PricewaterhouseCoopers on Potentials of the E7

``The entrepreneur always searches for change, responds to it, and exploits it as an opportunity."- Peter F. Drucker

Unless the country tacks into the fold of a Cuba or North Korea, as suggested by some xenophobic but influential segments of the society, (aside from the politically fixated minds), the seismic changes unfolding amidst the macroeconomic and geopolitical front is truly a wonder to behold if the trend should persists. Aside from Goldman Sachs, an investment firm that predicted the rise of economic powers of the ``BRIC: Brazil Russia India and China” to supplant the major western powers, now we have PricewaterhouseCoopers predicting on the same plane that (emphasize mine) ``By the year 2050, what the report calls the ‘E7’ economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will have outstripped the current G7 (United States, Japan, Germany, UK, France, Italy and Canada) by between 25%, when comparing Gross Domestic Product (GDP) using market exchange rates, and 75%, when using purchasing power parity (PPP) exchange rates.”

The two tables from PricewaterhouseCoopers (United Kingdom) shows of the following: Table 1 (projected growth rates from year 2005) and Table 2 (projected size of economies relative to the United States).

Table 1: Projected real growth in GDP, income per capita and working age population: 2005-50 (%pa)

Country	GDP in US $ terms	GDP in domestic currency or at PPPs	GDP per capita at PPPs	Working age population
India	7.6	5.2	4.3	0.9
Indonesia	7.3	4.8	4.2	0.4
China	6.3	3.9	3.8	-0.4
Turkey	5.6	4.2	3.4	0.6
Brazil	5.4	3.9	3.2	0.5
Mexico	4.8	3.9	3.3	0.4
Russia	4.6	2.7	3.3	-1.1
S. Korea	3.3	2.4	2.6	-0.9
Canada	2.6	2.6	1.9	0.2
Australia	2.6	2.7	2.0	0.4
US	2.4	2.4	1.8	0.4
Spain	2.3	2.2	2.2	-0.7
UK	1.9	2.2	2.0	0.0
France	1.9	2.2	2.1	-0.3
Italy	1.5	1.6	1.9	-0.9
Germany	1.5	1.8	1.9	-0.5
Japan	1.2	1.6	1.9	-0.9

Source: PricewaterhouseCoopers LLP GDP growth estimates. Working age population growth from the UN.

Table B: Projected relative size of economies in 2005 and 2050 (US = 100)

Country (indices with US = 100)	GDP at market exchange rates in US $ terms		GDP in PPP terms
	2005	2050	2005	2050
US	100	100	100	100
Japan	39	23	32	23
Germany	23	15	20	15
China	18	94	76	143
UK	18	15	16	15
France	17	13	15	13
Italy	14	10	14	10
Spain	9	8	9	8
Canada	8	9	9	9
India	6	58	30	100
Korea	6	8	9	8
Mexico	6	17	9	17
Australia	5	6	5	6
Brazil	5	20	13	25
Russia	5	13	12	14
Turkey	3	10	5	10
Indonesia	2	19	7	19

Source: PricewaterhouseCoopers LLP estimates (rounded to nearest percentage point)

Of course these are nothing more than assumptions with immense probabilities of deviations from the embedded very long-term forecasts, akin to those institutions or buyers of sovereign 50-year bonds (whom are projecting more of the past and present to the future).

However, the essential point driven by PricewaterhouseCoopers is that the critical sources of the largest growth potentials come from Emerging markets rather developed ones, characterized by the confluence of a large dynamic growing populations, are resource rich and have been capitalizing from the ongoing wealth and technology transfer as the global division of labor gets to be highlighted, on the backdrop of increasing trends of globalization, or economic growth on more trade and financial integration (unless subverted by protectionist policies).

Investors looking for YIELD outperformance should therefore seriously look at or consider the prospects of investing in emerging markets as ours. It is probably one reason why foreign investments constitute a majority of the activities in the Phisix despite the mephitic political atmosphere. If the Indonesia can get noticed, why shouldn’t we? Or simply, how can the Philippines be NOT a part of the growth dynamics of its sizzling hot neighbors unless it adopts “curtain wall” policies?

Bullish Signals from the Recent Rally

``To profit from good advice requires more wisdom than to give it."- Wilson Mizner (1876-1933), US Screenwriter

One thing inspiring about the present rally is that internal sentiment and some technical indicators appear to have turned bullish.

As figure 4 shows, two patterns seen in the Phisix chart formed for about a year manifests of two bullish formations, particularly the ascending triangle coupled with a “rounding bottom”.

Since both bullish formations have been at work for about a year, this can be reckoned as “intensively” bullish, which means that if a breakout ensues, the pattern can lead the Phisix to test 2,530 levels! The estimate is arrived from measuring the bottom of the chart to the present resistance levels applied on the upside from the resistance levels.

Indeed such outlook can be quite exciting, however, one should be reminded that charts can only be used as a guidepost to measure the psychology of the investors/market and are NOT foolproof! Second is that if indeed a breakout follows, it means that the Phisix may test the estimated level for a period of time, similar to the duration of its formation, which may span from one year or even possibly more.

Now of course, such an outlook means adopting the right strategies when and if the Phisix does break the 2,172 resistance levels. Past performance is no guarantee that the future outcome will be similar, as in the case of PLDT, measuring its ALPHA (measurement of stock performance beyond its Beta) through Figure 5, shows that PLDT during the initial stages of the Phisix run in 2003-2004 had greatly outperformed the Phisix.

Figure 5: Measuring PLDT’s Alpha

Today, PLDT still outperforms the Phisix but much to a lesser degree, as shown by the angles of the two disparate trend lines. This means that either PLDT will pick up its momentum and lead the Phisix anew or a coming breakout would come from a broader participation from other heavyweights.

As mentioned in the past, outperformance comes with “speculative issues” as local investors turns optimistic, the tendency is to pile on broadmarket issues rather than on the heavyweights.

And signs are on the wall. During the past attempts of the Phisix to the resistance levels, most second or third tier issues that were having an upside momentum have been stalled by sellers waiting at the wings at each of the issue’s resistance levels. In short, most issues failed to fulfill a breakout.

Last week, I have noted of several ‘successful’ breakouts on the broadmarket which could mean that local investors could be indeed turning bullish, such as Cebu Holdings Inc. (+15.78%), Keppel Philippine Marine (+28.57%), Steniel Manufacturing (+59%), MRC Allied (+65.85%), Filinvest Development Corp (+27.16%), International Exchange Bank (+7.5%) and Paxys Inc. (12.328%).

Finally as a matter of market internals, the breadth had a marked substantial improvement with advancing issues dominating daily activities (even on Friday’s decline). Moreover, as initially stated, foreign capital flows remained significantly positive at P 888.835 million, with inflows seen in the broadmarket while foreign transactions represented about 61% of cumulative turnover.

Obnoxious politics aside, the Phisix is now about 40 points away from its resistance and may consolidate first or move ahead to test its one year high soon. Of course, if the political equation changes (with a violent overthrow of the present government), and if any exogenous blowouts occur (abovementioned risks)...all bets are off. Momentum for the moment is in favor of the bulls.

Personality Based Politics and The Acceptance of Income Disparity

``To say that you're going to have social justice means you're going to have to concentrate power in the hands of some small group of people to override rules, and standards, and so forth. And people do not see that that's more dangerous than the injustice that they're trying to wipe out." Thomas Sowell, columnist, Townhall.com

Obviously, this is a clear case of shooting ourselves in the foot. While one may argue correctly, using present values, that economic gains have not filtered to the masses and that the financial markets may not ‘entirely’ be reflective of the overall economy, signals emitted by the marketplace are usually discerned as LEADING indicators that signify a change in social mood (Robert Prechter, Elliot Wave International) and economic cycles. In short, the improvements in the marketplace could be indicative of an impending recovery or a gradually unfolding recovery in our midst.

Yes, I know, I have argued alot about liquidity driven markets, but that is precisely the point, today’s macro framework has been particularly liquidity driven, such that because the world is swimming in too much money, this has filtered into the country’s financial markets as well as into the domestic economy. Thus, our country’s recovery has been anchored on liquidity dynamics more than a structural one much like most of its contemporaries or the emerging market economy class, albeit they could be transient and dependent on the continuity of liquidity creation and intermediation.

Let us be honest to ourselves, all forms of recoveries in any aspect of our lives; be it physical, financial, emotional or spiritual, in the norm, does not come with a wink of an eye but rather through the passage of time (Of course there are exceptions to rule like winning lotteries is one).

Only to the “personality-based” politically obsessed minds can one not or refuse to see these emerging positive developments.

Personality based politics in my definition is analogous to a game of musical chairs. Under the present system of popularity and patronage derived economic opportunities and expectations for government led stimulus or more government intervention in the provision for our social needs, no amount of leadership change would successfully reform the country’s economic and financial status (as said above present gains are a matter of global liquidity dynamics rather than a structural one) ...UNLESS the populace is given the unbridled opportunities under an environment that would allow them to take the necessary risks, to fail, learn and excel in their respective fields in the open market.

Whining about social/income inequality (as seen in growing social/income inequality in US, China or other parts of the world) or mouthing egalitarian objectives conventionally seen with our leaders, politicians and their factotums are nothing but a facetious attempt to pay lip service to the public (demagogues). In reality these represent nothing but a bunch of canards...and they know or are aware about it! Nonetheless, in assuming or maintaining political power, which incidentally emanates from the myopic, gullible and fickle voting public, the political players simply have to tell or promise on what the public simply wants to hear (perpetuating these untruths)!

Yet the quest and struggle for political power is simply so compelling because it practically is all about Spending Other People’s Money (SOPM)! Everybody seems to have their ‘rightful’ concept about governance, or bluntly said, how to spend someone else’s money...except theirs. It seems that hardly anyone realizes that more laws equates to more budget or spending, yet none of the local analysts/experts or ‘self -righteous reformers’ have ever parleyed on the correlation of the du jour word of “corruption” to the relative size of government. Everybody seems to be agog with the fallacious inferences and associations of the virtuous aspects of governance (SOPM) while IGNORING on the structural ones.

In essence, the world is simply never equal. Borrowing the sagacious words of Gavekal Research, from their book Our Brave New World (emphasis mine)...

`` The acceptance of income disparity is probably the hardest thing to achieve in the current political structure of most countries. Why? Because most countries counterpoise the ‘social’ to the ‘unequal’ and strive to avoid wide income disparities.

`` But the refusal to accept income disparities is very destructive. Inherently, it implies that capital is taken from where it is efficient and generating higher returns and distributed where it is not. Such a course of action can only lead to an improverishment of the greater society; and when the greater society gets poorer, it is the poorest members who suffer the most. Time and again, this has been the experience of socialism.

`` Trying to prevent the growth of income disparities is also denying an important economic reality: income disparities are a tremendously creative force. As Thorstein Veblen showed in the Theory of the Leisure Class, one of the main motors of capitalism is the desire for conspicuous consumption; or as popular knowledge calls it, the wish to keep up with the Jones’. If there are no Jones to keep up with, why get out of bed in the morning?”

A Reprise: Fear Not A Rising Peso

(edited from Newsletter edition)

``The real difference is that China’s communist government has succeeded in globalising a much larger share of its population than India’s democratic government has managed to do.” Kenneth Rogoff, Harvard economist

During the past week, a headline article in a business broadsheet appeared where various domestic economic experts broached deep concern over the sharp appreciation of the Peso with some of them suggesting that our government keep the local currency at certain levels. In other words, some of our experts are advocating compelling the government to intervene and manipulate the local currency for what I believe as “perceived short term” benefits.

The kernel of our argument in my January 2 to 6^th edition, (see Fear Not the Rising Peso) was based on the prospects of diminishing export competitiveness which we aptly debunked. A second issue was likewise raised by the article concerning the domestic economy’s dependence on remittances wherein a weaker dollar allegedly translates to weaker consumer spending by the beneficiaries of the foreign exchange brought into the country by our overseas workers.

Let me reiterate the fundamental premise of my contention, relative to export competitiveness, currencies as expressed by its price value or exchange rates have not been the sole and most important determinant of export competitiveness especially in a world where demand, supply and finances have gradually been integrating.

To wit, Japan’s currency have jumped over a period of time from 370 yen in 1970 to about 118 yen today, yet its trade balance have reached are treading near or at record highs as shown below.

On the same plane, we see a sharp reversal of Brazil’s currency, the real, since 2002, yet the currency’s strengthening has produced, instead of attenuating exports, surging trade surplus brought about by record exports even as the commodity based economy tries to climb up the value chain by adopting “internal reform measures”!

An opposite viewpoint could be seen with the US dollar index. As measured by its trade weighted share relative to its corresponding major trading partners, as seen in the above chart, the US dollar benchmark index has fallen from 2002 to 2004 nonetheless has failed to curb its record setting trade deficits and in fact continues to fall into the abyss, see figure 6!

In other words, while adjustments in currencies through fiat policies appears to be an easy way out to remedy trade imbalances, they have unintended consequences that may prove more detrimental or fatal than what is aimed to be rectified for political convenience.

To quote leading Austrian economist and free market advocate (emphasis mine) Ludwig von Mises, ``If one looks at devaluation not with the eyes of an apologist of government and union policies, but with the eyes of an economist, one must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, favor them exclusively. A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations' monetary systems.”

It seems that our experts have forgotten that the gist of today’s issues have been strongly interrelated with the Brobdignagian deficits in the US that has led to a steep decline of its currency during 2002 or 2004. Effectively, the transmission of this decline in the US dollar has prompted for a “push” to our peso (higher) albeit belatedly relative to our neighbors.

Second is the question of the valuation metrics. Despite the Peso’s fall from Php 26 to Php 56 to a US dollar from 1992 to 2005, the rate of change as measured in the Philippine export growth has even slumped (see January 2 to 6^th edition, see Fear Not the Rising Peso)! We can draw up economic models for all to see yet question is will it work? But who would pay for a misdiagnosis effected by misdirected government policies? Why not let the market set its own valuation metrics?

Third, getting our products to the global economy by building the required infrastructure. To quote Harvard economist Kenneth Rogroff, ``Over the past five years, China has multiplied its highway system five-fold. Its 50,000 kilometres of new roads are built to handle even large aircraft...If your products can’t get to the global economy, you cannot conquer it.” Instead of asking our government to intervene in the currency markets, why not suggest to use instead the excess reserves to build the required infrastructure to allow local enterprises to compete in the global marketplace.

Fourth, with the evolution of the trade dynamics borne out of technological changes, the trend of outsourcing has been inclined towards accessibility to a supply of highly qualified labor pool with an environment conducive to productive collaboration between corporations and universities. Let me quote the New York Times report of Steve Lohr (emphasis mine), ``The study contended that lower labor costs in emerging markets are not the major reason for hiring researchers overseas, though they are a consideration. Tax incentives do not matter much, it said. Instead, the report found that multinational corporations were global shoppers for talent. The companies want to nurture close links with leading universities in emerging markets to work with professors and to hire promising graduates.”

Fifth, if the aim is to get a big portion of our economy to be “globalized” then the country has to set conditions conducive to capital and investment flows. It has to give weight towards lowering the cost of doing business, increase labor productivity, adopt and maintain regulations, economic and monetary policies favorable to capital flows and market access, improve accessibility to the capital markets and reduce state intervention to economic affairs. Why then concentrate on the price factors instead of real concrete changes or reforms?

Sixth, is the risk of incurring foreign exchange losses; considering the financial difficulties of the present government, could we allow our public institutions to absorb more losses or incur further financial strains for gains that are likely to be ambiguous? How about the risk of diffusing inflation into the economic system? Have devaluations not been the cause of reduced savings to the people and reduced standards of living transmitted via price inflation?

Throughout the entire 2003 to the First quarter of 2004, Japan intervened in the currency market spending about ¥35 trillion yen or US $317 billion to control their rising domestic currency but had proven to be ineffective then. Luckily for the Japanese government, the Yen fell significantly last year as the US embarked on a tightening campaign, where global investors used the Yen and Yen denominated assets to finance a global trading arbitrage, thereby offsetting their initial losses. What if luck is not on our side? Again who again pays for the misjudgments?

Finally, is the issue of consumer spending; while the negative side of our labor exports have been highlighted by the media to even demean the industry by labeling them as “maid exports”, why is it that our experts seem to mollycoddle on the “rhetorical” preservation of a fragile consumption-led remittance based growth model rather than advocate on an investment fueled one which could be induced by a rising currency?

To a reprise a quote from Dr Marc Faber (emphasis mine), ``a strong currency has never been a problem in the long run. It forces corporations to become extremely efficient, to innovate and to invent new methods of production. Weak currencies on the other hand are an incentive to compete based on short term favourable exchange rate movements – in nature very much alike protectionist economic policies.”

Resistance to change would be a natural reaction that could be expected from the man on the streets....but normally, not from our experts.

URC’s Possible Change In Share Price Dynamics

(edited version from newsletter)

One of the outliers or exemplary performers of the Philippine Stock Exchange has been Universal Robina Corporation . It is one of the two stocks that has your investor analyst bemused all this time (in my radar screen since 2003) considering that it has significantly outperformed the market in general, the index or its industry contemporaries. Figure 3 shown below shows how URC has upstaged its colleagues.

Figure 3: URC (red line) has been consistently bested Alaska Milk (blue line) and San Miguel B (green line) over the past two years.

Consider this, since the bottom or the inception of the bullrun in 2003, from the yearend 2002 priced at Php 2.75/share until Friday’s close, URC has unnoticeably returned an astonishing 545% almost equivalent to gain of PLDT! In comparison over a similar period, measly returns can be found among URC’s peers, namely, Alaska Milk +63.6% and San Miguel B +25%. Ginebra San Miguel even posted a negative 40% defying the market’s buoyancy seen in the runup of mid 2003 to 1^st quarter of 2005.

So what has URC accomplished to merit above gravity returns? In my view, none. While URC has the best top line growth average for the past three years among its peers by a margin, it appears to be priced at the top-end of the industry, meaning URC cannot be construed as inexpensive relative to its industry leagues. I have to admit though that I haven’t scrutinized the annual report or financial papers of URC or its competitors and have instead depended on the financial valuation ratios provided for by pinoyfinance.com to make this curtly ‘generalization’. You’d have to give me the leeway for possible deficiencies.

However, another thing I’ve learned from my mentor (in some of his choice of stock investments~ of course, again this would be unorthodox or against your traditional or textbook way of selecting stocks) is the selection or positioning on issues by virtue of the so-called possible “drivers” or “jockeys” relative to particular issues. He believes that certain personalities (usually insiders or owners or associates thereof) would be engaged in M&A or Joint Venture (JV) or other corporate activities or at least a semblance of, that would eventually whet the investor’s imagination and/or appetite for a speculative punt in an attempt to drive up stock values.

For instance, in the case of URC, prior to the recently concluded secondary offering, according to some accounts, the company shares floated in the market ranged from 5 to 10%, or even to as low as about 3.0% according to the Philippine Daily Inquirer. Essentially, this means higher demand for unliquid issues can drive prices to stratospheric levels as that of URC and vice versa.

And here is where my theory goes...Since the owners of the company could have lined up a secondary offering way back as an early part of their corporate strategy, their objective could be as ingeniously simple: to optimize fund raising by driving up share prices to optimal levels. In essence, to sell more shares to the public it had to contrive an image of past success!

Maybe the owners of the company could have been partially responsible for levitating share prices indirectly (through varied associate firms or individuals) seconded by the bullish backdrop during the early leg of the bullish phase in 2003-2005. Simply put, they could have jockeyed up the shares from the lows of Php 2.75/share up to the 20’s (the bulk, of course, would cost below the price offering) and sold it back to the public at Php 17/share (including their additional 25 to 30% shareholdings equates to profits galore)! Since the market float then was about 5% of total capitalization, it would cost a minimum to drive up share prices considering the known war chest of the owners!

Using our back of the napkin tabulation, total shares traded from January 2003 until Friday’s closed was at more or less 198 million shares (inclusive of cross trades) compared to the recent float of 634 million shares or roughly 31% of the offering. That is to include last week’s activities; URC traded over 33 million shares during its relisting (inclusive too of cross sales). Excluding last week’s trade and assuming a 50% take up by our protagonists; at an average of P 12 per share (high side of estimates) it would roughly cost them in the range of P 800 million to Php 1 billion worth of buybacks (again high sides of estimates) during the past two years to achieve a return of about P 10 billion (the 25-30% float comes with a par value P1)! Amazing.

Of course, the natural advantage of a vastly market floated shares are manifold, such that it enables the company to reallocate or redirect profits to “maximize shareholder value” by investing on projects that may increase returns, to allow for more liquidity to enable foreign fund managers (institutions, mutual funds and hedge funds) to acquire significant shareholdings, such that the company maybe included in their portfolios~ for prestige and returns objectives, and to accommodate in strategic investors who may share their technical or technological expertise or gain entry to new markets.

The major disadvantage would be is that if my underlying assumption on the dynamics of URC’s share prices is accurate, then it has fundamentally changed. For one, motives to increase share prices by the abovementioned economic agents has now shifted to the market for determination. Second, given the larger supply of shares into the market, it would be more costly to drive share prices unless accompanying demand for the company’s shares rises in tandem, from which local speculators are unlikely to have the funds to finance for a punt. Third, in all likelihood, URC’s share performance would now shadow (plus or minus on a margin) that of the activities of the Phisix.

All told, my suggestion is not to project URC’s past into the future. You may likely get disappointed.

Remittances Growth Subject To Global Economic Dynamics

Now alot of readers may think lightly of how globalization has come to affect demand, supply and finance even at the local level. While most local and some foreign brokers appear to be overtly optimistic, I am however, cautiously optimistic since I am quite aware that sentiment borne out of cycles dictate on the flows of the market rather than what is concocted as fundamentals...in the words of Robert Folsom of the Elliott Wave International (emphasis mine), ``This is why "discipline" is usually the first word out of the mouths of consistently successful investors and traders, when they're asked how they managed to succeed. They know that while the market is a formidable foe, undisciplined investors face a far more lethal enemy -- namely their own emotions, and the emotional impulse to follow others.”

The chart below courtesy of Arthur Woo of HSBC as published by the leading local business broadsheet the Businessworld shows of the risk arising from a US impelled slowdown which COULD adversely affect sentiment over at the local market...

Changes in Remittances are subject to Vagaries of Global Economic dynamics

Periods of rising global growth (gray line) has accompanied rising remittances except during the Estrada Crisis in 2001 (reflecting the divergence).

In short, if the world economic growth slows, remittances which serve as one of the significant backbones to the Philippine economy (about 10% of GDP) could likewise be affected too. The constriction of remittance flows would essentially spillover to the industries presently benefiting from it.

Needless to say, the Philippine economy, as key exporter of labor is an integral part of the international division of labor and thus, subject to the volatility dynamics of the global economy. This is one year to be less aggressive and more defensive. Ignore this warning at your risk.

First Gen: Year of the Investing Dogs?

My apologies for not having posted updates since I was out of town and had been inaccessible....Anyway here is one belated “micro” article which I sent last January 27, and which I think deserves a look...

First Gen: Year of the Investing Dogs?

"It can be no dishonor to learn from others when they speak good sense."- Sophocles, Greek Playwright (496-404 BC)

Because it is the NEW “year of the Dog” then we will take the definition of “Dog” in the context of the investments. In the financial markets, a “Dog” is usually defined as “a bad investment” or ‘investments that under perform”. In the US markets, the ``Dogs of the Dow” is defined by investopedia.com as ``An investing strategy that consists of buying the 10 DJIA stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks.”

This suggests that the lunar year of 2006 could be one of the following: the year of UNDERPERFORMERs, a bad year for equities or possibly the year of the high yielding dividend paying stocks.

The First Gen IPO ends its offering this week, and was reportedly met with unresponsive demand from the public or in particular, domestic investors, which fits our new year’s characteristic of our “Dog”. However, could it be that the market has discounted factors or have been remiss in their assessment of the First Gen IPO?

First of all, First Gen is an Independent Power Producer (IPP) which is required to list as part of the Electricity Power Industry Reform Act (EPIRA). In other words, First Gen’s listing is part of a compliance of an existing regulation. Without the law, it would be unlikely for First Gen to list.

Second, Utility firms are usually characterized by high margins and huge dividend payouts, investopedia.com identifies an important aspect of utilities investing as (emphasis mine), ``Utilities still go to great lengths to ensure distribution of cash to shareholder; relative to others the industry offers good income potential. Dividend Yield, measured as the Annual Dividend/Market Price at the time of purchase, probably offers the best tool for gauging the income generated by utilities stocks. Besides, a solid dividend yield suggests a more attractive proposition for conservative investors.” In short, the public may have omitted the reason for investing in utilities…DIVIDENDS.

Today, the public has tagged First Gen as typical of any publicly listed firm which disregards the significant “FUNDAMENTALS” aspects and fails to distinguish between capital appreciation- based relative to dividend-based investing. Most of them have reckoned that stockmarket investing is primarily the capital appreciation based ergo the “speculative bent” of domestic investors rather than what fundamentally matters.

To consider, mainstream sellside analysts are wont to present to its clients the attractiveness of an issue based on sophisticated financial jargons, yet I find it quite unusual where NONE of the conventional/mainstream analysts so far has delved on the margin-dividend aspect of the issue.

And quite curiously too, First Gen has been bizarrely reticent about declaring its Dividend Yield. While it has noted in its prospectus of the nominal figures it distributes as dividends it has clammed up on how much dividends it pays out per share.

	2002	2003	2004
Dividends	1,539,000,000.00	5,421,000,000.00	2,243,000,000.00
common	11,307,110.00	11,307,110.00	11,307,110.00
preferred	4,076,872.00	3,643,204.00	3,643,204.00
total	15,383,982.00	14,950,314.00	14,950,314.00
net income	3,218,000,000.00	5,328,000,000.00	4,960,000,000.00
Payout Ratio	47.82	101.75	45.22

I have made a short table based on the data from its prospectus of the dividends it pays out to its shareholders (common and preferred) and its net income. I omitted my estimates of how much it pays out per share since it looks too enormous and could be most likely wrong. However, based on its stated net income and nominal dividends payout...the minimum payout or payout ratio (dividend/income) has been an incredible no less than 45% since 2002!!!

Third, the previous IPOs could be an example to what we may call as ‘Past Performance are not indicative of future results’. One may find subscribing to last year’s IPOs as “UNPROFITABLE” because to this point none of them has risen above its subscription offering and all three were listed during the PEAK of last year’s bullish market; in particular, Semirara Mining (SCC) listed on FEBRUARY, Manila Water (MWC) and SM Investments (SM) both listed on March.

One would also note that the three issues where mostly warmly received (remember five to eight times oversubscribed!) during their offering, which at the time had a very bullish backdrop considering the upside momentum of the Phisix. Stated differently, today’s lackluster appetite for First Gen has been due to the “rear view mirror effect”, phlegmatic sentiment aggravated by poor track record of past IPOs. Comparing the past issues to First Gen is like comparing apples to oranges.

Candidly, I have NOT scrutinized on the entire prospectus of First Gen to make an in-depth ‘fundamental’ recommendation. However, being your contrarian analyst or seeing value in what the public fails to appreciate, First Gen looks likely a buy for me (I have not subscribed but am looking at the prospects of buying on listing). In essence, when the public disregards or dismisses the reason to why one should invest in utilities, gauges subscription on IPOs based on popularity and uses flimsy basis as comparison, my inclination is to go against the popular sentiment.

Fourth, utilities investing are also reckoned as defensive or countercyclical investing meaning going the opposite direction or against a cycle, where on general market weakness, utilities tend to outperform the general market since energy issues are usually considered economically as having inelastic demand.

Finally, today’s global trend of ‘supply inelasticity meets growing demand’ has resulted to investors paying attention to energy related issues…utilities issues have not escaped the global investor’s eyes…

``Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." remarked the legendary investor Warren Buffett. Ah ah, I certainly would not ignore the writings on the wall.

***

A follow up observation on First Gen (February 12)....

Here is an irresistible commentary by a local analyst who predicts First Gen to FALL by as much as 18%???!!!...., ``Like SM Investments and Manila Water, First Gen was offered “without a discount" to comparative companies. If it follows the performance of those recent IPOs (emphasis mine), First Gen could fall around 18%”...based on comparing apples to oranges!!

I noted that past performance cannot be indicative of future outcomes. This analyst has essentially been entrapped in the so-called heuristic bias or cognitive illusions of ‘hindsight bias’ or ‘anchoring’ in determining his projections about the share prices of First Gen by comparing “laggards” mostly weighed by sentiments rather than fundamentals (instead of comparing with companies from the same industry).

Second, such observation emanates from the initial listing activities which had been weighed down by lackluster sentiments in the general market, as well as in the particular stock (as a matter of bad publicity more than anything else), in short, the analyst is a practitioner of “rationalizing” events to past actions rather than finding value buys.

If I am right (conditional on the dividend per share data) about the “surprisingly above average dividend yields” offered by the newly listed utility power producing firm, especially in a defensive market, First Gen would likely be a winner than a DOG. I am yet trying to get in touch with the proper authorities to uncover “unearthed” figures that I expect.

In Defense of Relative Returns; Time Is Key!!!

``When it comes to Wall Street, there ain't no tooth fairy.'' Joel Greenblatt

AS part of my forecast blemish in 2005 (mines to be the year’s winner), an involuntary repercussion naturally would be portfolio underperformance, and in this regard I have been taken to task by those whom mistimed their entry to the market by buying at the “peak” of last year’s cycle and secondly, had been fervidly imbued by the price anomalies (losses) in Lepanto.

Nevertheless, it is understandable that the average investor could be characterized as having the typical shortcomings: a short time horizon in terms of reckoning of returns, are emotionally overwhelmed, expect oversimplified explanations to developments in a vastly complex and dynamic framework, and most importantly, expect flawless, infallible and “pulling rabbits from hats” performances (by anticipating fund managers or analysts to accurately forecasts tops and bottoms of the markets) instead of taking into perspective the overall risk-reward nature of the markets.

In earnest, it is quite a daunting task to rather help investors attain for themselves the appropriate risk-reward expectations management when in most instances they have the faintest idea of why they are in the market in the first place, principally focusing on mark-to-market fluctuations without considering the risks and volatility factors involved. Hence, the investing landscape is littered with countless numbers of spurned investors whose goals today are to simply return to their costs rather than profit after years of horridly watching their portfolio shrivel.

As a battle hardened investor whom has lived off the years from investing and trading the market, let me share to you some of the insights I have gleaned which may hopefully help you to comprehend more the nature of the financial markets and help shape your objectives or goals when investing.

1. Past Performance Does NOT Guarantee Future Outcomes. The market has a life of its own and is simply soooo fluid and dynamic that randomness dominates daily, weekly or yearly or what we might call as ‘short term’ activities. To quote the famed mentor of the world’s most successful stock investor Warren Buffett, Mr. Benjamin Graham, ``In the short run, the market is a voting machine. In the long run, it's a weighing machine."

For instance the mining industry in general had been in two decades of slumber (remember our “Rip Van Winkle in Gold” series in 2003), so in essence the “investing herd” has been conditioned to believe of the perpetuity of such inertia.

A reader from the United States recently wrote to complain about the lagged performance of Benguet Corporation (BC) abroad despite the recent rip roaring price surges of Gold. Yes indeed, gold stocks are leveraged to Gold but it does not necessarily follow that BC (or local mining stocks) should shadow the price of the metal as our experience shows, why? Simply because local investors have not yet fully ingrained to their psyche that Gold is in a bull market! And because investors have been “anchored” or affected by Warren Buffett’s terminology of “rear view mirror syndrome” and have been primed mainly by mainstream analysts who still maintain their “speculative” outlook on the unfolding generational investment theme. Meantime, the mining industry is in the run-of-the-mill process of proselytization (winning converts) hence the huge potentials to the upside!

Since I wrote my piece “The Philippine Mining Index Lags Behind” which was published in two international websites, safehaven.com and goldseek.com in 2003, the domestic mining index has belabored in its sporadic rise and has been preponderated by prolonged bouts of heavy selling as signal of the public’s rabid denial.

A Trend is A Friend Until It Isn't

As the chart above shows, the Mining Index (blue line) has lagged behind the Phisix (black candlestick) since the inception of the 2003 bull run and has been so until end 2004! After a dismal 2005 some signs of life during the last few weeks!

Gold (and other precious metals) has been in a bullmarket for about 5 years while the local mining industry has been trailing its counterparts abroad and is still struggling to get its feet standing. Will these last perpetually? My answer is no. It will rise, but lag as history shows.

As a matter of randomness, do you know that Lepanto’s surge to a record high (according to my chart 1980s up) was in 1997 just when Gold was into its last phase of the bearmarket (to $252 per oz)? Do you know that Philex Mining soared to its record high in 1987 just as copper prices was in the prime of its decade long descent throes from its peak during the 80’s?

Of course, things do change. Today’s technology enabled connectivity has brought the world into a more intertwined state such that global capital flows are now “real time” or within a click of the mouse.

The combined market capitalization for the world’s mining sector is said to be less than $150 billion a puny compared to an estimated $30 trillion or more in aggregate market cap for the entire world. A panic into gold or the precious metal group could simply send global investors driving mining stocks to the roof! One might argue that this might be a black swan event (low probability event); my response would be; NOT with Gold in a bullmarket, anything is possible.

The same assertion holds true with “supply inelasticity themed” natural resource based stocks as oil, natural gas, coal, water or agriculture. They may be in slumber today, but are we certain that they would remain the same tomorrow?

2. The Financial Markets Operate in Cycles. I have long argued that investment themes take time to develop and they usually come in the forms of cycles, unlike mainstream brokers who keep shifting themes as often to encourage you to trade the market.

Former IBM top honcho Thomas J. Watson, Jr. once said that ``There's a fine line between eccentrics and geniuses. If you're a little ahead of your time, you're an eccentric, and if you're too late, you're a failure, but if you hit it right on the head, you're a genius." In other words, timing is the key for one to be judged as eccentric, failure or genius. One may be right about his/her anticipation of the future market trends, however, being too early could result to unacceptability as the investing public is mostly concerned with faddish issues. Unfortunately market timing is an arduous task.

Needless to say, cycles are part of the general acceptance of the investing public of the unraveling events or trend formation. Mr. George Soros, a billionaire speculator and now turned philanthropist, once dubbed as “the man who broke the Bank of England” for successfully shorting England’s currency in 1992 enumerates the phases of a boom/bust cycle in his book Alchemy of Finance which is applicable to any asset market, namely,

1. The unrecognized trend
2. The beginning of a self-reinforcing process
3. The successful test
4. The growing conviction, resulting in a widening divergence between reality and expectations
5. The flaw in perceptions
6. The climax
7. A self-reinforcing process in the opposite direction

Obviously yours truly could be considered as an eccentric for promoting the mining sector when it was yet an “unrecognized trend”.

The Supreme Court’s decision to validate the Mining act of 1995 was obviously the beginning of the self reinforcing process, as mining stocks ephemerally zoomed at its wake. However, after a short stint up, 2005 was dominated by the public’s refusal to accept the industry’s revival until the end of the year where select mining stocks started to gain upside momentum...

After last week’s forecast where once again I made a similar call to that of 2005 that the mines and oil will lead the market in 2006, it appears that destiny could be kinder to me this time around or if not has given me a pivotal headstart; the reformatted MINING and OIL index soared by 11.61% leaving all other indices eating dusts!

Unassuming and unhedged Philex Mining, a star performer in 2005 up 120% (it’s payback time for those who have stood with me in the test of time!!! The dividends of Patience!!), was up 22.34% over the week and 30.68% year to date (While I am still bullish over the present mining celebrity over the long term, I see this stock as having been overextended and requires a short-term correction or profit taking soon). Philex B approaches its major resistance at Php 2.5 per share, touched by about FOUR times in 1994-1997 with one successful encroachment.

Meanwhile, Apex Mining too gave out scintillating returns up 25.77% for the A shares and an astounding 50.48% for the B shares and mining index heavyweight Lepanto finally showed signs of recrudescence with its B shares up 24% over the week.

These signs of mining issues moving higher without corresponding headline news to underpin their rise looks likely a gradation from stage 2 or “the beginning of a self-reinforcing process” to stage 3, the “successful test”. Notice that the psychological influences take investors not a month or a year but YEARS to develop (since 2003)!!!

This also shows why diversification works, spreading your eggs to limit risks while maximizing gains over the broad based issues or over the broader market.

So, as far as the present situation is concerned, it is a mistaken notion to take investing in commodity based stocks over a very short time frame.

In fact, the entire Commodity Cycle since 1800 shows that it similarly takes awfully LOOONGG years for the overinvestment cycle to shift to underinvestment cycle as limned by the BHP Biliton chart below...

200 years CPI adjusted Commodity Price Index-BHP Billiton

As I have noted before analyst Puru Saxena observed that in ``over the past 200 years, commodities had five secular bull-markets between the following periods –

1st boom - 1823-1838 (15 years)
2nd boom - 1848-1865 (17 years)
3rd boom - 1878-1918 (40 years)
4th boom - 1929-1950 (21 years)
5th boom - 1963-1980 (17 years)

So the likelihood is that commodity cycle may last anywhere from 15 to 40 years which means that if the boom cycle began during the advent of the millennium, the peak of the cycle could last anytime from 2015-2018 (15-18 years)! So essentially, commodity based assets have a looonngg way to go too (caveat there will be interim bumps-as we have seen and will continue to see)....

This also means that whatever transpired in Lepanto’s underperformance last year could be considered as a “price shock” or unexpected price moves or an anomaly. For as long as there is no major fundamental problem concerning management or its operations or most importantly, Lepanto’s ownership of its reserves, then the likelihood that last year’s price digression could simply be a short term move (one year is short term relative to cycles).

To quote DR Barton of Traders U, ``unforeseen transmission problem, the market has a particularly keen knack for hitting us with unexpected price moves... There's an old trader's axiom that every market participant has a disastrous trade out there with our name on it. Our job is to minimize the effect of unexpected price shocks.”

Differentiating between short term moves and long term cycles is a must for investors to ensnare real positive returns, otherwise you’ll be caught chasing prices (ending up in tears~ recall 1997?).

3. Real Returns is all about Risk Taking. This is a timely apothegm from investment maven Mr Paul McCulley from PIMCO (one of the largest bond institutions in the world) who writes his outlook for this month (emphasis mine), ``Risk taking is a risky business. But logic says you gotta take risk to make real returns...In the investment arena, you don’t have to be in it to win it. Rather, you have to be in it or out of it at the right price. It’s called active investment management, taking positions on both the overweight (long) and underweight (short) sides of risks embodied in benchmarks.” In short, in trying to beat the relative returns of the market, one has to take risks to where the highest possible yield would most likely accrue and this is primarily the reason I stuck to the “supply inelasticity theme” given our profuse natural endowments.

Relative return is defined by financial-dictionary.com as ``The return that an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the asset and the return achieved by the benchmark.” For instance the Phisix, since its reversal to the advance phase, in three years has gained 41.63% in 2003, 26.38% in 2004 and 14.99% in 2005. In short, its relative return for the past three years is about 27% per annum. IF, for example, because of investor’s stubbornness to accept our investment themes and assume that for 2003 and 2004 return was ZERO but in 2005 yielded 105% then relative returns would be almost equal to that of the Phisix for the same period. That’s if we aspire to achieve the same performance. We aim for Gold or outperformance with active management!

Stated differently, given the lagging cyclical effects, underperformance could be expected at the onset as these themes gradually work its way to the mindset of mainstream investors. Top notch value investors (characterized by investment in non-popular themes) like Warren Buffett, constantly outperform the market “Beta” at the margins, after positioning earlier on issues largely ignored by the investing mass. For instance his bet against the US dollar has resulted to a losing position by almost $1 billion in 2005, does it make him less effective? Obviously not, because the record shows that Mr. Buffett’s overachievements results from long term holdings delivering positive real returns (relative or absolute). You can take Berkshire Hathaway’s ownership of 129 million ounces since 1997 or a quarter of the world’s silver supply as an example!

Please do not misconstrue me as comparing myself to a legend, I am simply a disciple of the market learning the ropes and conveying to you that ‘investment themes such as contrarian picks or value investing are given time to work and shape, and does not happen overnight’ as alot of investors mistakenly expect. And lastly,...

4. Timing the Market Is At Best Probabilistic. You can simply scour on the list of top 100 or so of the world’s most successful investors and find NO PURE market technicians as part of the roster. Why? Timing is one of the hardest thing to accomplish! As John Bogle founder of Vanguard fund, once said ``After nearly fifty years in the business, I do not know of anybody who has done it successfully and consistently. I do not even know anybody who knows anybody who has done it successfully and consistently."

As to my experience, most of my missed calls have largely been out of purely timing or technical calls. Remember the failed two successive Christmas rallies, the individual chart calls, how about 2005’s last minute whipsaw?

An analyst says that predicting tops and bottoms is a mug’s game. Well while he does it anyway and so do I admittedly. This is not to outrightly dismiss the prospects of market timing because occasionally they do work. However to my experience, they work best when they are either supported by fundamentals and/or sentiment or a combination thereof.

Your prudent investor analyst has had a streak of major forecasts that went favorably for him: promptly forecasted the bottom of the market in 2002 (recall index trading edition), accurately pinpointed the technically guided “capitulation” of PLDT in October 2002, rightly forecasted the market’s reversal in 2003 to even challenge ING Baring’s flat outlook (which eventually was proven right), accurately predicted the rise of telecoms during the said year, while in a derring-do fashion called for the upcoming rise of the mines and the oil extractives industry; was on the spot in 2004 with mines taking the cue from the Supreme Court’s ratification of the Mining Act of 1995 and precisely prognosticating the reversal of the Peso which was realized in 2005. All these took quite sometime to unravel using the mélange of technicals, sentiment and most importantly macro fundamentals as yardstick to these auspicious or “lucky” forecasts. In short hard work, provenance from above, and a tinge of “luck” mattered. NOT astrology or NO crystal ball nor tarot cards, made this happen.

To cap this defense of Real returns, let me quote analyst Chet Currier of Bloomberg (emphasis mine), ``Beating the market is, at best, a misguided goal for most individual investors. When a child's college tuition comes due, it matters not a whit whether you beat the market or not. The only pertinent question is, do you have the money to pay the bill? Real-life investment plans should be geared to such real- life goals, with careful attention to risk as well as reward --- not to an abstraction like beating the market. That's for professionals, and for people who invest as an ego-driven sport.”

My personal objective for the market is based out of survivorship, am definitely NOT part of the ego-driven sporting classes that go for technical abstractions or jingoistic “sophistications” and am definitely a FAILURE when it comes to “pulling rabbits out of your hat” renditions. Besides, there are no shortages of Harry Houdinis and David Copperfields wannabes in the field of investing.

Albeit, as hands on practitioner of the market, I do believe in Absolute returns at minimum, and Relative returns at best, which ALL requires the test of time. As the preeminent and another legendary investor Sir John Templeton once said, ``The best time to invest is when you have money. This is because history suggests it is not timing which matters, it is time.”