Expect a Rebound from the Lagging Philippine Property Sector

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production. Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers' goods industries. Murray N. Rothbard

Two of last week’s cynosure or market darlings had been East Asia Power [PSE: PWR] on a mind boggling gain of 232%, and Boulevard Holdings [PSE: BHI] 31.4%.

PWR can now be considered as a property issue considering the takeover by Century Properties has been formalized[1]. Meanwhile, BHI’s rumored acquisition by another real estate giant has yet to be confirmed.

To me, these developments signify as writing on the wall.

Where the huge breakout by the Phisix has been validated by broad market based bullishness or a “rising tide phenomenon”, a confirmation or continuation of these upside biased actions on the Phisix would also mean rising prices of property issues.

During the recent phase of the bubble cycle, which began in early 2009, the property sector (top window, blue line) has mostly led or outclassed the Phisix. This seems in stark contrast to the financial sector (lower window, red line) which has mostly lagged the local benchmark.

The two large red circles I drew demonstrate the occasions where the Property sector has vastly outperformed the Phisix and the green circle which reveals that the roles have reversed.

This implies two possible scenarios:

-one, the lagging property sector could be an anomaly that would eventually revert to the mean, or

-two, the seeming laggard effect could be representative of a new trend.

The 6 biggest property sector according to their free float market cap weighting in the PSE Property basket are (in pecking order[2]): Ayala Land 35.96% [PSE: ALI], SM Prime Holdings 17.92% [PSE: SMPH], Belle Corporation 10.97% [PSE: BEL], Megaworld Corporation 7.91% [PSE: MEG], Robinson’s Land 7.66% [PSE: RLC] and Filinvest Land 5.01% [PSE: FLI].

The performances of the big six on a year to date basis in %:

Only BEL and SMPH posted gains so far, while the others remain in the red, with Megaworld suffering the most.

The massive divergence between the price actions of most of these property heavyweights and the Phisix is the reason why the property sector has conspicuously trailed.

Yet parsing on the recent price trends….

…I find that the returns on the table above haven’t been revealing exactly what has been happening.

Individual trends suggest that there has been an ongoing rotation; leaders BEL (blue) and SMPH (black candle) appears to be in consolidation whereas the laggards have all been ascendant, namely RLC (violet), ALI (red), FLI (orange) and Megaworld (green).

So the rising tide has already begun to filter into the worst performers and we would likely see more of the same actions going forward.

With the steep local yield curve (left window) along with the domestic monetary environment operating on negative real interest rates (right window), which the World Bank chart confirms my earlier observations[3], foreign portfolio inflows should include not only investments in equities but also on real estate which should likewise get reflected on the Phisix Property index.

And the same forces are likely to also impel locals to get into a property acquisition binge.

A construction boom can be ubiquitously seen in the Metropolis as new buildings grow like mushrooms. Such anecdotal evidence appears to be confirmed by the reported $ 1.19 billion worth of real estate investments for the first 5 months in 2011[4].

And the property sector signifies as a capital intensive sector most receptive to the monetary policy induced Austrian Business Cycle.

To quote the great Murray N. Rothbard[5], (bold emphasis mine, italics original)

For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Like the capital intensive mining sector, the domestic property sector will undergo a boom bust cycle phase.

Bottom line:

The lagging effect of the Property sector seems more of an anomaly than an evolving trend.

The breakout of the Phisix should be seen as a catalyst that could launch the next leg up for the property sector.

The upcoming rebound would not only close the underperformance gap but would also power this sector as one of the best performers.

The Philippine property sector as I earlier predicted will see a boom phase[6] (again barring any exogenous shocks). Real estate or property booms have traditionally functioned as the centrifugal force from a monetary induced bubble cycle. This has been very evident in China[7]. And likewise became the ground zero for the US mortgage-banking crisis[8].

Well it’s time to profit from the political folly.

---

[1] Philstar.com Century Properties seals deal to take over East Asia Power, July 12, 2011

[2] based on Friday’s close and only considered weights of 5% up

[3] See Phisix: Negative Real Interest Rate and Stagflation Risks, June 12, 2011

[4] Philstar.com Surge in investment shows return of investor's confidence, July 2, 2011

[5] Rothbard, Murray N. The Austrian Theory of the Trade Cycle, Economic Depressions: Their Cause and Cure, Mises.org

[6] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010

[7] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion, June 28, 2011

[8] See 2008 US Mortgage Crisis: The US Federal Reserve and Crony Capitalism as Principal Causes, May 31, 2011

US Equity Markets: Signs of the Rising Tide Phenomenon

I’ve long been saying that pricing of equities are being influenced more by the inflationism (boom bust cycles) rather than the deep-seated conventional notion of discounted cash flows or other traditional metrics.

Even in the US we seem to be observing the “rising tide phenomenon” affecting the price actions of their equity markets, similar to the Philippines.

The recent rally in the US has been broad based and manifested across all sectors.

As Bespoke Invest notes, (chart theirs)

At the moment, 68% of stocks in the S&P 500 are trading above their 50-day moving averages. It's a strong breadth number, but it's still below the levels seen at prior short-term market highs over the past year.

Also Bespoke sees that the US rally has been supported by strong market internals

Bespoke observes, (bold emphasis mine, chart above theirs)

Last week's strength of group breadth was also notable given the fact that all 24 groups finished the day in positive territory on four different days. Looking back at data over the last ten years, we found that there has never been a period where all 24 groups were up on the day in four out of five trading days. In fact, prior to last week, there was never a period where all 24 groups were up on the day in even three out of five trading days.

This reminds me of Edwin Lefevre’s investment classic “The Reminiscences of a Stock Operator” where he quotes the legendary trader Jesse Livermore, (emphasis mine)

Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.

How Global Equity Markets Performed in 2010

Here is the tabulation of the final returns of global equities for the year 2010 (based in local currency; courtesy of Bespoke Invest)

Contrary to the prognostications by the mainstream, most equity markets posted positive gains. (Double dip, where?) Only 19 national benchmarks suffered losses or 22% out of the 83. Again this may seem like a rising tide phenomenon.

While emerging markets peripheries led gainers, some developed economies such as Denmark and Sweden posted significant gains of over 20%, whereas Austria, Norway and Germany posted above 15% increases (European crisis anyone?).

More on Europe: Obviously the tailenders had been those directly hit by crisis—Greece Spain and Italy. But the divergent performances between crisis and non-crisis economies suggest of insulation and not of a contagion—again which the mainstream significantly misread.

The top 10 represented a mélange of emerging markets. Nevertheless the rankings can be seen in the following order: South Asia, Eastern Europe, Southeast Asia and Latin American EM’s.

The Philippine Phisix ranked 11th.

G-7 and BRICs had mixed performances. The race of 2010 belonged to the EM peripheries.

For 2011, I don’t think there would be much of a difference, except that I expect BRICs, who dominated 2009, to vastly improve their showing this year and possibly close on the gap with EM peripheries.

I certainly don't share the opinion that developed countries with all its internal tethers to outperform EM economies (periphery or the BRIC).

US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

This looks to be another proof of the effects of inflationism.

The broad market has essentially been rising, which gives credence to the "rising tide lifts 'all' (most) boats" phenomenon.
Bespoke Invest has a wonderful series of charts expressing these developments.

The first one deals with the general market where 90% of component issues have risen above their 50-day moving averages, shown above. And Bespoke also has a breakdown on the % on a per industry basis here.

Nevertheless, current string of gains has made the entire market, as represented by all 10 sectors, as "overbought".

This implies that a natural correction should be expected anytime soon.

But as a caveat, such retracement isn't likely to herald the return of the bear market as perma bears have been craving for.

Yet, it's not that I am bullish with US stocks or her economy, instead I see this a formative phase of a new bubble cycle panning out.

Kentucky Derby And The Global Stock Markets

``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 1^st 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.