflect on higher correlations of emerging Asian equities.

The statistical correlations may seem ambiguous, but from the above charts courtesy of the ADB[2] we can see how least correlated we are with US equities in relative terms.

Among ASEAN bourses only Malaysia has had above half a percent of correlations (left window). Indonesia (.38) has the least correlation followed tightly by the Thailand (.39) and the Philippines (.4).

So well into 2011 the correlations have tightened among ASEAN bourses which have also been reflected on the right window (emerging Asia-emerging Asia correlations, green line). Whereas correlations of emerging Asia with the US has clearly departed or has significantly diminished, where previous correlations .62 in 2009 has recently been only .46.

The implication is that global or US investors who seek to diversify away from high correlations performance with US assets may likely consider Emerging Asia or the ASEAN region as an alternative.

This is why the recent US downgrade is unlikely a net negative for Phisix or the ASEAN region as global diversification play could be a looming reality.

And this could also be why regional policymakers appear to be “bracing” for a possible onslaught of foreign capital flows[3].

3. Domestic participants appear to be learning how to discount events abroad.

In the Phisix, the seeming resiliency from the recent global market rout has primarily been an affair dominated by domestic participants.

Net daily Foreign trade (averaged on a weekly basis) exhibits net outflows last week (left window). Nonetheless, total outflows have yet to reach the May levels, in spite of this week’s dramatic volatility. This has likewise been reflected on the Philippine Peso which was nudged lower (.14%) to close at 42.64 to a US dollar this week.

The share of foreign investors to total trade has spectacularly declined as domestic investors has taken over or dominated (right window) trading activities. Local investors accounted for about 65% of this week’s trade.

I think the current trend of local bullishness can be buttressed by recent empirical evidence. Philippine bank lending in June has reportedly been strongly expanding[4]. Although official statistics say that most of the loan growth has been directed to ‘production activities’ led by power (62.3%) and financial intermediation (31.9%), I would surmise that many of these loans may have been redirected to the Phisix.

The Bangladesh stock market crash should be a noteworthy example to keep in mind where were substantial amount of bank loans had been rechanneled to the stock market. And when the government imposed tightening measures (both monetary and administrative), the Dhaka Stock Index collapsed[5]by about 40% in January of this year. Since, the Dhaka has hardly made a significant headway in recovering.

Nevertheless the Philippines maintains the steepest yield curve in Asia, which should even boost the appetite of banks to lend. This should serve as an impetus for the boom phase of the domestic business cycle which the Phisix seems to be part of the transition.

Importantly, policy rates remain very accommodative with only two marginal increases in the BSP’s policy rates as of June 2011. Meanwhile Indonesia’s rates are at record low (no wonder the outperformance).

Phisix and Market Internal Divergence

3. Market internals despite this week’s drastic swings has not been entirely negative.

Daily traded issues averaged on a weekly basis (left window) seem to validate the remarkable actions by local investors as this sentiment indicator continues to climb.

The advance decline spread computed on a weekly basis reveals of the same developments; lopsided lead by declining issues during the early selloff has partly been offset by the asymmetric difference by the advancing issues during days where the Phisix rebounded.

Proof of this week’s astounding resilience is that the early devastation from global market carnage hasn’t reached the intensity of the 1^st quarter storm marked by the Arab Spring-Japan triple whammy calamity selloffs.

In essence, the losses of the Phisix may have overestimated the actual actions in the general market or the Philippine Stock Exchange.

Said differently, the Phisix reflected on foreign outflows (selling of Phisix heavyweights) in contrast to the general market which manifested a much buoyant of local investors, an apparent divergence!

I argued of a potential ASEAN Alpha play at the end of July[6], here is what I wrote,

So it is unclear whether ASEAN and the Phisix would function as an alternative haven, which if such trend continues or deepens, could lead to a ‘decoupling’ dynamic, or will eventually converge with the rest. The latter means that either global equity markets could recover soon—from the aftermath of the Greece (or PIIGS) bailout and the imminent ratification of the raising the US debt ceiling—or that if the declines become sustained or magnified, the ASEAN region eventually tumbles along with them. My bet is on the former.

Therefore, I would caution any interpretation of the current skewness of global equity market actions to imply ‘decoupling’. As I have been saying, the decoupling thesis can only be validated during a crisis.

In the meantime, we can read such divergent signals (between ASEAN and the World) as motions in response to diversified impact from geopolitical turbulence.

For this week, the function of the Phisix (or ASEAN) as alternative haven has been demonstrably true for the domestic participants but unsubstantiated by foreigners fund flows.

My divergence theory seems as gradually being validated by the marketplace!

Again let me remind you, that divergence only thrives in a global scenario that doesn’t signify a real crisis or a recession, most likely from a global liquidity drain. For if the imminence of an overseas recession should emerge, we have yet to see how the local and regional markets would react.

Remember this is no 2008! This time the activist approach by the conventional ‘modern’ central bankers has been paving way for different outcomes on different markets.

Gold as Refuge, Also Played Being Out via Domestic Mining Issues

4. As Gold, the Japanese yen, and the Swiss franc has functioned as the du jour flight to safety assets during the current market distress, we seem to be witnessing the same phenomenon taking hold even in the local equity markets where gold mining issues have taken the center stage!

Whether from year to date (below window) or from last week’s amplified volatility, the market psychology of domestic investors on mining issues have ostensibly turned from the fringe to the mainstream.

One would note that in the sectoral charts above, Tuesday’s carnage only dented the mining sector (violent) which again found footing or used this decline as leverage to recoil higher. All the rest of Phisix (green) sectors, namely bank (blue), Commercial Industrial (grey), Holding (red), Services (light green) and Property (black candle), went in the direction of the mining sector but has been hobbled by the steep losses.

All I can say is that since the Philippines have NO physical markets for gold in terms of spot or futures or even Exchange Traded Funds (ETF), mining issues could have likely served as a proxy or representative asset.

That’s why in the face of the current market inconstancy or turbulence, despite the hefty gains, I would recommend a partial shift of asset exposures to gold mines as hedge. This is not a momentum play but rather a possible flight to safety move as we seem to be seeing here and abroad.

Conclusion

Mimicking the US Federal Reserve, my closing will be a reprise of my statement from last week[7] but with some alterations, enclose by brackets [ ]

The Phisix and the ASEAN-4 bourses have not been unscathed by the brutal global equity market meltdown.

However, excluding Friday’s [Monday and Tuesday’s] emotionally charged fallout and despite the weak performances of developed economy bourses during the week, the Phisix and ASEAN bourses has managed to keep afloat and has even demonstrated significant signs of relative strength, signs that could attract more divergent market activities in a non recessionary setting.

As global policymakers continue to engage in a whack-a-mole approach to the acute problems facing the developed economies’ banking-welfare based government system, the path dependent solution, as demonstrated during this tumultuous week, has been the age old ways of printing money and selective price controls.

The same foreseeable actions can be expected over the coming days, more patchwork with unintended consequences overtime.

And the outcome to the marketplace should be variable as the current conditions reveal.

Lastly, downgrades for Asia and possibly for Europe which may have a short term effect on Asian assets should actually be a plus for the region over the long run. This is not only from the possible diversification move but also from real capital flows.

That is if we adapt relatively sounder money approach and embrace economic freedom.

However if we continue to act in concert with global policy trends then we could expect these downgrades to eventually export boom bust cycles anew to Asia.

---

[1] See Philippine Phisix: What An Incredible Turnaround! (Global Equity Markets Update), August 11, 2011

[2] Asian Development Bank Asia Capital Markets Monitor August 2011

[3] Bloomberg.com Asia braces for capital flows as currencies rise, gulfnews.com August 9, 2011

[4] BSP.gov.ph Bank Lending Continues to Accelerate in June, August 10, 2011

[5] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011

[6] See The Phisix-ASEAN Alpha Play, July 31, 2011

[7] See Phisix-ASEAN Outperformance Despite Global Meltdown, August 7, 2011

It’s Now A War On Commodities: Credit Margins On Oil and Gasoline Products Raised!

The war on precious metals has expanded. It’s now a war on commodities.

Considering the ‘Pearl Harbor’ effect or the initial success of interventions with silver, the series of price manipulation will now include hikes in credit margins of oil and gasoline products.

According to the CBS Marketwatch, (bold highlights mine)

U.S. exchange operator CME Group CME +1.17% said Monday it is raising the margin requirements for trade in a wide range of oil products, effective Tuesday. The requirement for a new position in benchmark New York Mercantile Exchange crude contracts rises to $8,438 from $6,750 previously, with margins also higher for contracts in benchmark Brent crude, gasoline and other products. The hike was the first of its kind since March 4, according to TheStreet.com. June crude oil CLM11 -0.62% traded at $101.95 a barrel early in Tuesday's electronic session, down 56 cents, or 0.6%, from the close of floor trading Monday on the New York Mercantile Exchange.

It would be so naive for some to believe that this equates to “mitigating” the effects of loose monetary policies.

Commodity traders suffer undue losses by the rigging the rules of the game by regulators (I know they are private regulators but they appear to be working in behalf of the government).

This is equivalent of robbing commodity traders of their property rights...just to justify current policies.

What if the US government decides to apply the same to the stock market?

Yet this New York Times article says that CME officials, in raising credit margins, have not been aware of the consequences of these interferences on the commodity markets. (bold highlights mine)

On April 25, half a dozen officials from the CME Group, which runs many of the nation’s commodities exchanges, met via videophone to discuss the eye-popping rise in the price of silver, which had doubled in just six months to about $47 a troy ounce.

They didn’t realize it, but they were about to take the first step toward popping a bubble in global commodities prices.

Worried about the speculative run-up and the increased volatility of the silver market, the officials concluded that it was time to raise the amount of money that buyers and sellers had to put down as collateral to guarantee their trades. The first increase in so-called margin requirements took hold the next day, effectively making it more expensive for speculators and other kinds of traders to play in the market...

This is unalloyed hogwash, if not a sheer self-contradiction in reporting. Yes this smells more and more of the Fed's 'signaling channel' or state engineered propaganda aimed at manipulating inflation expectations.

Raising credit margins for FIVE times (or more than double the existing rate) signifies as deliberate measures to curb the price acceleration of silver.

It’s silliness to say that the effect of this measure had not been known and that officials acted on this out of worries.

Also, the fact that they are now expanding coverage means officials see the initial effects as a policy success, which it hopes to replicate on other markets. In short, path dependency.

Even more nonsensical is to the attribution of a commodity bubble.

What should be underscored as a bubble is the bubblehead policies to justify more intervention.

It is even foolish to believe that price controls or manipulation will continuously work under the current regime which promotes such ‘speculative’ dynamics.

That’s because inflationism induces a flight to real assets. For as long as governments, most especially the US government, continue to debase her currency, people will seek shelter through commodities via the marketplace.

And further is the asinine impression that markets operate in inertia.

The markets function as a discounting mechanism. Since the market has priced in new information or that it is now aware of the rigging of game by political operators, the market has begun to adjust accordingly.

Proof of this is that despite the announcement of increasing oil margins, oil, silver and gold surged yesterday!

What this only means, at this early state, that price manipulation efforts appear to be wearing off! And so goes the ‘mitigation effects’.

As Ayn Rand aptly wrote

When you see that trading is done, not by consent, but by compulsion -- when you see that in order to produce, you need to obtain permission from men who produce nothing -- when you see money flowing to those who deal, not in goods, but in favors -- when you see that men get richer by graft and pull than by work, and your laws don’t protect you against them, but protect them against you -- when you see corruption being rewarded and honesty becoming a self-sacrifice -- you may know that your society is doomed.

Attacking the symptoms, engendered, fostered and nurtured by policymakers, won’t solve or cover the problem. Instead, it is a sign of societal degeneration.

Philippine Mining Index Surfs The Commodity Tide

Domestic mining issues have been one of the recent ‘darlings’ of the Philippine Stock Exchange for the second week.

The Rising Commodity Tide

And these have been happening on the backdrop of record metal prices mostly led by precious metals.

Sizzling hot silver (+51% year to date) has skyrocketed reportedly from a massive short squeeze[1] and so with also gold (+5.91%).

Meanwhile copper also drifts near its record price highs even if its year-to-date performance has been lacklustre (marginally down .63%).

Importantly, prices of commodity products lead mining issues, and this phenomenon seems to take place around the world as global mining issues (S&P/TSX), Emerging Market Mining Titans (EMT), Gold Bugs (HUI) and Industrial Metals ($DJAIN) can be seen in an ascending trend (red line).

Philippine Mining Index Surfs The Tide

Domestic Mining issues have likewise been markedly moving higher too.

Since mid-2010, major mining component issues as Philex (black candle), Semirara (blue), Lepanto (green), Atlas (violet) and Manila Mining (orange) have lifted the Philippine Mining Index (red line). These companies constitute about 89% of the Philippine Mining index and whose pecking order shown above are based on market capitalization.

Some may suggest that the current price actions have been prompted by corporate deals. For instance, the yet to be formalized joint venture agreement of Philex with Manila Mining [MA] for the combined development of Philex’s Boyongan with Manila Mining’s Kalayaan properties[2].

While this may be partly true, one should understand the function of the market is to discount the flow of information that are perpetually being disseminated through the ticker tape. I call this the diminishing returns[3] or the marginal value of information as market prices incorporate future expectations rather than the present or the past.

In other words, there are bigger forces than just mergers and acquisitions (M&A) or joint ventures that drive equity share prices. Although, M&A and JVs characterize the climate of the underlying bull market trend.

Looking at the bigger picture, chart actions reveal of the same narrative: Mining issues has been on an uptrend since 2009, but the actions differ in terms of degree and in timing.

As I earlier described in 2009[4], (bold emphasis original)

Since the domestic mining industry remains broadly underinvested and where current crops of mining firms lack the capital to expand or operate, the major catalysts for prospective runs would be speculations on joint ventures and or prospective M&A developments from new investors (they could be foreign or local godfathers)

Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

A sustained bullmarket in commodities- arising from monetary “pass through” or from BRIC and emerging markets demand- is likely to underpin the secular case for investing in local mines.

Compared to other sectors mines are likely to generate ALPHA.

IT has not always been a boom, nonetheless nearly all of what we have described above been fulfilled.

And the rotation has not been limited to companies within the mining index but signifies largely a phenomenon of the general market, as different sectors flow in a single direction but gets differentiated by timing and by the degree of price motions.

Yet there will always wall of worries to climb.

Anti-Mining Politics, It’s Economics Stupid!

The recent landslide in Compostela Valley that has resulted to 3 fatalities, has largely been blamed on the mining activities.

In the understanding of the public’s anti-mining bias which has been buttressed by the Church, and the attendant environmental hysteria that has been promoted by mainstream media, accidents like this could lead to a political backlash that could risk political outcomes. Though I would say that this is likely to be attention-span based which means public’s attention is usually short term, fickle and limited and would shift to new controversies as they emerge.

Yet the anti-mining political hysteria fails to distinguish that the environmental hazards emanate NOT from market based mining activities but from underground based activities as consequences of the feckless prohibition laws.

As the Inquirer reports[5],

Many of these operations are illegal and unregulated, and there are frequent accidents, Reuters said in a report.

The point is: One CANNOT legislate away demand and supply. Politics can only shift them.

If resources, as mineral commodities, are there for the picking, and considering that these products has been generating higher values (ergo MORE profits), then either the markets or political means will resolve its extraction.

The essence is, since these politicized commodities have imputed economic values, then prohibition laws won’t stop the economics of mining.

It’s downright dimwittedness for anyone to suggest they can.

And if politics is the chosen option, then mining will become either an activity rewarded as concessions to the politically favoured—who would seek to please the political benefactors as their priority than of the environment—or an activity that will be implemented in a guerrilla warfare fashion. Of course, the latter would most likely operate under the inferred blessings of venal local officials.

In addition, in guerrilla type of mining operations, since illegal miners operate under temporary implicit licenses or are reckoned as completely underground, this implies that operators won’t care about the environment since they are illegal anyway.

Besides, illegal operators are most likely to be amateurs from within the locality or from the surrounding areas, instead of professional miners. Thus by rendering illegitimate the industry, this would lead to more frequency of accidents and of damages in larger scales.

Yet unknown to most, because economics is what drives the mining business, prohibition laws would only breed and nurture corruption. High profits and reduced competition would allow illegal operators to payoff politicians and the police.

Again it is all about economics.

So the more the prohibition, the more we can expect accidents from underground activities to take place.

Conclusion

Rising commodities prices have been filtering into global mining issues.

We see the same phenomenon impact the local market.

Momentum appears to favor a continued rise.

Political risks from recent catastrophe may affect mining sentiment on the short run but this should be muted.

In terms of politics, prohibition laws won’t ever succeed to stop the forces of demand and supply. It’s just the distribution that changes.

Yet the above dynamics has once again been validating my predictions since 2003, as published in safehaven.com[6] (there are two more articles I published thereafter[7])

The prospects of a continuing rise in commodity prices due to the tightening of supplies and possibly in combination with mounting demand from the rapidly expanding China and India, or from the steep fall of the US dollar, should highlight the potentials of mining and resource based companies in our region too.

No trend moves in a straight line. Yet, mining issues will function as the main beneficiary of inflationism and the emerging market consumption story.

So I’d stick by them. So should you. (My other favourite industry would be technology)

---

[1] See Hi Ho Silver! April 23, 2011

[2] Philstar.com Manila Mining says deal with Philex on Kalayaan 'done', April 20, 2011

[3] See “I Told You So!” Moment: Being Right In Gold and Disproving False Causations, March 6, 2011

[4] See Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!) November 15, 2009

[5] Inquirer.net 15 buried miners saved, April 24 2011

[6] Safehaven.com The Philippine Mining Index Lags the World, September 26, 2003

[7] Safehaven.com Author Benson Te

Greece Default Risk At New Record, No Contagion

The default risk of Greece, represented by the Credit Default Swaps (CDS), has just traded at new record highs.

The elegant chart and subsequent table below from Bespoke Invest.

With the current surge, Greece has now supplanted Venezuela as the riskiest nation with the likelihood of a default, as shown below.

Additional comments

1. The credit risk table shows that it has been a bipolar world. Emerging markets have mostly been down (diminishing perception of credit risks), since December 31, 2009, while developed economies have been up (higher credit risks mostly from the after effect of the 2008 crisis).

2. The Greece episode which used to haunt the world markets (in 2010) appears “contained” or has become uncorrelated today.

(from stockcharts.com) Move along, nothing to see here

So far the Euro, the Europe’s Stoxx 50 (Stox50) and major global equity index (DJW) has virtually ignored the Greece rumpus unlike in 2010.

The lessons:

This highlights the dynamic where:

Past performance do not guarantee future outcome.

Markets learn to discount risks.

Global central bank’s flooding of money has so far temporarily masked whatever credit woes that have plagued the PIIGS.

It’s a complex market with variable interplaying factors. Oversimplification leads to misdiagnosis

Phisix and ASEAN Equities: The Tide Has Turned To Favor The Bulls!

A good trader has to have three things: a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility. -Michael Steinhardt, American investor and philanthropist

The tide must have turned immensely to favor the bulls.

Figure 1: Bloomberg: Jumpstarting the ASEAN Equity Markets

ASEAN markets appear to have been jumpstarted.

We have been repeatedly pounding on the table saying that this turnaround was about to happen. The bulls have been knocking on the door, but few had the grit to pay heed.

And that the previous weakness was not a manifestation of an inflection point nor was it representative of a reversal back to the bear market days. Instead, such market infirmities accounted for as a normal countercyclical process called profit-taking. The basic market lesson is that trends do not move in a straight line.

Yet the profit taking theme seemed unacceptable for the consensus. First because it is boring stuff. And second, because it would seem unworthy of conversations. Part of social conformity requires contemporaneous expressions. And unstylish themes don’t fit such bill.

Social signalling is prioritized more than the relevance of the returns on investments.

Moreover, because people’s intuitive desire is for the graphic, the controversial and the sensational, mainstream experts fed on this false attribution by fixating on the current exogenous factors—the political crisis in Middle East and Africa and Japan’s triple whammy calamity—which they interpreted as having driven markets.

Never mind if evidences hardly supported such assertions, the important thing was to blabber on what seemed fashionable and conversational.

Hardly anyone appear to realize that applying mental shortcuts or heuristics (such as available bias) draped with technical gobbledygook, which would look good from the outside or from the surface, are hardly the pertinent factors when accounting for real investment returns.

In reality, risks and uncertainties stare at our faces at every moment of our lives. Yet, it is just a matter of managing the diversified degree of risk-uncertainty environment that makes the difference. The proverbial wheat is, thus, separated from the chaff.

And as predicted, markets have gradually been digesting on the uncertainty-risk environment from these events. The constant stream of variable, localized, fragmented and frequently contradictory information, which allows markets to discount[1] the uncertainty-risk factor[2], has apparently reduced the perception of the event risk.

The aesthetics of the marketplace is the scintillating evidence of the perpetual flow of the great F. A. Hayek’s description of knowledge[3] and its indispensible role in breathing life to the marketplace via the pricing mechanism and the coordination and discoordination process underpinning the dynamism of prices.

We are now in the process of being vindicated anew!

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[1] See Managing Risk and Uncertainty With Emotional Intelligence, March 20, 2011

[2] See “I Told You So!” Moment: Being Right In Gold and Disproving False Causations, March 6, 2011

[3] Hayek, Friedrich von The Use of Knowledge in Society, econolib.org, 1945

Managing Risk and Uncertainty With Emotional Intelligence

If your emotional abilities aren't in hand, if you don't have self-awareness, if you are not able to manage your distressing emotions, if you can't have empathy and have effective relationships, then no matter how smart you are, you are not going to get very far.-Daniel Goleman, Emotional Intelligence

Markets thrive on information. Information is processed as knowledge. Thus knowledge which coordinates people’s actions through prices, determines the risk-reward tradeoff.

Amgydala’s Fight or Flight Response[1]

When uncertainties or the prospect of peril emerges, our brain’s amygdala responds by impelling us either to fight or to take flight. That’s because our brain has been hardwired from our ancestor’s desire for survival—they didn’t want to be the next meal for predators in the wild.

Applied to the present state of the markets, the legacy of our ancestor’s base instincts still remains with us.

Yet in face of market turmoil, some would say “when in doubt get out”. But that’s an absurd statement to begin with.

First, there is hardly any market that operates without a doubt. Markets exist exactly with the aim to reduce such uncertainties, risk and or doubts.

As the great Ludwig von Mises pointed there is nothing certain, and everything is subject to speculation[2]

Future needs and valuations, the reaction of men to changes in conditions, future scientific and technological knowledge, future ideologies and policies can never be foretold with more than a greater or smaller degree of probability. Every action refers to an unknown future. It is in this sense always a risky speculation.

Two, the sheer prospects of black swan event (low probability, high magnitude impact) like Japan’s nuclear crisis always lurks somewhere.

Again, our understanding is always based on incomplete knowledge.

In contrast to the act of taking flight, doubts are where profits reside.

It’s basically a battle between the emotional and the rational. This is magnificently encapsulated by the Wall Street axiom “Bears and Bulls make money Pigs get slaughtered”.

Pigs get slaughtered because they depend on the amygdala to direct their actions. In short, when emotions hijack our rationality then we react senselessly and increase our risks.

Emotional Phases of Investing

The chart above illustrates how overconfidence or extreme depressions mark the inflection points of major market trends. In other words, when the consensus reveals certainty about a specific trend, that’s the time to take the classic contrarian stance—stay on the opposite side of the trade!

As author and economist the late Peter Bernstein wrote[3], (bold highlights mine)

In their calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions; they act as though uncertainty has vanished and the outcome is beyond doubt. Reality is abruptly transformed into that hypothetical future where the outcome is known. These are rare occasions, but they are also unforgettable: major tops and bottoms in markets are defined by this switch from doubt to certainty.

Three, when dealing with the financial markets, it is the Emotional Intelligence (EI)—or the argued ability, capacity, skill or, in the case of the trait EI model, a self-perceived ability to identify, assess, and control the emotions of oneself, of others, and of groups[4]--that is essential.

The management of the emotions is critical to weighing risk-reward tradeoff.

Psychologist and author Daniel Goleman offers 4 main ways to manage Emotional Intelligence:

-Self-awareness – the ability to read one's emotions and recognize their impact while using gut feelings to guide decisions.

-Self-management – involves controlling one's emotions and impulses and adapting to changing circumstances.

-Social awareness – the ability to sense, understand, and react to others' emotions while comprehending social networks.

-Relationship management – the ability to inspire, influence, and develop others while managing conflict.

Thus when the stream of information suggests that the ensuing problems, like Japan’s nuclear crisis, are becoming less uncertain, what then we have is a transformation of uncertainty (immeasurable risk) to a quantified risk environment (measurable losses). Thus, the market starts to discount the ‘negative’ information.

And that’s why the effect of calamities on the financial markets has usually had limited impact[5].

Let me add that the problems that beset Japan today has been one of technical (how to control the risk of contamination from the affected nuclear power and the disaster rehabilitation or rebuilding) more than about sociology (social relations).

This makes the ongoing interventions in the Middle East by the Saudi Arabia-led GCC forces on Bahrain[6] and UN sanctioned military strikes in Libya[7] as having the probability of more lasting adverse impact than Japan because the MENA events represents social problems.

What would pose as the uncertainty factor would be the consequences or the possible unforeseen events from these interventions, e.g. how will Iran (Shiite) respond to Saudi’s (Sunni) aggressive actions given the sphere of influence conflict between Islam sect Shia-Sunni? Will Iran’s response be benign or will it provoke or parlay into a regional armed conflict which should drag the entire world with it?

The point here is to distinguish the source of uncertainty and ascertain how will it be resolved or dealt with. The events in itself do not constitute as market risks, it is the chain of 'stimulus-response' and 'action-reaction' based on the interpretations of the consequences of these events that constitutes as uncertainties or risks.

I close this with a quote from the great Professor Ludwig von Mises[8], (bold highlights mine)

In the real world acting man is faced with the fact that there are fellow men acting on their own behalf as he himself acts. The necessity to adjust his actions to other people's actions makes him a speculator for whom success and failure depend on his greater or lesser ability to understand the future. Every action is speculation. There is in the course of human events no stability and consequently no safety

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[1] Royal Air Force, On Field Discipline 2004

[2] Mises, Ludwig von VI. UNCERTAINTY: Uncertainty and Acting Chapter 6 Section 1, Human Action

[3] Bernstein Peter, quoted from A Study Of Market History And Valuation Through Graham And Buffett And Others By John Chew, istockanalyst.com

[4] Wikipedia.org Emotional intelligence

[5] See Will Japan’s Earthquake-Tsunami Be Market Bearish Or Bullish? March 13, 2011

[6] See Saudi Arabia Led GCC Intervention In Bahrain March 15, 2011

[7] See Fearing A Slap On The Face, UN Sanctions A No-Fly Zone, March 18, 2011

[8] Mises, Ludwig von VI. UNCERTAINTY: Case Probability; Chapter 6 Section 4 Human Action