Phisix: Back to our Bullish Stance! But Keeping Vigil on the US Dollar Index.

Phisix: Back to our Bullish Stance! But Keeping Vigil on the US Dollar Index.
-US Markets: Presidential Cycle behind Recent Rally?
-BSP Reflates! Locals seen to Add Fuel to Fire
-US Dollar Index Sits At Multi-Year Lows, Risks of Disorderly Unwind Heightens

``Accept the premise that my method is no better than theirs, and yours no better than mine. It doesn’t matter anyway; methodology isn't the primary element of successful trading. The key to success lies in two simple words: money management. There will be losing trades with every methodology. The secret is to have smaller losses on the losing trades and larger relative wins on the winners. To put it another way, "trade picking" ability, while important, is secondary; money management is primary.”- George Kleinman, editor of Commodities Trends, How to Become a Successful Trader

In the past issues we have noted of our interim neutrality stance towards the Phisix stemmed from the ambiguity provided by the dithering US equity markets, which has accounted for the negative factor, relative to the plight of the cascading US dollar, which represented as the positive factor. This push-pull dilemma apparently got resolved this week.

With the US market’s electrifying breakout from its key resistance levels, particularly Dow Jones Industrials (+2.17% week-on-week) and the S&P 500 (+1.48% w-o-w), our main tentativeness have been set aside, as we are LIKELY to see momentum flow tilted in favor of the bulls.

Figure 1: Stockcharts.com: USD-SPX-Phisix correlation

The upper window pane of the chart shows of the US S & P 500 bellwether which recently bolted convincingly out of its resistance level (blue arrow), while the Phisix at the lower panel appears to be levering up for a thrust over the 3,800 zone, although, the Philippine benchmark could back up first to gain enough pivot room for the all important test on the resistance level at 3,822.

US Markets: Presidential Cycle behind Recent Rally?

Amidst the variegated concerns of a deflating housing industry, an equivalent tension over the possibility of a contagion from the subprime mortgages anxieties, and the softening of the US economy, the paradoxical vibrancy seen in the US equity markets could be resonant of the Presidential stock market cycle following next year’s slated US Presidential elections.

The Presidential Stock Market Cycle according to Investopedia.com, ``A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a new U.S. president. According to this theory, after the first year, the market improves until the cycle begins again with the next presidential election.”

Figure 2: Contraryinvestor.com: Script Right on Cue!

In figure 2, courtesy of the contraryinvestor.com, the best returns have been historically found during the third year of the Presidential cycle. And today’s US market performances appear to be right on cue!

To quote contraryinvestor.com (highlight mine), ``What history suggests to us is pretty much crystal clear. In the last half century, there has only been one third year of the Presidential cycle period that has witnessed negative results for the S&P. The average third year cycle performance since 1955 is 18.4%. Again, in the wonderful world of make believe as per "what if this happened in 2007", an 18.4% increase for the S&P in 2007 would mean a target of 1,670. Again, we present all of this completely in the spirit of learning to accept and be at peace with whatever happens in the financial markets, and in the spirit of acknowledging the lessons of history, regardless of our personal outlook or beliefs.”

If we go by the data presented above, then 1,670 as a target for the S&P translates to another 7.5% gain from Friday’s close, considering that on a year-to-date basis the S&P is already about 9.5% higher.

Of course when we talk about statistical average, in simplest form it means that to arrive at an average number requires that about half of the time the S&P has performed above this average and vice-versa.

With the momentum today strongly favoring the bulls following the impressive breakout, our immediate guess is that the index could go higher perhaps until sometime mid-August before a major slowdown or a correction ensues.

Of course, to avoid being literal, no trend goes in a straight line: which also means despite the tendency of US markets to advance there could be one, two day or even a week’s correction interspersed during the coming month or so.

While we aren’t interested in exact figures, what interests us is how the US markets plays out during the last half of the year.

If any corrections especially going into the traditional or seasonal lean months of September-October will be benign or mild then the last quarter could probably see a sturdy bounce to reflect on the Presidential cycle’s usual performance.

If the global market’s correlation to the US markets holds, then the most likely scenario is that world markets including that of our Phisix will continue to strongly outperform.

Anyway all these are just plain conjectures. Statistical patterns or seasonalities are hardly enough reasons why one should be invested.

BSP Reflates! Locals seen to Add Fuel to Fire

As these positive developments unfold, world markets seem to have similarly celebrated the latest shindig.

In all of Asia, only Sri Lanka’s All Share index fell (-2.38%). The biggest gainers were Korea (+5.48% w-o-w), China’s Shanghai Composite (+3.52%), Indonesia’s JKSE (+3.35%), Thailand’s SET (+3.21%), Taiwan’s Taiex (+3.08%), Singapore’s Strait Times (+2.6%) and Hong Kong’s Hang Seng (+2.52%). While the Phisix joined neighboring Malaysia’s KLSE as two of the “lagging advancers” up .72% and .79%, respectively.

While the Phisix registered NET foreign buying, most of these emanated from the highly successful second round offering of the PNOC-Energy Development Corporation (+15.79%).

However, over the broadmarket, excluding special block sales, we observe that foreign money has been Net sellers based on nominal amount (Php 629.5 million), and on the number of issues traded (Net 34 companies encountered outflows this week).

We are unaware if the recent action taken by foreign investors has been related to the recent announcement by the Philippine Central Bank (Bangko Sentral ng Pilipinas or BSP) to recalibrate its monetary tools by suspending tiering system for bank placements and by lowering overnight interbank borrowing and lending (from 7.5 and 9.75% to 6 and 8%, respectively).

Figure 3: NSCB: Declining Philippine Inflation Rate

IT is said that such actions were considered “neutral” and aimed at “preempting inflation” as benchmark oil crude prices (WTIC and Brent) appear to be headed towards the record $80 levels.

However, our reading of this is that BSP acted to REDUCE THE YIELD SPREAD for Philippine assets relative to our neighboring counterparts or relative to our contemporaries in the emerging markets asset class.

In other words, we are predisposed to view BSP’s twin monetary actions with an UNSTATED goal of lessening the INCENTIVES for massive portfolio inflows from overseas investors.

Given today’s INTEREST RATE DRIVEN global capital flows dynamics, the implied effect is to PUT A BRAKE towards the rapid appreciation of the Peso.

In figure 3, the National Statistical Coordination Board (nscb.org.ph) shows of the Philippine inflation rate in sharp decline almost in conjunction with the steep rally of the Philippine Peso vis-à-vis the US dollar in 2005 until the present.

While in most instances, it would be a cognitive folly to attribute a correlation as causally linked, here we can probably say that the rising Peso has perhaps contributed to the decline in inflation rates (as measured in consumer prices).

As previously shown in March 26 to March 30 edition, (see History Is NOT A CLOSED BOOK: The View from IMF-chart provided by Gavekal Research), the rising Peso could have prompted for increasing trends to import capital goods, and this could have translated to lower consumer prices or a greater purchasing power for the Peso. So how bad could a rising Peso be?

Yes, since every action has a consequence and not all consequences will be positive. The rising Peso has to some degree affected our export sector.

However, Morgan Stanley’s Stephen Jen calls this muted effect on the export sector by rising currency levels in Asia as the “Ballast Effect”, where essentially, currency values becomes subordinate relative to the snowballing regionalization trends in the global trading dynamics and a more sophisticated financial markets.

To quote Mr. Jen, ``The notion of declining trade elasticities with respect to exchange rate movements in recent years has been well-documented, particularly for developed countries. What this means is that, with globalization, the export demand curves have steepened, i.e., it now takes bigger price adjustments to induce a unit of change in real trade. Several possible explanations have been proposed by academicians. First, as countries move up the product ladder, products become more differentiated (the ‘heterogeneity’ argument) and therefore less price-sensitive. Second, currency hedging may have retarded the responses in real trade as exchange rates change. Third, global demand (the ‘income effect’) has been so robust recently that the slope of the export demand curve appears steeper, when in fact the export demand curve has ‘shifted to the right’ due to the strong income effect.”

Thus, the BSP has done the unthinkable and unorthodox. But seemingly a lot better approach compared to those advocating the institution of rigid capital controls, as knee jerk reaction to the present trends. Capital controls are most likely to lead us to retrogress economically and financially as markets become heavily distorted by intervention. Recall Thailand’s bungled efforts backfired? Where they ludicrously repealed most of what they have imposed in less than a week!

Moreover, if today’s subdued inflation rate (measured by consumer prices), has been corollary to the rising Peso then in essence, its consequent gains has been more publicly widespread (if the index is to be believed) compared to the propping up of select industries by government intervention at the expense of the society in general.

Putting these into a philosophical dimension allow me to quote the trenchant words of Professor Gary North,

``We all wear two hats: a consumer's hat and a producer's hat. As consumers, we want producers to compete. As producers, we want protection from unfair competition. What is unfair competition? Successful competition.

``People vote with their money as consumers. They often vote in a polling booth as producers. As consumers, they want liberty. As voters, they want controls, or more to the point, control. Control over them. You know. Competitors.

``Spending is about liberation from controls on us. Voting is about the imposition of controls by us.”

The latest action undertaken by the BSP is almost synonymous to the UNSEEN motion to “reflate” the economy.

The lowering of interbank transaction rates effectively reduces rates available to the public across the board. And by the doing so, the public could be spurred to redirect their savings towards more entrepreneurial activities or drive them into the open arms of the domestic stockmarket.

With today’s highly inflationary environment, in terms of surging money and credit growth and intermediation: falling US dollar, bursting-to-the-seams trade and current account surpluses in Asia and oil exporting countries, exploding derivative markets etc…, most conspicuously evident in the global financial marketplace, it is less likely to see a marked constriction of capital flows although the BSP’s move could have SOME effects.

Again we can probably anticipate some intrinsic tradeoffs; a slight decline in foreign money participation but increasingly more local players into the market.

This also implies that as locals join the bandwagon we could probably envisage greater and more volatile activities in the broader market. This means that there could be an increase in the activities in the second and third tier issues, which should also suggest the latter’s outperformance relative to the Phisix.

Perhaps, given the current outlook, positioning a portion of one’s portfolio to speculatives may help increase yields over the immediate term.

US Dollar Index Sits At Multi-Year Lows, Risks of Disorderly Unwind Heightens

The last of the issue of concern is the US dollar.

Figure 4 : NYBOT: Components of the US Dollar Index

Figure 4 is taken from the New York Board of Trade, where the largest component according to its weighted order is the Euro (57.6%), followed by the Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and the Swiss Franc (3.6%).

While a falling US dollar has so far benefited global equity markets, what brings us to worry is that at present the US dollar index closed at a multiyear low.

Because a currency pair is a zero sum game it explains that the plight of the US dollar equals to a record high in the Euro, a 26-high in British Pounds, a 30 year high in the Canadian dollar, 2 ½ year high in the Swedish Krona and interestingly, a indications of significant rallies from “carry trade funding currencies” of the Swiss Franc and the Japanese Yen. In short, the US dollar has weakened almost across the board.

With Iran recently asking Japan to pay in Yen for its oil sales, we risks seeing a furtherance of the decline of the US dollar index, as major exporters

1. Depeg or delink from the US dollar as a currency anchor as Kuwait, or

2. Establish or increase exposure to Sovereign Wealth Funds to augment returns by utilizing surplus or excess forex reserves to diversify into NON-US dollar assets or finally and most importantly,

3. Be required to be paid for export sales of products or services in non US dollar currency.

Effectively all these construe to a weakening demand for the world’s reserve exchange currency.

Foreign central banks portfolios account for about a quarter of the total US treasuries outstanding, with similar degree of significant exposures into other US dollar denominated assets.

With the present decline in the US dollar index, these redound to enormous losses in the price value holdings of these institutions. And added losses could signify a litmus test on the loss taking appetite for these international institutional banks.

So far the US dollar’s decline has been orderly. And the benefits reaped from the global financial markets have been an offshoot to such gradual clip of decline.

However, if anyone from these institutions should undertake the initiative to sell on its holdings to cut losses or for some other reasons beyond our comprehension, such an action could risk a domino-effect panic selling binge that could trigger a US dollar crash, which could easily roil the financial markets and spoil our fun.

I think at such critical times it would be best for one to have sufficient exposures to precious metals in your portfolio, as insurance, especially if a US dollar panic turns into a gold/silver buying spree panic. Oh please if you are contemplating mines as a proxy to metals, only mind those with proven reserves.

Also best be reminded to keep those mental stops active.

Fischbowl: Shift Happens, Did You Know (Version 2.0)?

``Everyone takes the limits of his own vision for the limits of the world.”-Arthur Schopenhauer (1788-1860), German Philosopher

Major developments unravel at the margin.

The following YOU TUBE presentation by Karl Fisch of Arapahoe High School together with Scott Mcleod of Dangerously Irrelevant blogspot, succinctly depicts of the ongoing seismic “exponential” technology-enabled growth transforming the world today.

As Nassim Nicolas Taleb wrote in his “Black Swan, The Impact of the Highly Improbable”, ``History and societies do not crawl. They make jumps. They go from fracture to fracture with a few vibrations in between. Yet we (and historians) like to believe in the predictable, small incremental progression.”

Apparently because of the lack of sensation, mainstream media hardly covers on such trends.

While we don’t write to convince skeptics, especially those who have been “tunneled” towards mainstream media and IVY league personalities as their only ACCEPTED sources of information, eye-opening books like Thomas Friedman’s “World is Flat”, Alvin and Heidi Toffler’s “Revolutionary Wealth” and to the extreme futurist Ray Kurzweil “The Singularity is Near: When Humans Transcend Biology” have elaborated deeply on these evolving trends at varying degrees.

According to analyst John Mauldin ``I think that we underestimate the accelerating pace of change we are going to see in the next 15 to 20 years. We will see more change in the coming decade than we saw all of last century. Think back just 20 years and realize how much things have changed. Then double that pace through 2020. The opportunities and displacement are going to be huge.”

Likewise, we believe that the drive towards the Phisix 10,000 would be underpinned mostly by these defining transformations.

Watch and Learn!

The Prudent Way To Profit From IPOs!

``I guess it's true that some people simply don't have the stomach to think big thoughts, let alone take big actions. The ultimate nightmare for such people is waking up some fine morning only to discover that they're going in the opposite direction from where the mainstream is headed. To people with a lemming mentality, acceptance is more important than money, dignity, or purpose. Which is unfortunate, because success and the desire for acceptance are mutually exclusive objectives.”-Robert Ringer, Making Ripples

The Prudent Way To Profit From IPOs!
-Prevalent IPO Fallacies: Confirmation Bias and the Greater Fool Theory
-Fundamental Analysis or Rationalization?
-Market Cycles Determines IPO Activities Over the Long Run
-IPOs Over the Short Term: "It’s the Market Sentiment, stupid!"; Lessons

The Prudent Way To Profit From IPOs!

As the Philippine benchmark, the Phisix, continues to set fresh record highs, a stream of Initial Public Offering (IPOs) have been set to take advantage of the public’s burgeoning appetite for Philippine securities. And with several scheduled to list in the coming weeks, we get a flurry of queries on these.

With the prevailing perception that IPOs represent the quickest way to earn money, such desire to secure allocations occasionally creates a friction between clients and their brokers on the former’s access to available IPO shares.

It should be understood that member-brokers of the Philippine Stock Exchange are prorated shares in accordance to the allocation as determined by the candidate company undergoing the IPO process under the supervision of the Philippine Stock Exchange (PSE).

It is then the brokers who assign the distribution of the partitioned shares to their clients. Plainly put, given the traditional role, the brokers have the discretionary power to ration IPO shares to their clients according to their priorities.

Amidst the prevailing buoyant sentiment exuded by the market, the reality is that NOT everyone can be pleased.

However, because of this bottleneck, several companies undergoing IPO have tried to accommodate small retail investors through a special arrangement or via the “small investors program”, where retail investors can directly or indirectly subscribe from the company or through a designated non-broker conduit.

Anyway, despite the hubbub generated by the IPOs, our assertion, once again going against the conventional wisdom, is that buying IPOs for short term gains is a SPECULATIVE undertaking, unworthy of the anxieties that emanate from securing shares to subscribe. Moreover, as we will show the best returns from IPOs DO NOT COME from short term gains!

To quote Porter Stansberry of Stansberry & Associates (highlight mine), ``Speaking of IPOs... Buying them is a fool's errand, if you don't get the broker price – which you can't get unless you've got tens of millions of dollars in your account or you're plugged in. Market studies show that, on average, buying IPOs on their first day of trading is one of the worst ways of investing.”

Prevalent IPO Fallacies: Confirmation Bias and the Greater Fool Theory

IPO’s by definition means the first sale of stock by a company to the public (investorword.com) or specifically a private company’s channel to raise capital by the sale of its shareholdings to the investing public.

The procedures of the IPO itself requires the company to disclose all attendant risks that the prospective investor could likely assume, as indicated in the preliminary prospectus or the “Red herring”.

However, since the main thrust is to raise money by the sales of its shares, then obviously the plus or the selling points and NOT risks get to be emphasized. The likely analogy is that of the fine prints usually found in contracts, which are hardly ever read by the contract signatories which only come into their awareness when a conflict occurs.

And naturally, in order to generate public interest for the raise funds via the IPO route, the company undertakes a marketing campaign. Media blitz, Road Shows, and other related activities are conducted here and abroad. But since the core of MOST of the offerings are designated for overseas investors, so does the thrust of the marketing campaign.

In other words, good publicity combined with warm reception from the international investing community frequently lead to a “buzz” in the local sphere which prompts for a surge in the local market participant’s demand for the IPO.

AND MOST importantly, in the backdrop of spiraling prices in the market, as signified by the ecstatic Phisix, as well as elevated prices of companies belonging to the same industry, further reinforces the impression that such investments are impervious to risks. Subsequently, the average investors thus draw a conclusion that the prospective IPO would inarguably go nowhere but UP…especially over the short term!

Here, as we have noted before, the fallacy where average investor equates rising prices as representative of “fundamentals” is much pronounced. In addition, their perspectives have been apparently shaped by projecting the recent performances as tomorrow’s outcome, known as the “Recency Bias” or the “rear view mirror” syndrome.

As an example, let me cite you the common threads asked of us on the upcoming IPOs:

1. What do I think about the IPO?
2. How will the market receive the IPO?
3. Will there be opportunities to make short term gains?

Where our natural response is that we can’t see how IPOs perform over the short term as they are most likely to be DETERMINED BY THE PREVAILING SENTIMENT UNDERPINNED BY THE MARKET CYCLE, and that over the short-term the RISKS DIMENSIONS ARE FAR GREATER with respect to the market’s general dimension…unfortunately we get the Rodney Dangerfield treatment-“we get no respect”, simply because our answer DOES NOT FIT what they had actually expected to hear!

The first question was never really of any relevance or importance because it was a question designed to lead to a discussion on the known “fundamentals” as they have most probably gleaned from either the media, their social circles or from broker reports.

What these prospective investors would like to hear is a confirmation of their belief, where we recall Julius Caesar invaluable words, ``Men in general are quick to believe that which they wish to be true.”

And our expected role as a person from within the industry was to actually validate on such views! And to talk of something beyond what is expected was tantamount to blasphemy!

As a student of the financial markets we understand this fallacy as the confirmation bias or where one looks for circumstances to confirm one’s beliefs, or (wikipedia.org) ``the tendency to search for or interpret new information in a way that confirms one's preconceptions and avoid information and interpretations which contradict prior beliefs.”

In essence, people simply want to believe what they need to believe regardless of the validity of the basis of their beliefs.

The second issue is to deal with expectations particularly that of the short term dimension.

Basically, except for the insiders, information disseminated from an IPO company are usually almost evenly distributed, where both long term investors and short term speculators obtain similar data and profile as dispensed by the company through their prospectus.

What distinguishes the investors from the speculators is the time frame expectation in terms of holding on to a security or in this case the IPO.

In the norm, like long term investors, speculators often cite “fundamental” reasons to justify their actions.

However unlike the long term investors, instead of the rating securities based on valuations, they are predisposed towards tuning into the surrounding hype and the prevailing market action from which, they assume, would allow them to sell to a BIGGER SUCKER once the IPO gets listed.

This investing approach is commonly known as the Greater/Bigger Fool Theory or from wikipedia.org (highlight mine), ``the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to some one else for an even higher price.” In short, this approach essentially epitomizes gambling. You go into a position in the hope that someone else will subsidize your bets.

Likewise, the average speculator never ruminates about the other side of the trade, i.e. if there is a willing seller there should be a willing buyer at an agreed price. If they sell, who would be the buyers?

What if, despite the media sensation and present buoyant conditions, a significant majority of the IPO subscribers turn out to be short term punters, where most expect to unload of their holdings upon the company’s initial listing date? And in contrast to expectations, when the company debuts in the stock exchange, a paucity of investors or “Greater Fools” surfaces instead. The likely scenario is that the IPO share prices would DROP towards its offering price or could even trade below them!

And since falling prices runs counter to the average speculator’s mindset, especially by those who cannot accept their mistakes, this would entail a sudden departure from a short-term perspective to a “long” only position. Our spurned punter then turns into a buy-and-hold investor!

To put in categorical perspective, does anyone ever recall of how major telecom player Digitel Telecommunications Philippines which listed on November 27, 1996 at Php 3 per share NEVER popped beyond its offer price (as shown in figure 1)?

The company’s share prices even lost more than 90% of its value (a low of about 26 centavos) during the trough of the recent bear market! Today, DGTL trades about HALFWAY from its 1996 offer price!

Figure 1: Digitel Communications: Never Seen the IPO Sunlight!

This is not to say that the conditions we cited above had been applicable to Digitel; that would be speculation on our part.

But the fact is DGTL’s listing came at the peak of the bullish cycle (Phisix reversed in first semester of 1997), where its unfortunate timing resulted to its failure to breach its listing price and consequently suffered a loss for both the investors and speculators alike, especially by those who were in denial about the state of the market’s cycle.

Could these happen again? Of course it can…or it will, if and when the market cycle turns.

As finance guru Jay Ritter says of the investing in IPOs, ``The IPO market is never in equilibrium. It's either too hot or too cold. Buy in the cold periods.”

Fundamental Analysis or Rationalization?

The third fallacy goes with the “fundamental” excuse to justify one’s activities.

As we have noted above, the average investors most probably in the league of speculators or momentum traders tend to use “fundamentals” to justify entry positions and exit based on “intuition”.

Take for instance an investor obsessed with the Price earnings ratio. Let us assume that company ABC presently priced at 10 pesos per share has earnings of Php 1 per share, which effectively translates to a Price Earning ratio of 10. The company expects an average earnings growth rate of 10% a year.

Because our average investor/speculator thinks that such PE ratio is “cheap”, Company ABC is then added to his/her portfolio at current prices.

Then for no apparent reason, sometime in the future, the share prices of Company ABC is bidded up to Php 11 per share. Our investor/speculator having seen a 10% gain decides to take profits because he/she “feels that the price has risen and therefore subject to fall”.

If going by the “fundamental” reasoning, an earnings growth of 10% implies earnings per share at Php 1.1. So at the market price of Php 11, essentially the PE ratio remains the same. So why did our investor or speculator sell?

Because the actions taken to enlist one’s position had been simply an effect of “rationalization” or (wikipedia.org) ``the process of constructing a logical justification for a flawed decision, action or lack thereof that was originally arrived at through a different mental process.” (highlight mine)

This is the sort of convoluted reasoning is so widespread in the marketplace. It is the same kind of misaligned thinking that usually leads to portfolio disasters, simply because market participants manifests the lack of focus and discipline in their investing approach and allow ticker directed impulses to dictate on their decision-making process.

Market Cycles Determines IPO Activities Over the Long Run

If the function of the IPO is to raise capital for a private company by selling its shares to the public, then obviously the best time to facilitate such activities is when the markets are RECEPTIVE. Accommodating conditions allow for the company to sell their shares with relative DISPATCH at the same time get MORE value for them. So our question, when is this?

Figure 2: PSE: IPO TRENDS follow Market CYCLES!

Figure 2 gives us an indication of IPO activities. IPO activities (bar) tend to rise as the Phisix (line) goes higher and vice versa.

During the peak of the previous market cycle (1994-1997), companies that went public ranged from 13 to 22 a year. When the market cycle reversed as shown by a declining Phisix (1997-2002), the number of companies that took on the IPO road slowed to less than 5 a year.

Today as the Phisix transits deeper into the advance phase of the contemporary market cycle, we hear of more and more companies considering the IPO path. To quote the Philippine Daily Inquirer, ``Several companies are also raring to list shares. There’s Northwind Power Development Co., which operates a wind farm in the northern province of Ilocos Norte; ethanol fuel producer San Carlos Bionenergy Inc., based in Negros Occidental province; PNOC Alternative Fuels Corp., a biofuel unit of state-owned Philippine National Oil Co.; and Enerfuse Holdings Inc., also a biofuel producer.”

It’s a brewing IPO fever. And such is what to expect, upcoming hysteria from the IPO landscape as the Phisix goes higher!

IPOs Over the Short Term: "It’s the Market Sentiment, stupid!"; Lessons

Our earlier premise was that IPOs represent as “one of the worst form of investment” over the short term because it is usually treated as an alternative form of gambling.

This is premised on the difficulty of predicting market sentiment on the inaugural day of the company’s listing, where we painstakingly described above of the attendant perceptive fallacies commonly adopted by the “crowd”.

Figure 3 tell us that despite the all the rationalization about fundamentals, market sentiment weighs HEAVILY on the performance of an IPO company on its launching season.

Figure 3: Fundamental driven IPO Successes??? In your Dreams!!!

Since the onset of the millennium, the largest IPO offerings (in pesos) according the PSE to date had been (in pecking order):

1. SM Investments (Php 250 per share, listed on March 22, 2005, offer amount Php 28.75 billion),
2. PNOC Energy Development Corporation (Php 3.2 per share, Dec. 13, 2006, Php 16.696 billion),
3. First Gen (Php 47, Feb. 10 2006, Php 8.503 billion),
4. Manila Water (Php 6.5, Mar. 18 2005, Php 4.845 billion),
5. National Reinsurance (Php 3.8, April 27, 2007, Php 2.424 billion) and
6. Banco De Oro (Php 20.8, May 21, 2002 Php 1.852 billion).

The reason for this list of the IPOs is to put into perspective the so-called “fundamentals” usually broached by the average investors. The largest IPOs consist of the companies with known “fundamentals”.

And because the common assumption is that fundamentals drive IPO successes over the short run, we take into consideration of 3 issues that has operated in different time frames or in distinct stages of the market cycle as shown in Figure 3.

First is Banco de Oro, listed in 2002 at Php 20.8 per share, as shown by the leftmost arrow, represented by the black candle chart. The superimposed green line is the Phisix, while the red trend line denotes of the interim trend of the Phisix during the listing date.

BDO suffered a decline below its offering price during its debut to close at Php 20.75 and even lost a further 25% to a low of Php 15.5 three months after! This came as the Phisix slumped to its cyclical nadir in 2002.

After a year BDO even fell further to its ALL time low at Php 14.75. When the Phisix manifested signs of recovery, BDO broke above its offering price only in November of 2004 or more than two year after it listed!

Today, BDO is about 246% above its IPO price. Was BDO then, a showcase of “fundamentally-driven” short-term success?

Second is utility stock Manila Water, seen in the blue line whose listing date is similarly marked by the red arrow.

I purposely chose to chart MWC over SM Investments (not shown in chart), where both had almost simultaneously listing in March 2005, because UTILITY firms are often reputed abroad as “defensive” issues which usually outperforms on a countercyclical basis or during market or economic downtrends. Unfortunately so, as the chart indicates MWC did not manifest or operate as Utilities are known to function when the Phisix corrected.

Anyway unlike SM which traded immediately BELOW its offering Price during its debut, MWC for the first two days closed on a slight PREMIUM. However, as the chart shows, the declining Phisix (falling red trend line) once AGAIN weighed heavily on the two “fundamental” firms.

Remember at this stage of the cycle, the Phisix has already been navigating on the advance phase (drifting at the 2,100+ level after a steep run up). But the offering came at such a bad timing (both in March) which was coincidental to the massive corrective wave (also in March) and led to a dismal start.

Relative to the offering price, MWC fell or lost 14% to a low of Php 5.6 per share three months after, while SM fell to a low of Php 191 per share or a loss of 23% six months after!

Could SM and MWC serve as examples of “fundamentally” driven short-term success??? Obviously not!

When the Phisix bolted out of its previous high during the last quarter of 2006 or about one and a half year after the listing of MWC and SM, both companies breached their offering price levels to trade at a premium today of 96% and 80% respectively.

The recent best one day performer among the IPOs has been the listing of Pacific Online last April 12, 2007 where its share prices stormed by over 50% above its offering price of Php 8.8.

I won’t exactly categorize this issue as of the same “fundamental” caliber relative to the securities cited above, would you?

The rightmost chart shows LOTO, as signified by the violet line, in conjunction with the overtly bullish sentiment exuded by the Phisix (rising red trend line and downward arrow). So far LOTO trades about 73% above its offering price.

ALL other IPOs or secondary offerings from listed companies during this year have traded conspicuously ABOVE their offering prices simply because the Phisix has been on a tear up 26% year to date!

Such OVERWHELMING evidences basically demolish the argument that “fundamentals” drive stocks higher over the short-term! Not in the Philippine setting, anyway.

Some important lessons gleaned from the aforementioned experiences are:

1. IPOs are NO different than the REGULAR listed issues. They operate under the auspices of the market cycle in all time frame dimensions (short, medium or long term).
2. IPOs are NOT exempt from risks.
3. Recent activities DO NOT guarantee an IPO’s success.
4. While corporate fundamentals count, market sentiment MOSTLY determines the short term success of IPOs. But since short-term movements are hard to predict, it’s anyone’s guess how the IPOs perform over the short-term.
5. The best returns in an IPO experience does NOT arrive by second guessing what an IPO does during its listing date but by comprehending on the whereabouts and conditionality of the present phase of market cycle and by taking appropriate action based on these circumstances.
6. Like all forms of prudent investment, an enforceable exit strategy or contingent plan should be employed.
7. Benefit from a RISING trend by nursing one’s gains while reducing losses and finally,
8. Avoid falling for perceptive fallacies; conduct your own detailed investigation on the merits of the investment.

In 1992, the controversial presidential campaign slogan coined by Democratic Party Strategist James Carville which was carried by ex-US President Bill Clinton became widely used today...It’s the economy, stupid!

Allow me to paraphrase this quote in the context of IPOs over the short term, “It’s the Market Sentiment, stupid!”

Remaining Neutral But On A Bullish Bias As Market Sentiment Recovers

``Security is the mother of danger and the grandmother of destruction.” -Thomas Fuller (1608-1661), British Clergyman and writer

Yes, market sentiment has unquestionably recovered, with emerging markets and Phisix breaking out into new highs as the US dollar continues to stagger and approach its December 2005 lows, see figure 4. Momentum appears to have now shifted in favor of the bulls.

Figure 4: Stockcharts.com: Falling US dollar

Signs of general recuperation in the US markets plus the faltering US dollar have aided this present momentum shift.

Emerging markets on the upper panel as indicated by the iShares EEM, Asia’s markets as indicated by the JP Morgan Asia Equity index in the lower panel, the Phisix on the Main window synchronically on RECORD territories, most likely prompted by the declining US dollar (upper lower panel).

Yet, we cannot discount the risks that volatility could nudge higher as US markets have YET to clear the hurdle of its recent highs as the case of the S&P 500 and Dow Jones Industrials, see Figure 5.

Figure 5: stockcharts.com: US benchmark breakout imminent?

Albeit, Nasdaq’s recent highs (upper panel below main window) should increase the probability that a similar breakout on the Dow and S&P could be imminent.

In the meantime, component industries represented in the S&P 500 has shown significant indications of healing from those experiencing recent selling pressures such as the S&P Banking Index (lower panel).

Further the significant breakout of Crude oil to the 70’s territory, which apparently has turned out as we had earlier predicted in our April 23 to April 27, 2007 Edition (see Could Brent’s Premium Over WTI Imply a $70 above Oil prices?), could imply that there could be more forthcoming weakness in the US dollar.

Moreover, strong oil prices could also be representative of a pick-up in global demand (indicative of world resilient economic growth) relative to supplies.

We remain on a neutral status but this time with a bullish bias (with selective opportunities), until we see those recent highs by the key US benchmarks surpassed.

On Being Neutral: A Bird At Hand Is Better Than Two In The Bush

``Everybody knows that you need more prevention than treatment, but few reward acts of prevention. We glorify those who left their names in history books at the expense of those contributors about whom our books are silent. We are not just a superficial race (this may be curable to some extent); we are a very unfair one.”-Nassim Nicolas Taleb, Black Swan: The Impact of the Highly Improbable

Our call for neutrality drew some reactions last week. One concerns with how to deal with one’s portfolio. The other reflected on the perception of our “assailing” of the prevailing optimistic convictions.

Extrapolating on the signals of the markets, the mixed messages produced by two important pillars; the lethargic US dollar, as measured by its trade weighted index, in contrast to the emerging indications of the softening by the US markets, have prompted us to this outlook.

In our industry, securities are traditionally rated by the following calls; buy, sell or a hold.

Our neutral stance essentially expresses indecision or ambiguity towards the interim direction of the market, hence is equivalent to a HOLD. And since such incertitude bespeaks of possible signs of emerging risks, then it would do us no harm to take some money off the table until we see better or clearer times ahead. Learning from one of the morals of Aesop’s fables, ``A bird at hand is better than two in the bush”. Having the proverbial “bird at hand” is equivalent to capital preservation.

Since we are not in the practice of financial markets astrology, given our understanding of the present cycle, we manage our portfolio in times of turbulence by raising our cash levels relative to our total holdings. We do not sell ALL until we are faced up with the following conditions; envisage the end of the secular cycle or foresee of deep reversal within the present cycle or react to an unfolding crisis.

Unfortunately for us, our local market is so crude as not to offer alternative instruments which could enable us to benefit from a declining market or take insurance or hedge positions. In developed markets one can short an issue or buy funds that short select issues or industries or market indices, or take advantage of put or call options (basic derivatives) against your positions as a form of insurance.

The assumption of abandoning our position in the marketplace by going all cash presumes great market timing abilities, something that is in practice NOT consistently feasible. Investing decisions based on single minded chart reading is predicated on the trajectories of past performance, which does not always work. Remember Wall Street’s ubiquitous warning, PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RETURNS? And so it is.

US Market Internals Indicate of Prospective Heightened Volatility

``In seeking wisdom thou art wise; in imagining that thou hast attained it, thou art a fool.”--Lord Chesterfield (1694 – 1773), British statesman

The dilemma which we described last week conspicuously manifested itself anew. Where we noted that the reaction of our Phisix would “highly depend on the degree of volatility in the US markets”, our market responded exactly to these events.

When the US markets made significant moves our Phisix followed its footsteps. When US markets closed with minor changes, the Phisix responded to the upside, see figure 1.

Figure 1 Stockcharts.com: Waltzing Phisix and Dow Jones Industrials?

The Phisix (candlestick in main window) has closely tracked activities in the US markets (line chart behind in main window), as much as the other pertinent benchmarks of the iShares Emerging Market (upper panel below the main window) and Dow Jones EX-Japan Asia/Pacific index (lower panel).

These, in my view, have been the push and pull factors weighing on the Phisix, as it struggles to follow the sentiment of the US markets while being buttressed by the declining US dollar, which appears to have recently accelerated (-.52% for the week, 2.1% year-to-date).

Nonetheless, our principal concern, to reiterate for emphasis purposes, is the “degree of volatility in the US markets”.

We broke down the industry components of the major US benchmark the S&P 500 last week and discovered that 6 out of 10 industries comprising about 61% of the index weightings had seen marked deceleration of their price actions.

Meanwhile, based on the Dow Theory, we observed a meaningful divergence where the price actions of the UTILITIES and TRANSPORT indices has deteriorated compared to the Dow Jones Industrials which has managed to maintain its sanguine composure. This digression could be indicative of a looming reversal for the key major index.

Essentially this degeneration in the market internals served as our basis for our bearish outlook in the US markets.

Again, let me remind you that, today’s potential decline in the US markets could simply be a transition to a normal “corrective phase” rather than an unfolding crisis as some bears suggest, unless proven otherwise.

Since we are not into the markets for vanity reasons, we adjust our views as the market depicts to us and react accordingly (where most of the time our reaction is simply to sit, read and do nothing).

We do not engage in wishful thinking or adopt rigid “convictions” as with most of the average investors, since we understand that our emotions are the principal determinant to our portfolio losses. We frequently like to blame/heckle others when we cannot control ourselves.

To quote one of our favorite market gurus Mr. Martin Barnes, managing director BCA Research (highlight mine), ``There are so many forces and imponderables that affect the outlook, that one must keep a very open mind and not get trapped in a fixed mindset. Too many people have locked themselves into either a bullish or bearish view and that undermines their willingness and ability to take account of a changing environment. It is important never to become overly confident that you have it all figured out.”

For this week the only notable change within the universe of benchmarks we previously cited was the Dow Utilities benchmark which has shown some signs of improvement. The rest of the other benchmarks retained their overall tones.

Because we understand the follies of cognitive illusions, we try to avoid from attributing events as having a causal relation to market activities. Instead we let the markets do the talking.

Despite the marginal weekly gains in the major US bellwethers, we noticed of the volatility building from within.

For instance in the past five sessions, the US Dow Jones Industrials sprinted to the positive side marked by notable gains during the early half of the sessions only to end marginally down, except on Wednesday wherein it managed to close significantly up.

In Friday’s session alone, the Dow Jones spiked above 130 points of advance at the first half, only to reverse itself by declining about the same degree (down 130 points) during the latter half; it ended the session 13.66 points down. That was over 260 points swing (from top to bottom to the close)!

These incipient signs of volatilities suggest to us that the US markets could be facing major headwinds which could rattle our own markets if our correlations with the US Dow Jones persist.

Figure 2: stockcharts.com: Declining Breadth in US Markets Foretells of Turbulence

Figure 2 conveys to us the market breadth conditions of the New York Stock Exchange (NYSE) and of the Nasdaq. This is the ratio of issues hitting NEW highs as against issues hitting new LOWS. Fundamentally, this ratio reveals to us of the overall market sentiment underpinning these exchanges.

In the two charts, we can take note that in both NYSE (above) and NASDAQ (below) bourses, the present trend has been that of a DECLINING ratio of NEW highs vis-à-vis the NEW Lows. In other words, market sentiment tells us that the bullish sentiment looks frayed and exhausted. And if history determines future actions, then the continuing downward drift (blue trend line) indicates accelerated deterioration in market sentiment which could most probably lead to equivalent declines in the major benchmarks, as represented by the S&P 500 above (line chart) and similarly shown in the past (blue down arrows).

Of course, we can never count on history alone; but the messages emitted in the context of the different behaviors of these market internal data (component trends, Dow Theory, New high relative to New Low) seems lucidly tilted towards an imminent corrective phase, even as the major benchmarks has yet to break their all important support levels.

One could probably take on short positions on the key US benchmarks if their support levels relent to a breach, where backed by the weakening market internals, could translate to a meaningful decline. To my recollection the US markets haven’t had a 10% correction since 2003, which means a 10% decline will be a norm for any trend.

On the other hand, if the markets remain irrational and does the unexpected; one could take the long end if such indices break above their most recent high. However, I would assign the latter with a smaller probability of occurring. This should apply to our end too.

US Subprime Woes Spreading; Feedback Loop Dictated by Market Ticker

``No matter how hard we try, our perceptions about people will be misguided a significant percentage of the time. Of course, it’s one thing to be off target occasionally but quite another to be consistently wrong. That’s because the foundational principle of all other success principles is having an accurate perception of reality. Which means that great achievements are virtually impossible if one’s perception of reality is perpetually faulty.”-Robert Ringer on Changing Perceptions

We also noted last week that fundamental variables such as the appearance of a contagion of the subprime implosion, new Taxes, and the state of the Japanese Yen could lend to heightened state volatility in the markets today.

BCA Research recently published two back-to-back issues which dealt with the Subprime sector. While the highly reputed independent research outfit acknowledges that yield spreads have widened, they think that the present anxieties over the permeation of the subprime woes are less likely to pose as systemic risks, as shown in Figure 3.

Figure 3: BCA Research: Subprime Weakness and Systemic Risks

Let me quote BCA Research (highlight mine), ``Falling home prices combined with rising delinquency and foreclosure rates have pushed the ABX index spreads (a basket of sub-prime home equity ABS) to new highs. A key difference from the selloff that occurred earlier this year, however, is the divergence between the higher and lower quality indexes. In the first three months of 2007, all of the ABX indexes sold off, up to and including the AAA-rated securities. In the more recent flare-up in spreads, the damage has been more concentrated in the low quality indexes. The market appears to be acknowledging that the latest disruption is more a reflection of credit concerns, unlike the February move, which was also accompanied by (unrealized) concerns of broader financial systemic risk. Bottom Line: the shakeout in sub-prime debt is not over, but may now be contained to lower quality securities, with less risk of a contagion into credit spreads and the banking sector.”

While we’d like to assume BCA’s optimistic position on the overall state of the US credit markets, so far the performances of the financial sector, including that of the banking indices has manifested strains from the recent subprime ruckus, in contrast to their outlook. Besides, understanding how BLACK SWANs or low frequency high impact events unfold, underestimating risks could lead to portfolio disasters.

In fact, the du jour apprehension in the global marketplace has been mainly focused on the valuations aspects of these so-called complex “structured finance” products that have proliferated in the world of finance.

In the US, where $375 billion Collateralized Debt Obligations (CDO) had been sold in 2006, subprime debts comprised 45% of its collateral backings, according to a Bloomberg report. CDOs are bundled pools of assorted debt instruments, from corporate bonds, mortgages, loans and others.

The problem is that such complex and highly illiquid instruments obtain their values not from market based pricing but from ratings issued by credit rating agencies or through “model” based-what the bankers or accountants say it is worth. When the going was good, nobody questioned the way these assets were valued…until now.

As the subprime saga deepens, losses which were once limited to the domain of mortgage lenders, have now appeared in the portfolios of hedge funds, as in the recent case of Bear Sterns and other funds, such as two London based funds-Queen's Walk Investment Ltd. and Caliber Global Investment Ltd., including a hedge fund shut by Zurich-based UBS AG which accounted for 150 million Swiss francs ($122 million) of first- quarter losses (Bloomberg).

In addition, as investors have become increasingly wary over mounting incidences of losses, deals, flotation and offerings have equally suffered such as Dollar General (could scrap its offering), CanWest MediaWorks (reduced its offering) and mortgage fund IPO by the Carlyle Group (reduced its offering). Such are signs of how investors have turned to risk aversion. And risk aversion implies for a prospective liquidity crunch.

Notwithstanding, the emerging risks wherein the escalating losses in the portfolios of hedge funds and other institutions could pave way for a re-rating from credit rating agencies as S&P, Fitch and Moody’s.

Let me quote at length Bloomberg’s Mark Pittman report (highlight mine),

``Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

``The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

``That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.

``You'll see massive losses from banks, insurance companies and pension managers,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody's and Fitch understate the risks of subprime mortgage bonds. ``The longer they wait, the worse it's going to be.''

Could there be a contagion? Of course, such is possible. Losses in a portfolio, especially from the leveraged positions, would imply liquidations in other areas in order to cover or offset such a loss.

Let us take for example the pension industry. According to a Bloomberg’s David Evans, ``Public pension funds have bought more than $500 million in CDO equity tranches in the past five years, according to data from public records requests.”

Equity tranches are known as ‘toxic waste’, because they represent the riskiest composite tranches of a packaged CDO.

According to the same report from David Evans (highlight mine), ``The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.”

And we are all aware how the Philippine government exerted so much effort to keep the US largest pension fund’s investments here intact, which was valued at $78.5 million in 2005 from $12.46 million in 2002 according to Manila Times.

What if, by virtue of this subprime implosion, they experience outsized losses? And importantly, if the accrued losses have been amplified by the use of leverage? Naturally, they could take the route of selling on their other holdings such as their investments in Philippine assets. And this may not be limited to Calpers, as there could be other fund entities with equivalent exposure to Philippine assets affected by the present US subprime epicenter woes.

In short, one could expect the turmoil from the worsening subprime sector to ripple to the Philippine shores if the implosion turns into a rout or into a disorderly manner.

This is where our selling stops should be in place.

This is NOT to say that this WILL happen, this is to say that such events COULD happen and should NOT be discounted. As Nassim Nicolas Taleb wrote of Black Swans, ``ONE single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is ONE single (and, I am told, quite ugly) black bird.” Obviously the subprime debacle is turning out to be not an isolated event. The $64 trillion question is; to what degree the ramifications?

No matter how bullish our convictions are for the Philippine stockmarket cycle, such does not imply that the present trends will not meet speed bumps or be derailed by obstructions enough to shakeout the present prevailing sentiment. This always happens. As we always say, no trend goes in a straight line. Further, in every secular trend there is a counter cyclical trend.

Said differently, those blinded by euphoria today will encounter such periods as their day of comeuppance. Where due to heavy stress over unacceptable losses, such investors will abandon the markets until signs of recovery emerge. Since they operate on hope, the likely response under such conditions would be denial, frustrations and then fear.

This happened before. Remember the Phisix in the last secular advance cycle in 1986-1997 had two major crashes in between (40%+ losses in about a year in 1987 and 1989), but it did not stop the cycle from reaching 3,400 or a gain of about 22 times from trough to peak. And this could happen again.

Such is the reason why we always advise people to treat the present outsized gains as bonus, and not to expect markets to persistently outperform as today. Managing one’s expectations is one healthy way to improve on one’s portfolio performance.

Going back to the fix in “structured products” (derivatives, structured finance); while such innovative tools had been in the past repeatedly argued (especially by regulators) to have aided the capital markets by spreading risks to a wider universe of investors, today there is a newfound perspective; such diversity could in fact be a disadvantage.

Let me quote currency analyst Jack Crooks, ``HSBC Chairman Stephen Green said he was “’worried by the degree of leverage in some big-ticket transactions nowadays’ and felt ‘something is going to end in tears.’” “He also warned that losses could be higher because the parceling out of risk to so many parties across the financial system could make it more difficult to arrange a rescue – a comment that highlighted widespread and growing unease among senior banking executives.”

There you have it; it’s all in the perspective dictated by the ticker. Previously, broader market base was said to benefit investors since they spread risks. That was when the markets were strong where no one seemed to challenge such assertions.

Now that the air has come out of some over inflated markets, the view has changed. Because of the diverse base, rescue packages would be more difficult to address since many parties are involved.

It’s all a feedback loop depending on the angle you chose to take. That fundamentally is how markets operate.

Every Action Has A Consequence; An Equal And Opposing Force

``If you know yourself and your enemy, you will not fear battle. If you know yourself but not your enemy, you will lose a battle for every one that you win. If you do not know yourself and do not know your enemy, you will never see victory."-Sun Tzu, The Art of War

I’d like to show you how the US economy has performed of late.

Figure 4: Northern Trust: US GDP

Consider this: the US markets have performed remarkably (Dow Jones up 7.6% and S&P 6% year-to-date) even as their GDP has been growing on a sub-par basis as shown in Figure 4, profits coming from record highs as well as the decline in the housing industry which is said to contribute to about 23% of its economy.

If one were to believe that financial markets reflect economic conditions then obviously this contravenes such expectations.

Our observation has been that of the explosion of credit in the financial sector which has paved way for the boom in mergers and acquisitions, private equity ventures, structured products and derivatives, as well as, from the current account surpluses of Oil producing and Asian exporting countries which have similarly led to a global financial markets boom.

With the tightening of lending standards, escalating subprime woes, losses spreading to hedge funds and other institutions, increasing signs of investor aversion, potential impact of taxes on US investors, the risks a volatility jump in the Japanese Yen, widening credit spreads and the trend of rising interest rates worldwide, all this could be extrapolated as a potential reduction in liquidity and should spell for a slowdown in the price appreciation of the financial markets in general.

Although barring the specter of a disorderly unwind; I think there will be selective market opportunities.

As to the Philippine setting, last week’s action likewise manifested of a sudden decline of market internals reflective of souring sentiment, albeit the end of the week recovered some of this lost footing.

While I think the falling US dollar and the rising Chinese yuan could imply for continued strength in most Asian currencies (ex-Japan), this should provide for a floor to any interim stress-testing arising from any volatility spikes in the US.

As gyrations in the US markets have shown more influence to our market, it would be best to remain defensive under current conditions and to avoid from chasing speculative issues from which could wither under continued pressure.

Last week was a lesson for punters, as fast as fancy stories can bid up share prices so is with its decline. As a saying goes, every action has a consequence, an equal and opposing force.

Nonetheless, I expect the Asian markets to decouple from the US markets in the future but this has yet to become evident.

Until then, MIND your stops!