Phisix: Expect A Breakout from the 5,000 level Soon

The neurotic cannot endure life in its real form. It is too raw for him, too coarse, too common. To render it bearable he does not, like the healthy man, have the heart to "carry on in spite of everything." That would not be in keeping with his weakness. Instead, he takes refuge in a delusion. A delusion is, according to Freud, "itself something desired, a kind of consolation"; it is characterized by its "resistance to attack by logic and reality." It by no means suffices, therefore, to seek to talk the patient out of his delusion by conclusive demonstrations of its absurdity. In order to recuperate, the patient himself must overcome it. He must learn to understand why he does not want to face the truth and why he takes refuge in delusions. Ludwig von Mises

Analyzing financial markets has principally been about focus—particularly what we think or believe comprises and signifies as causal factors that lead to specific outcomes.

Focusing on Real Action

Since our focus has mostly been influenced by conventional theories, definitional context of issues involved and heuristics (or mental shortcuts), we are likely to be drawn to distractions from the allure of false relationships. Noise will be read as signals. Effects will be read as causes.

As Austrian economist and author Gary North wrote[1],

People can be misled by deliberately distracting them. This fact is basic to all forms of "magic," meaning prestidigitation. The performer seeks to persuade members of the audience to focus their attention on something peripheral, when the real action lies elsewhere. A skilled performer can do this "as if by magic."

In the marketplace, deliberate distraction has been part of the social convention. We docilely embrace mainstream ideas because this is mostly seen as a socially appropriate or the popular or the normative thing to do. We are hardly concerned about what works or not (but which we presume that they do work), or of the validity or soundness of theories, but rather have mostly been concerned with how we blend with crowds.

Thinking out of the box is seen as a form of heresy which risks ostracism and ex-communication and so must be sternly avoided. Thus, when the orthodoxy has become fixated with peripheral events or activities, we are predisposed to join them, even when the real action, as Professor North says, lies elsewhere.

Boom bust cycles are evidences of such dynamics. Lured by false signals from distortive policymaking, the public imputes many peripheral issues to explain and act on market activities.

The public’s understanding has mostly been influenced by mainstream’s popular obsession with peripheral based doctrines disseminated through media and or by institutional based literatures or through “expert” opinions.

Yet the effects of policies in shaping people’s incentives are hardly reckoned with, even if political actions influence almost everything we do—from savings, investment, consumption to everyone’s distinctive value scales. Conventional thinking reduces the import of political policies as “given” or as having neutral effects to people’s thought processes and the attendant incentives to action. Many for instance are engrossed with “aggregate demand”

The public, including the army of so-called establishment experts, who incidentally hardly saw the 2008 crisis coming[2], forgets that tampering with money essentially contorts half of every transaction that we engage in, whether in the real economy or the financial markets.

Also the boom phase of the bubble cycle influences greatly the market’s psychological framework.

Booms have the tendency to cover or forgive on many of our mistakes. Booms also have the proclivity to embed on the tenuous or flimsy methods we employ in the evaluation or appraisal of the markets. Lastly, because booming markets tend to confirm on most of our biases, there comes a point where the markets will be overwhelmed by an egotistical overreach, highlighted by systemic euphoria or to engage in colossal risk taking activities on the account of overconfidence.

By overlooking on the genuine relationships between perceived causal factors and the expected outcomes, we hardly realize that we may be imbuing on more risks than warranted.

The point is focusing on the peripherals without comprehending on the genuine actions driving the marketplace serves as recipe to a calamitous portfolio

And real action shows that this week’s marginal gains by the Philippine bellwether, the Phisix, have again been a global one and not a standalone or local event.

Outside the Philippine Phisix, the list of my top ten global market performers among 71 nations which I monitor seems like a horse race, where the dominant character has been sharp gyrations, although generally biased to the upside.

This week Greece, India and Brazil dropped out of the list and have been replaced by Denmark, United Arab Emirates and Columbia. Despite the latest bailout agreement[3], Greece benchmark fell by a nasty 9%, nearly halving the yearly gains in just a week. On the other hand, the declines of Brazil and India have mostly been due to recent marginal retracements amidst the fiery rally by other bourses.

Note that the gains have ranged from 17-34% while the median gains are at 20%.

With 90% of global bourses up on my radar screen, where almost half have posted gains of over 10%, it safe to generalize that bulls, running on central bank steroids, have been on a rampage since the start of the year.

The ASEAN-4 bellwethers have seen divergent performance. Thailand (red orange) and the Philippines (orange) are head-to-head in front of Malaysia (red) which seems to have stagnated and Indonesia (green) which appears to have stumbled. My guess is that eventually the laggards will pick up the pace.

Sectoral Indices: Mixed Actions and Changes in Composition

This week’s actions at the PSE suggest of two events: one that the interim consolidation partly represents selective retracements, and second, that the slight gains posted by the Phisix over the week, understate what has been going on in the broader market.

Selective retracements are visible from the divergence in sectoral performance.

Profit taking mode enveloped most industries except the financial and holding sectors, where the latter’s gains have mainly emanated from the astounding run by Aboitiz Equity Ventures [PSE: AEV] up 21.78% over the week.

And much like the sharply volatile global markets, year to date, the financial sector has captured the top spot from the property sector while the Holding sector has equally surpassed the service sector for third spot.

The banking and finance sector has essentially been lifted by the stupendous advances of Union Bank of the Philippines [PSE:UBP], which has been up by about a whopping 104%, followed by the Rizal Commercial Bank [PSE:RCB] and Security Bank [PSE:SECB]. Other giants as Bank of the Philippine Islands [PSE: BPI] and Metrobank [PSE:MBT] has basically reflected on the advances of the Financial index while Banco De Oro [PSE: BDO] and China Bank has lagged [PSE: CHIB]

The massive jump in share prices of the financial system has been reflecting on the recent spike in the credit growth of the domestic financial system[4]

Last year’s most outstanding performer, the mining sector, has lagged the advances of the Phisix due to the consolidation phase by the mining heavyweights. The transition in the mining sector has been exhibiting a shift in the market’s attention from the heavyweights to the periphery (second and third tier firms) and now to the oil issues.

Philodrill [PSE: OV, black candle], Oriental Petroleum [PSE: OPM] and Petroenergy Resources [PSE: PERC] posted extraordinary gains over the past two weeks. [disclosure I am a shareholder of PERC and OV]

Once again these are manifestations of the rotational process at work. And the transitions in the upside price actions have been in the context of companies within specific sectors and the relative performances among the sectoral benchmarks

All these actions have been confirming signs of an inflationary boom.

Yet index watching can’t be entirely relied on as they are subject to changes by the authorities based on several self-designed standards.

The Philippine Stock Exchange [PSE: PSE] has recently announced there will be some alterations in the composition of subindices, while leaving the main index or the Phisix unchanged.

From a news report at the Businessworld[5],

"A total of 11 companies will be added to the current composition of various sector indices while 13 companies will be removed," the PSE said.

For financials, National Reinsurance Corp. of the Philippines and Vantage Equities, Inc. will be taken out while CitisecOnline.com, Inc. will be added, the bourse said in a memorandum circular.

Industrials will see the departure of Integrated Micro-Electronics, Inc., Republic Cement Corp., San Miguel Brewery, Inc., and Ginebra San Miguel, Inc., and the entry of Greenergy Holdings, Inc. and Megawide Construction Corp.

For holding firms, South China Resources, Inc. will be replaced by Solid Group, Inc., Pacifica, Inc., and Alcorn Gold Resources Corp.

Leaving the services sub-index are Pacific Online Systems Corp., Liberty Telecoms Holdings, Inc., and TransPacific Broadband Group International, Inc. The inclusions are Premiere Horizon Alliance Corp. and IP E-Game Ventures, Inc.

Dropped from the property list were Philippine Realty & Holdings Corp. and A. Brown Co., Inc.

Mining and oil, lastly, will have Omico Corp. replaced by Benguet Corp. "A" and "B," United Paragon Mining Corp. and Abra Mining & Industrial Corp.

Any impact from the tweaking or changes in the composition of the sub-indices will be short-term.

Market Internals Turns Notably Bullish

While the market internals of the PSE has partly been exhibiting partial signs of profit taking, some vital indicators has been neutralizing or offsetting these.

Net foreign trades (averaged weekly) appear as showing signs of recovery from an interim slump. Any reacceleration of foreign buying will likely focus on Phisix component issues. And foreign buying into Phisix issues means a potential test or even a successful breakout of the Phisix 5,000 level.

The chart also shows that this cycle has broadly been about local investors driving the Phsix to record highs.

The daily average Peso volume (averaged on a weekly basis) has likewise been on an uptrend. This means that further expansion of trading volume will likely translate not only to a higher Phisix but also on a broad market based buoyancy.

Finally this has been the most surprising of them all, total number of trades (averaged weekly basis) has exploded.

This possibly extrapolates to a jump in the number of ‘new’ participants (most likely retail investors) and or more active or aggressive churning activities by traders and punters.

In short, the local markets have been exhibiting generalized bullishness.

Improving net foreign trade, rapidly ballooning trade volumes and spiking total daily number of trades seem like a pressure packed seething volcano awaiting the right opportunity to explode.

More Steroids from Global Central Bankers and their Real Side Effects

Well central bankers are there to ensure the continuity of the cyclical boom.

Despite talks of ‘stigmatization’ or the reluctance to avail of European Central Bank facilities by several banks[6], I expect the reopening of the second three year Long-term Refinancing Operations (LTRO) facility will be utilized to the hilt.

In addition, the expected implementation of the recently announced credit expansion programs via asset purchases or QEs by the Bank of England[7] and Bank of Japan[8], and China’s recent easing of reserve requirements[9] have all been pointing to another gush of liquidity headed for the global financial marketplace. And much of these should be expected to get funnelled into the asset markets.

Moreover, as of this writing the G-20 have reportedly been trying to forge for a $2 trillion global rescue fund[10] to erect a firewall from the European sovereign and banking debt crisis.

As stated earlier, real actions means that swamping the world with digital and or freshly minted money will have real side-effects, not only the financial markets, but also in the economy.

Prices of natural gas, which should remain under pressure from the supply side growth from the shale gas revolution (see chart above[11]), seem on the verge of a price recovery (see chart below).

One would note that the recent recovery in oil prices have coincided with the jump in the US S&P 500 benchmark. Also the price surge in gasoline in the US has been accelerating.

I have not persuaded[12] that the spike in oil prices have been because of geopolitical turbulence particularly a prospective war on Iran or the ongoing civil war in Syria.

A continued uptick of the prices of vital commodities would eventually push up interest rates through the inflation premium. And higher inflation could possibly either force a policy tightening which translates to an eventual bust, or shortage of money which will be met by even more money printing that leads to an acceleration of inflation or the crack-up boom.

Thus it pays to observe how pervasive the side-effects will be and how politicians will react to side-effects. Again a stimulus response feedback loop mechanism based on market’s response to political actions and vice versa

Global Credit Easing Policies Points to A Firming of the Philippine Peso

Going back the immediate transmission effects of global policies to the local markets, perhaps recent signs of the recovery seen in the NET foreign flows in the PSE can be traced to cross-currency yield seeking arbitrages or carry trades.

To add, should portfolio flows into the Philippines intensify, through the PSE and local bond markets, then the lagging Philippine Peso will likely see more room for appreciation.

The Philippine Peso’s historic 40 decade long of decline (see the upper window of the above[13]) had been reversed as portfolio flows to the local debt and equity markets surged from 2004-2007 (see the lower window of the above[14]).

In addition, when the Phisix peaked at the 3,800 level in 2007, the Peso eventually firmed up until the 40.25 level. Today with the Phisix knocking at 5,000 levels the Peso still remains at the 42.84 levels. Much of this can be explained by the current locally driven bullmarket and the relatively lack of participation by foreigners.

I would suspect that part of the Peso’s lagging performance could also be due to interventions by the BSP. But I would need evidence to confirm this.

The ramping up of QEs may change the complexion of the game where local bulls will likely be complimented by foreign yield spread arbitrageurs.

And the bottom line is: Expect a break of the Phisix 5,000 level soon.

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[1] North Gary Inside Job: How Nixon Was Taken Down, June 8, 2005 Lewrockwell.com

[2] Telegraph.co.uk The Queen asks why no one saw the credit crunch coming November 5, 2008

[3] Bloomberg.com Euro Finance Ministers Said to Reach Agreement on Greek Bailout February 21, 2012

[4] See Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions February 13, 2012

[5] Businessworldonline.com PSE limits tweaks to sub-indices, February 22, 2012

[6] Weekly Focus, Two steps forward – one step back Danske Research February 24, 2012

[7] See Bank of England Adds 50 billion Pounds to Asset Buying Program (QE), February 9, 2012

[8] See Bank of Japan Yields to Political Pressure, Adds $128 billion to QE, February 14, 2012

[9] Bloomberg.com China Cuts Reserve-Ratio for Growth as Inflation Deters Interest-Rate Move, February 20, 2012

[10] Reuters.com G20 inches toward $2 trillion in rescue funds February 26, 2012

[11] Gruenspecht Howard Annual Energy Outlook 2012 Early Release Reference Case, US Energy Information and Administration, January 23, 2012

[12] See Are Surging Oil Prices Symptoms of a Crack-up Boom? February 24, 2012

[13] Wikinvest.com Philippine Peso (PHP)

[14] Tradingeconomics.com Portfolio investment; excluding LCFAR (BoP; US dollar) in Philippines

Portfolio investment excluding liabilities constituting foreign authorities' reserves covers transactions in equity securities and debt securities. Data are in current U.S. dollars.This page includes a historical data chart, news and forecats for Portfolio investment; excluding LCFAR (BoP; US dollar) in Philippines.

An Inflationary Boom Powered Phisix Bullmarket

It is important, first, to distinguish between business cycles and ordinary business fluctuations. We live necessarily in a society of continual and unending change, change that can never be precisely charted in advance. People try to forecast and anticipate changes as best they can, but such forecasting can never be reduced to an exact science. Entrepreneurs are in the business of forecasting changes on the market, both for conditions of demand and of supply. The more successful ones make profits pari passus with their accuracy of judgment, while the unsuccessful forecasters fall by the wayside. As a result, the successful entrepreneurs on the free market will be the ones most adept at anticipating future business conditions. Yet, the forecasting can never be perfect, and entrepreneurs will continue to differ in the success of their judgments. If this were not so, no profits or losses would ever be made in business. Murray N. Rothbard

The mainstream view where the turbocharged performance by the Philippine Phisix is largely seen as representative of mainly a domestic affair and accounting for signs of economic “progress” is misguided.

The reality is what we observe as significant advances by the local stock market have instead signified as a global development.

Importantly, these magnificent gains account for as symptoms or illustrative of market’s reactions to easing policies adapted by global central bankers, whom has been promoting a negative real rate environment and has been engaged in massive interventions in the bond markets to provide political support to crisis afflicted governments and the banking system.

The Intensifying Rising Tide Phenomenon

The Phisix ranked an impressive second (based on nominal currency year to date returns) among the world’s top performers[1], last week. Not this time though. Bourses from developed economies to the BRICs to emerging markets and the frontier markets have advanced almost at a frenetic pace.

About 43% of the 72 global benchmarks I monitor posted year-to-date gains of 4% and above. That’s an incredible feat considering we are only 3 weeks into 2012.

Of course, these gains have distinct or individual stories to tell. While most of them seem to be in a recovery mode following last year’s pummelling, only a few bourses has broken into record highs or are within the ambit of previous record highs. The Philippines and slow starting Indonesia seem to fall into the latter two categories.

On the other hand, only about 20% of global equities have posted negative returns where many of them emanate from the MENA Middle East North African region.

While Argentina remains as the market leader on a year-to-date basis, the Philippine Phisix which posted an amazing 2.91% weekly gains this week, has been eclipsed by several major bourses.

Based on year-to-date nominal currency returns, aside from Argentina, the Phisix now trails Germany, Hungary, Brazil, Russia and Hong Kong. India’s BSE 30 is currently neck to neck with the Phisix.

And seen from the region’s performance, over the past 6 months the Philippine Phisix has dramatically displaced Indonesia and Thailand as the region’s trailblazer.

Chart from Bloomberg

It’s important to point out what you see depends on where you stand. Applied to the above, the 6 month perspective changes when we adjust for different time referenced starting points.

On a one year basis (not in chart) the Phisix has slightly surpassed Indonesia, while on a three month basis (not in chart) the Phisix still marginally trails Thailand.

The point is perspectives can be used to advance an observer’s subjective bias rather than to make an objective presentation.

Nevertheless in all three periods, the Phisix has either led the pack or has been slightly behind the leader. As to whether the Phisix can maintain such exemplary performance has yet to be ascertained. And as we have noted in the recent past, the leadership role among the ASEAN-4 bourses has been alternating.

And to give us a clue on what’s been driving the Phisix, we go to the year to date performance of each sector.

The property sector seems to have commanded the lead from last year’s run away leader, the mining sector which now ranks third. The service sector lead by the telecoms has taken the second spot while financials placed fourth.

Except for the service sector, the current rankings seem to fulfill my observations that capital intensive projects (mining, manufacturing, real estate related projects) are likely to benefit from artificially suppressed interest rates, whom will be financed mostly by loans via the banking sector (who will also account for as a beneficiary).

As I previously wrote[2],

Although I am not sure which sector should give the best returns over the short term, I am predisposed towards what Austrian economics calls as the higher order stages of production or the capital goods industries, which are likely the beneficiaries of the business cycle, specifically, mining, property-construction and energy, as well as financials whom are likely to serve as funding intermediaries for these projects.

Of course telecom companies are capital intensive projects too and became subject of an earlier boom bust cycles abroad—the dotcom bubble.

Yet the above dynamics looks like the interlocking and tessellating jigsaw puzzles all falling into their respective places, all of which seem to account for the business cycle.

And for a broader view of which issues from the Phisix basket has contributed much to the recent advances, the top ten largest free float market cap issues ranked according to their respective weights, based on year-to-date as of Friday’s close, can be seen in the above chart (largest to smallest market cap from left to right).

Combined, these issues account for about 61% weighting of the Phisix composite.

So far, the property majors have assumed the leadership role. Ayala Land (ALI) and SM Prime Holdings (SMPH), posted the best gains followed by holding firm Ayala Corporation (AC) and telecom titan PLDT (TEL). These firms have delivered the gist of the gains of the Phisix.

And it is further important to point out that the uptrend in net weekly foreign buying appears to support the case where foreign investors may have likely been loading up or has been providing a boost on these issues.

And as pointed out last week, it would be a mistake to ascribe current market actions as driven solely by corporate fundamentals or by micro factors when, in reality, general market sentiment has been revealing of a rising tide lifting all boats phenomenon.

Advance decline spread (weekly basis; upper window) has materially surged reflecting on broad bullishness of the marketplace. This has largely been due to the breakout of weekly advancing issues (lower window) from the consolidation phase. Given the limited number of issues listed, the ceiling or the maximum upside may have already been attained which means that we should expect rangebound actions but based on the current elevated levels.

What has essentially been happening on a global scene appears to parallel the developments being reflected on the internal market actions in the Philippine Stock Exchange (PSE).

Austrian Business Cycle In Progress

And as I have been reiterating, global central banks have slashing rates in near concert. The Philippines, this week, has joined the bandwagon of promoting policies which represents the euthanasia of the savers via a negative real rate environment[3].

Such policies are designed to stimulate aggregate demand, which have been couched and camouflaged in academic terms, when in reality, have been meant to advance the interests of the banking sector (as intermediaries of savers and borrowers) and the political class.

With nominal interest rates below consumer price inflation (CPI) levels, the public will be incented to shift money from fixed income instruments towards undertaking speculative activities and for entrepreneurs to invest on long range capital intensive projects.

Part of the effects of such policies, would be a boom in the stock market, which has already validated my thesis where negative rates will drive a stock market boom[4] as well as a boom in capital intensive projects such as in the real estate. I have been pointing out that we should expect a boom in the Philippine real estate industry[5].

And most of the funding of the latter’s project will likely be channelled through the banking sector (ergo expanding the latter’s profits).

As an aside, Philippine property sector has been showing signs of a vigorous recovery both in terms of annual price changes in Philippine housing and in luxury 3 bedroom units[6]

Also, at near record low rates, governments will be motivated to increase fiscal spending via more interventionists projects peddled or justified as “infrastructure” or “social” investments, which will be financed through the acquisition of more debts, and which subsequently will be sold and financed by the public through higher taxes or inflation.

Also, suppressed interest rates will impel consumers to spend more using credit cards and other credit programs or mechanism that leads to more consumptive activities.

Combined with higher government spending, and greater appetite for consumers to spend, not only does such activities lead to an overall growth in systemic leverage, thereby increasing fragility and risks, but likewise reduces the incentives for the local economy to produce more and tilts the balance of incentives towards greater consumption activities. Eventually this should unwieldy trade deficits.

Of course, adding to the systemic leverage will include entrepreneurs whom have been lured to invest in capital intensive projects.

Nonetheless, the initial burst of spending and speculation will be seen as a boom (as we are seeing today)

However, the competition for the use and consumption of resources (by government, consumers and entrepreneurs), as well as the misalignment between demand of consumers and investments in the production of capital goods will eventually get exposed through the interest rate channel.

As Professor Steve Horwitz explains[7]

The theory argues that the boom is generated by some exogenous factor that has caused market interest rates to diverge from the natural rate that accurately reflects the time preferences of consumers and producers. That exogenous factor is normally thought to be an excess supply of money, which is normally thought to be the product of bad central bank policy or problematic government regulations on the banking system. Once that bad interest rate signal is in place, intertemporal discoordination will result. The nature of money and the time-ladenness of production mean that we don't see that discoordination at first, as it is masked by the boom. The increased activity at both the higher orders of goods and the consumption level looks like growth until the fact that there is insufficient real savings to support the increased (now "mal") investment at the highest orders makes itself known.

Once interest rates level render many of these capital intensive projects unfeasible, the boom segues into a bust.

Yet countenanced with the prospects of depression, governments and their central banks has greater proclivity to resort to the same measures that has led to such problems—perhaps out of ideology, the interest to preserve the status quo, shared creed or dogma, groupthink, political pressures to apply policies that has immediate impact and path dependent actions—which ultimately becomes unsustainable.

As the great Nobel Prize winner Friedrich von Hayek wrote[8],

And since, if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which, in spite of rising prices, many firms will be making losses, and there may be substantial unemployment. Depression with rising prices is a typical consequence of a mere braking of the increase in the rate of inflation once the economy has become geared to a certain rate of inflation.

We don’t have to look far to identify where the global inflation cycle is being conducted. Since 2008, the balance sheets of major central banks of the world continues to balloon[9]! Inflation is being progressively compounded by through balance sheet inflation in order to keep asset prices afloat and to assure liquidity flows of the global banking sector.

And stepping on the brake by central bankers would extrapolate to a reversal of boom conditions in a disorderly manner.

Widespread Empirical Evidences

Over the past few years we have seen the same cycles being played out even outside the crisis afflicted developed economies, whether in Bangladesh[10], Brazil[11], India[12], Vietnam[13] or China[14].

Every time governments adapt easy money policies, we see booms in the stock market and or in real estate projects. And each time governments tightens the grip on monetary conditions in response to resurgence of consumer price inflation, we see the same weakness or discoodination pressures being reflected on the prices of their respective stock markets.

The great Ludwig von Mises reminds us that imbalances arising from policy intrusions can be reflected on the actions of the stock market[15]

The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.

Yet it would seem bizarre for the public to bet on the stock market of a slackening economy, but that’s how these things play out, especially when the economy is seen to hit the proverbial wall.

A good example is China, where her stock markets have surged this year when economic figures has been revealing signs of marked deterioration.

Why the surge?

Because market participants have been conditioned or trained to react to signals where policymakers will likely resort to massive measures to reflate of the system, if and when the pace of deterioration reaches alarming levels that risks inciting political upheavals.

And indeed not only do we see a spike in the 3 month rate of change of China’s money supply late last year[16], but there has also been increasing reports, or say speculative expectations of planned stimulus in both financial[17] and fiscal dimensions[18].

While my concerns over a possible bubble implosion in China persist, which prompts me to remain vigilant, I would submit that a massive stimulus program, like her Western counterparts, could buy her time or defer on the day of reckoning.

Moreover rampaging money supply has been permeating into the US economy giving the impression of a ‘broad based recovery’

For instance analyst Ed Yardeni says that the recovery could be broad based[19].

This time, key sectors of the economy haven’t participated in the initial economic rebound, but finally may be on the verge of doing so. The second recovery could take off as the pace of hiring quickens, housing activity finally picks up, auto sales head higher, and state and local governments stop retrenching. If so, then the US would finally enjoy the benefits of a broader-based recovery.

Such appearance of a inflation induced time lag ‘recovery’ has been signalled by the US stocks markets.

Conclusion: Phisix Upside Momentum Should Continue Amidst Interim Corrections

In the face of economic slowdown and the risks of a contagion from the continuing crisis in Europe, global central bankers seems to have tactically implemented a defensive cordon or firewall by massively easing credit conditions partly in coordination with one another. This has led to near record low global interest rates[20] compounded by a surge in liquidity from the various asset purchasing programs being undertaken.

These measures, along with the hiatus in the Euro crisis and the noteworthy inflation induced economic recovery in the US—backed by a surge in money supply growth and recovering credit conditions—have been powering the recent gains of the global stock markets.

The Philippines has undertaken a similar policy route. And considering the still relatively low consumer price inflation, which has yet to trigger political outcry, negative real rates, which have been one of the key factors responsible for the recent monumental and historic breakout of the Phisix, will continue to influence the bullish momentum of the local bellwether, perhaps going into first semester.

But since no trend goes in a straight line, we should expect interim corrections which should serve as windows of opportunities to accumulate.

At the Philippine Stock Exchange, it is important to reiterate that the mining index has been outperforming other sectors in the PSE on a one year alternating interval basis[21]. And since 2011 was yet another stellar year for the sizzling hot sector, and if the alternating trend persists, then there could be another rotation process at work, partly away from the mines and into the broader market as the liquidity driven boom percolates.

But it is not necessary for the mining sector to register losses for a rotation to occur. What we are likely to see is that the variances in the distribution of returns will not likely be as distant as last year.

Since history may not repeat and may not serve as a useful guide in making predictions, and where the public’s recognition of the mining sector seemed to have reached a critical mass only at the current bullmarket cycle which began in 2009, I can’t discount the possibility that the alternating pattern might be rendered irrelevant. So diversifying could probably be the best solution under such scenarios.

Yet if there should be a rotation where gains will be spread out to the other sectors, I think that the best way to diversify would be to use the clues from the Austrian business cycle where capital intensive sectors (most likely property or real estate) and the finance industry could be the major beneficiaries of an inflationary boom (aside from the mines).

Finally, it is worth repeating that there has hardly been any sign of decoupling. As one would observe, local policies have been strongly influenced by policymaking trends in the developed world. We may call this globalization of central banking actions where central bankers not only seem to act in the same manner, but also coordinate or synchronize their activities and extend assistance to one another via swap facilities. And the transmission effect of the other factors of globalization—finance and capital flows, trade, labor and culture—remain as the other major force in shaping market conditions.

And as 2011 has shown, what has made the Phisix and ASEAN markets outperform has been the non-recessionary environment in the US, in spite of the Euro crisis, as well as, the relatively low debt levels compared with her western peers. This relationship is expected to continue through 2012 unless the world deglobalizes or adapts protectionist measures.

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[1] See Global Equity Markets: Philippine Phisix Grabs Second Spot January 14, 2012

[2] See Phisix-ASEAN Equities: Awaiting for the Confirmation of the Bullmarket November 13, 2011

[3] See Philippine Government Applies Keynesian Remedies, Boom Bust Cycle Ahead, January 20, 2012

[4] See Investing in the PSE: Will Negative Real Rates Generate Positive Real Returns? November 20, 2011

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

[6] Global Property Guide Philippine property prices rising again!, December 5, 2011

[7] Horwitz Steve Austrian Cycle Theory is Not a Morality Play, March 3, 2011 CoordinationProblem.org

[8] Hayek Friedrich A. von Can We Still Avoid Inflation? The Austrian Theory of the Trade Cycle, p. 89 Mises.org

[9] Danske Bank A deal for Greece is near, Weekly Focus January 20, 2012

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

[11] Moneycontrol.com Brazil cuts interest rates for 4th time to restore growth, January 19, 2012

[12] Wall Street Journal India Adviser: Monetary Tightening Can End as Inflation Is Cooling, December 20, 2011

[13] See Vietnam Stock Market Plunges on Monetary Tightening, May 24, 2011

[14] See Has China’s Bubble Popped? May 29, 2011

[15] Mises, Ludwig von 3. DRIVE FOR TIGHTER CONTROLS, CONTROL OF THE MONEY MARKET p.145 The Causes of the Economic Crisis

[16] Holmes Frank Investor Alert - It May Take a Dragon to Breathe Fire into Markets, January 20, 2012 US Global Investors

[17] Bloomberg.com Chinese Officials Said to Weigh Easing Constraints on Banks, January 19, 2012

[18] China Real Time Report China Eyes Stimulus Targeted at Boosting Consumption, January 20, 2012 Wall Street Journal Blog

[19] Yardeni Ed A Double Recovery? January 17, 2012 Blog.yardeni.com

[20] See Global Central Banks Ease the Most Since 2009 November 28, 2011

[21] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

S&P 500 Sector Performances: Technology Sector Remains the Leader

Another great insight from Bespoke Invest (which includes the charts below),

The Technology sector ended the year with a 19% weight in the S&P 500, and that is where it stands now as well. The Financial sector, which saw its weight bounce significantly from the March 2009 low through the end of 2010, suffered a drop in weight from 16.1% to 13.4% in 2011. It has, however, bounced by 0.7 percentage points over the first two weeks of 2012 as Financial stocks have gotten off to a good start to the year.

Health Care, Consumer Staples and Utilities saw their S&P 500 sector weightings jump the most in 2011 as investors flocked to high dividend paying defensive names. Along with the Financial sector, Industrials and Materials are the only two other sectors that saw their weights in the S&P 500 drop in 2011. Interestingly, both Industrials and Materials have already gained back all of their 2011 weighting losses in the first two weeks of the year.

My view is that the continuing dominance of technology, despite last year’s underperformance, has been a manifestation of the US economy’s transition to the information age.

US Equity Markets: Sectoral Rotation

I have been pointing out how asset markets have increasingly been driven by monetary factors, which leads to the interim relative price changes and eventually to tidal flows that in the end accounts for boom bust cycles or what I call the Machlup-Livermore paradigm.

Activities in the US equity markets seem to be following this pattern.

Here is last year’s performance by industry

Table from Money and Markets

Now we seem to be seeing a rotation of leadership away from the previous leader, i.e Utilities.… [The following great charts from Bespoke Invest]

…to the laggards…