Bloomberg: Commodities, Led by Metals, Have Biggest Weekly Drop Since 1980

Time for that much needed pause....an excerpt from Bloomberg:

"Commodity prices had their biggest weekly drop in more than 25 years, led by metals and grains, on speculation that higher interest rates will erode the appeal of copper, gold and silver as alternative investments.

The Reuters/Jefferies CRB Index of 19 commodities fell 5.4 percent this week, the most since December 1980. The CRB reached a record on May 11, fueled by investor demand for gold and shortfalls of industrial metals such as copper. Oil declined to a six-week low today from a record last month as U.S. fuel supplies gained and tensions over Iran's nuclear program eased.

``The speculators are piling out of the metals,'' said James Vail, who manages $700 million in natural-resource stocks at ING Investments LLC in New York. ``There's been so much money made in this sector that people are trying to protect themselves. There was skepticism on the upside, and now there's panic on the downside.''

This week, copper plunged 10 percent, the most since October 1994, and gold tumbled 7.6 percent, the biggest drop in more than 15 years. The CRB Index dropped 19.46 this week to 342.29. It reached a record 365.45 six sessions ago."

Inflationary Pressures Long Extant; Asian Equities Depends on Growth

``By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” -- John Maynard Keynes

We are living on interesting times indeed.

The Phisix remained vivacious (up 1.94% week-on-week) amidst the recent precipitate correction across diverse asset classes in the global financial markets. (Needless to say, the Philippine benchmark has been markedly supported by torrential foreign money inflows and surprisingly inexorable signs of continued enthusiasm exuded by local investors taking up a majority of last week’s trading turnover despite the huge groundswell in aggregate peso volume turnover sans special block sales.)

Whereas in contrast to 2003 to early 2005, despite the falling US dollar trade weighted index, global markets rose on a tide of ex-US dollar asset accumulation, today, we are witnessing an antipodal perspective; falling markets in synchronicity, as shown in Figure 6.

Figure 6: Dow Jones Asia and World Stock Index (left), JP Morgan Emerging Bonds and Morgan Stanley Dean Witter US Government Trust Bond Index (right)

One week does not a trend make though, yet what is bruited about by mainstream media as the causal factor behind the series of decline is of the growing “inflation” concerns as exhibited by rising commodity prices. And that being so, rising inflation would translate to the FED continuing to raise interest rates. I have noted that rising gold prices has in the past signaled rising interest rates (see March 27 to 31 edition, Listen To Your Barber On Higher Rates and Commodity Prices!).

Hogwash!

Today’s market has been dissonant. Commodities have been rising since the advent of the millennium (media notices it only now?). Second, if the Fed’s continued rate increase is a concern then why is the US dollar down 1.3% this week to its lowest level since March 2005, considering that the trade deficit has fallen below expectations should have ameliorated its cause? Should it not be that rising short rates would benefit the US dollar by manner of a larger yield disparity as the case was throughout most of 2005?

Inflation has long been extant in the financially driven global economy suppressed only by government’s manipulation of its statistical data.

For instance, courtesy of Gavekal Research as shown by Figure 7, three leading indicators have been warning of a rising clip of economic growth indicative of emerging inflationary pressures since its trough in 2005 in OECD countries.

Figure 7 Gavekal Research: OECD leading indicators

Second, in the US, the changes enforced or effected by the different administrations (from the Clinton regime to the present) on the computation of the key inflation indicator, the Consumer Price Index (CPI), has arbitrarily suppressed the inflationary figures.

Economist John Williams see figure 8, shows that using past methodology prior to the massive changes in the statistical makeup of the present CPI framework, CPI figures are running about 3 percentage points above officially stated figures!

Figure 8: Shadow Government Statistics: Alternate CPI Measures

Such is the reason why Gold and commodities are running berserk simply because real interest rates are still in the negative! This translates to effectively a still EZ money policy in spite of the recent 16^th rate increase by the US Fed.

What we could possibly be seeing now is a symptomatic prelude to a US dollar run, if gold ever hits over and above $1,000 per oz, aggravated by signs of continued decline of US sovereign bonds and rising inflation pressures! Again I don’t wanna sound alarmist but we’ll take the market as it is.

Finally, rising currencies have not been detrimental to the advancement of the equities in Asia, but a slowing world growth will, notes the BCA Research’s on its latest outlook on present currency trends and Equity performances Asia; (emphasis mine)...

Figure 9: Emerging Asia Rising Currencies and stock Indices

``Currency appreciation will not derail the Asian equity advance unless global growth decelerates markedly. Asian currencies have been steadily appreciating against the U.S. dollar this year, with a weighted basket up nearly 4% year-to-date. But the rise in regional currencies has not proved to be a headwind for stocks—while Asian equities have lagged their emerging market counterparts, they have posted solid gains this year. Moreover, with the U.S. dollar falling against other major currencies, Asian currencies remain cheap on a real trade-weighted exchange basis. The bottom line is that a modest, albeit steady, appreciation of Asian currencies will not prevent the region’s equity markets from moving higher.

Need I say more?

A Real Estate Boom in Asia Pacific

Even prior to the recent improvement seen in the domestic equities market, one industry that has benefited from overseas remittances inflows has been the real estate industry (see January 10 to 14 edition As the Peso rises, Domestic Investment Stocks Lead the Way).

In addition, the prospects of a domestic investment led recovery could augment the industry’s present conditions, (see November 29 to December 30, 2004 Domestic Investment to Help Drive the Phisix?).

Aside, parallel roseate growth prospects from the services sector; particularly, the information and technology, Business Process Outsourcing (BPO) and Business Services Outsourcing (BSO) (see November 14 to 18, 2005 edition, Age Of Internet Boosts Domestic Economic Environment), tourism and the medical services could help churn a ‘critical mass’ to bolster the industry.

Notwithstanding, the recent surge in the prices of soft commodities such as sugar, rice, coffee and other agricultural products could likewise attract sufficient investments that may lead to more demand for properties catering this previously depressed sector, one which has a sizeable impact to the rural population.

Moreover, relative to investment flows, growing regional trade, financial and economic integration could help boost direct or indirect demand for various categories of properties in the country.

Finally, the rising Peso has been providing for a subliminal trigger for local investors to reinvest back into Philippine based assets, as well as, foreign portfolio flows into the country considering a higher yielding currency relative to its traditional favorite safehaven; the US dollar, given the present deluge of global liquidity. Ergo, the Philippine real estate sector could be seen as one channel or beneficiary for possible investment flows from local or foreign investors looking for outsized or above average profits.

Figure 3: USD/Philippine Peso (blue line) and Philippine Property Index (black candlestick)

As shown in Figure 3 the recent attempts by the USD/Philippine Peso to fall or a rising Peso coincided with a jump in the Philippine Property Index as indicated conversely by the red arrows above, i.e. peak USD/PHP=trough Philippine Property Index and vice versa. In short, somewhat like the Phisix, the Property sector appears to manifest an inverse relationship in its movements with the local currency vis-à-vis the US Dollar.

By the way, the domestic Property bellwether consists of the two major heavyweights such as Ayala Land and SM Primeholdings , as well as second and third tier issues such as Belle Corporation , Camella Palmera Homes , Cyber Corporation , Empire East Land , Fairmont Holdings , Filinvest Land , Megaworld Corp. , Metro Pacific Corp., Robinson’s Land Corp and Uniwide Holdings .

I find it refreshing to see the widely followed and respected Canadian independent research outfit, BCA Research, conform to my views. In its latest outlook entitled ``Asia-Pacific Real Estate: Laggard Poised To Outperform”, Bank of Credit Analyst highlights on a possible catch up by Asian real estate markets, writes BCA (emphasis mine)...

``Asia-Pacific real estate markets should catch-up to the global housing boom in the next few years...The 1990s property bubbles in several Asia-Pacific markets have been fully unwound, and real estate in this region is now perking-up anew. However, the recoveries have been very subdued compared with real estate market trends in the rest of the world. This is consistent with history: Asset markets which have experienced a mania and a consequent bust tend to stay depressed for a period and, as a rule, underperform their peers for some time. Looking forward, fundamentals suggest that Asian property markets are set to deliver solid gains in the years to come, outperforming those in the Anglo-Saxon world.”

Figure 4: BCA Research: A Real Estate Boom in Asia-Pacific

While BCA has ostensibly omitted the Philippines and Indonesia as part of its portfolio outlook, the movements of the Philippine Property index has been consistent or congruent with their analysis in spite of the omission as shown in Figure 5.

Figure 5: Philippine Property Index’s J.LO Bottom

Over a long term perspective, the recovery seen in the sector has been validated by its latest “rounded bottom” breakout or in Wall Street’s lingo a ‘JLO’ bottom breakout when reckoning from the 1999 high.

Today, the Philippine Property index is seen advancing towards its 1996 high of 1,793 buttressed by another huge and massive JLo bottom (from 1996 to date) formation, as marked by the blocked arrow.

As of Friday’s close it is about 600 points away from the 1996 target which looks quite realizable over a medium term perspective (1-2 years or even less!).

In short, it is imperative for a Peso based investor (local or foreign) to allocate a significant portion of their portfolio to the said real estate sector to achieve Alpha “outperformance” returns. And to use dips in the market to accumulate.

Bloomberg: Copper Rises to $8,000 a Ton for First Time as Metals Rally

Global Liquidity chasing profits....and pushing up commodities....

From Bloomberg's Chanyaporn Chanjaroen:

Pension and hedge funds are pouring money into commodities as raw materials from sugar to oil produce returns that are outpacing other assets. Crude oil has gained 16 percent this year in New York and traded above $71 a barrel today. Fund investments in commodities may exceed $120 billion by 2008, up from $80 billion last year, according to Barclays Plc.

Philippine Peso: Loss of Export Competitiveness Against Who?

``The wild geese do not intend to cast their reflection; The water has no mind to receive their image.” -Zenrin poem, The Way of Zen

This reminds me of the undue harangue by a slew of experts on the alleged “ills” of a strong Peso (“damned if you do and damned if you don’t” situation). In an incisive article, ``Will a unicameral parliament save us?” Honesto C. General business columnist for the Philippine Daily Inquirer enumerates the flawed cumulative economic policies adopted by the past administrations that have led to the country’s present predicament.

In short, his message was that when government assumes to know in behalf of its constituents and adopts policies in what it believes is for the better, in most instances THEY HAVE BEEN WRONG. And it is us who pays for such flawed policies instead of allowing market forces to determine where resources are best allocated for. More interventionism translates to more government bureaucracy, more red tapes, more corruption, and a more distorted economy. Think Soviet Union, central planning’s showcase. To quote leading Free Market advocate Ludwig Von Mises, ``Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought.”

Of course, I do share the concern that a precipitate surge in the Peso may lead to the so-called “Dutch Disease” or ``the deindustrialization of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The term originated in Holland after the discovery of North Sea gas” (investorwords.com). However, it appears that the present developments (belated Peso rise) does not highlight to such scenario, but instead reflects on the global if not regional trends. Yet, strong Peso critics argue most frequently about the “loss of export competitiveness”...against which currency?

Are we referring to our neighbors or to our distant relatives at the far side of the globe?

As you can see in three instances above except for Argentina’s Peso, the Brazilian Real, the Thai Baht and Indonesia’s Rupiah has appreciated steadily against the Philippine Peso over the 5 years period, with the Philippine Peso’s current belated rally providing for a countertrend rally but have not broken the main trends, i.e. Philippine Peso depreciates against “competitor” currencies. While following the debt default of Argentina in 2001, the Peso is just about neutral relative to the Argentine’s Peso.

Ergo, the firming of Brazil’s currency as well as by our neighbors’ demonstrates that the Philippine Peso has lagged the marketplace for quite sometime, thereby its present appreciation has not had a substantial material effect, thus far, on the so called “export competitiveness”. If taken at a converse perspective, since the Peso has depreciated largely against its “competitors” over the longer period, then presumably given the single dimensional focus on the “price component” as manifested by the underlying currency, then we should have gained “export” market share, bilaterally or through the world market, at their expense. But have we done so? Nicolas Taleb in his book Fooled by Randomness promptly explains, ``but economics is a narrative discipline and explanations are easy to fit retrospectively”.

Moreover, present world conditions highlights the increased dimensions of globalization as manifested by expanded linkages through trades, economic and financial integration can now be seen through the attempt to integrate the region’s monetary system whose possibility I discussed three years ago (see September 15 to 19, 2003 edition, the Emerging Asian Economic Bloc). According to Shehla Raza Hasan writing for the Asia Times Online notes that ADB plans to revive the adoption in June of the ACU (Asian Currency Unit) or the ``notional unit of exchange based on a "basket" or weighted average of currencies used in the 10 member states of the Association of Southeast Asian Nations plus South Korea, China and Japan”, for purposes of a single common currency to bolster the region’s capital markets, economic integration and cross border transactions. With the region’s growing realization of the need for an alternative form of currency, it is a wonder why too much effort have been spent looking for solutions that ran backwards. Interestingly, have not the G-7 in their latest communiqué, exhorted Asian nations to allow for “greater flexibility of exchange rates”?

Mission Impossible...Accomplished?! Thanks To Surplus Liquidity...

``If you’re just in it for the money or you view the market as a way to get-rich-quick, you’ll never have the urge to examine your mistakes. You’ll keep falling into all the common traps... reaching for the moon, not cutting losses, and over trading. Sooner or later you’ll blow up.” Tom Dyson, Daily Wealth

Life’s little miracles. For the longest period, the market seems so intricate to read or comprehend and at the next it seems so simple; everything seems to fall into places as if by design. In another instance of serendipity, in this game of chance, how fortunate of me to have the market play out the route of history. And from history your analyst appears to have captured these observable patterns in a bottle. In my March 20 to March 24^th edition, (see From Theme Based to Momentum Investing; It’s Horse Racing Time), these previous patterns were used as basis for my projections, particularly two invariable targets, namely the Phisix benchmark (2,457) and a defined time frame (early May).

Here is what I wrote then (emphasis added)...

``Of course, we understand that history does not necessarily repeat itself but it may rhyme. I have dealt on this last year (see November 7 to 11 Market Timing: Preparing For the Christmas Rally) but the Phisix failed to breach the critical threshold level. With this NEW episode, the pattern may have the chance for it to hold.

Now the table below shows of the 5 past runs.

Start	End	Months	Troughs	Peaks	Points	in %
29-May-03	4-Jul-03	1.5	1048	1308	260	24.81
1-Sep-03	4-Nov-03	2	1192	1432	240	20.13
27-Nov-03	23-Jan-04	2	1313.98	1565.56	251.58	19.15
26-Aug-04	4-Oct-04	1.5	1547.35	1853.29	305.94	19.77
16-Dec-04	8-Mar-05	2.6	1804	2172	368	20.40
24-Feb-06	????		2047.62

Table 1: Observable Patterns

“During the previous winning streaks, two patterns clearly emerges. One, the Phisix has returned by about 20% on the average and second, the average time frame of a run is about 2 months before it expires or goes to a pause.

“So if we take the February 24^th low as a starting point of the present run then 20% returns would be equivalent to 2,457 for the benchmark index. Presently that means an upside of about 11%. By Phisix, we mean the heavyweight component issues such as PLDT, SMC, Globe, BPI, Ayala Land, Ayala Corp, Metrobank, SM Primeholdings, SM Investments, Jollibee Foods and Petron Corp could be expected to have a return of 11% on the average (some above, some below) IF the pattern holds true. Second, if two months will be the reckoning period for the prospective upside steak as in the past, then we could be looking at the end of April to early May for the Phisix to possibly peak out.”

As of May 5^th or Friday’s close, the Phisix leapt over and above my target at 2,457 to 2,470! Talk about sheer providence or LUCK!

Well, over the week, the Philippine benchmark posted the best gains among Asian bourses up 8.8% to a seven-year high (you know that...it’s splashed all over media!!!), while recording a 17.85% return on a year to date basis.

Yes, I have read and heard a mouthful as to the supposed causality behind the Phisix recent success, and am delighted to see SOME of my contemporaries seeing the daylight among the clutter of balderdash.

You’d be surprised to learn that compared to the nascent phase of an advancing Phisix in 2003 to 2004 which had been dominated entirely by foreign money, last week’s abbreviated trading week recorded vivacious trading activities by the local investors quite similar to the developments seen in early 2005, which pumped up the market’s turnover even if we exclude the huge cross transaction of Mr. Enrique Razon’s buyout of ANSCOR’s holding in International Container Terminal .

Put bluntly, this time around, the hefty gains that you see in the Phisix had not been limited to foreign portfolio flows, as local investors have initiated sizeable participation over the buying activities in the broadmarket, lending credence to my theory that local investors have been shifting to reinvest into local currency based assets on the basis of better profit returns opportunities comparable to previously parking their ‘savings’ into US dollar denominated ones. Needless to say, the Peso’s rise had been one of the major subliminal psychological triggers for local investor to the join the ongoing rush to accumulate equity assets listed in the Philippine Stock Exchange.

However, as in the previous runs since the Phisix cyclically reversed in 2003, foreign portfolio inflows have been the leading exponent of equity accumulations, despite the mephitic political mileu and this run makes it no different. Portfolio flows have reached a March 12, 2005 high of over P 3 billion pesos or in just four days where foreign inflows contributed to about 17% of aggregate turnover at P 3.013 billion. As usual, these torrential deluges of foreign capital are symptomatic of global excess capital seeking for profit opportunities or “money chasing too few profits”. Wayne Arnold of the New York Times captures our thoughts in his article, ``Turmoil in Asia Doesn't Dent Investors' Enthusiasm for Its Markets” (emphasis ed.)..

In the Philippines, the president is facing protests and accusations of corruption after warning in February that elements of the military were planning a coup d'état. Yet foreign purchases of Philippine stocks are at five-year highs, the benchmark index is up 3.4 percent and the Philippine peso has appreciated about 8 percent. To some extent, this remarkable sangfroid with regard to Southeast Asia stems from a faith that political turmoil is not undermining economic growth. But economists and analysts say there is a bigger factor: a glut of global savings that is making cheap capital available to both heavily indebted rich economies and riskier developing countries. The resulting avalanche of global investment capital has become largely impervious, they say, to the political risks that often buffet Southeast Asia's accident-prone economies.

Let me remind our readers that the fabulous developments on the Phisix essentially reflects on a belated move by our equity benchmark relative to its peers similar to the latest outburst by the Philippine Peso.

...and the Falling US Dollar Index For a Rising Phisix, Albeit Caution is Warranted

``Successful investing doesn't require above-average intelligence because it is not an intellectual challenge; it is an emotional one and, I believe, it is a challenge most of you are capable of meeting head on and winning. If there's anything 'clever' about what I do, it is recognizing what works and ignoring what doesn't.”-Mark Shipman: The Next Big Investment Boom

Going back to the equities markets; to broaden your perspective, you must be enlightened that today’s activities have NOT BEEN limited to the country but is seen in most parts of the world through major benchmarks.

Figure 3: MSCI Emerging Free and the Dow Jones 1800 Asia Pacific Index

World markets are being driven to record highs following the expectations of “stimulative” monetary conditions from signals that the US FED maybe going into a “pause” (discussed last week).

Markets in the US (2000-2001 high), Europe (2001 high), in Latin America and Asia have been treading in fresh watermark highs as reflected in Figure 3, the MSCI Emerging Free Index and the Dow Jones 1800 Asia Pacific Index. This shows that Emerging market bourses, such as Brazil, Mexico and India have set new record territories which bolstered the Emerging market benchmark, while Asia’s index likewise being buttressed by record gains in Singapore, aside from near record territories by other Asian bourses as Australia, Taiwan and etc. Bloomberg’s Chen Shiyin reports, ``The Morgan Stanley Capital International Asia-Pacific Index, a dollar-based index that tracks shares in 14 markets across the region, added 2.7 percent to 140.75 this week, surpassing the previous all-time high of 140.41 set on Feb. 23, 1989. All 10 industry groups that make up the measure advanced.”

Figure 4: US Dollar Index Loss; Phisix Gains

As explained last week, the falling US dollar trade weighted index has had a “stimulative” aftereffect to emerging market assets. As such we have been seeing an accelerated increase in the prices values of world equity indices, as well as in commodities to emerging market equities.

In particular, I have noted that the Phisix experienced its cyclical reversal when the US Dollar index peaked in 2003 backed by the Fed’s flooding of the global marketplace with superfluous liquidity to arrest any prospects of deflation. The Phisix climbed at the back of intense foreign buying then until early 2005 as foreign money played the US dollar diversification theme.

For most of 2005, as the US dollar recovered on the premise of interest rate/yield differentials while the Philippine market practically stood still or traded rangebound. As shown in Figure 4, the mid April collapse of the US dollar index has been inversely associated with a positive reaction from the Phisix once again bolstered by foreign portfolio flows.

What this basically shows is that the Phisix appears to have a strong negative correlation with the US dollar index. A weakening US dollar appears to feed upon the appetite of foreign portfolio flows into Philippine assets.

Figure 5: Phenomenal Growth of Commodity derivatives

As a measure to the exponential growth of world surplus liquidity contraryinvestor.com shows us of the bulging commodities trade underpinned by exploding derivatives held by US banks!

While global monetary authorities have the power to control the liquidity valves, as to where it flows is practically beyond their reach. Here the authors of contraryinvestors.com suggest that to profit from present liquidity flows simply means to “follow the money” (emphasis mine),

``...whether the Fed is willing to admit this or not, it has become the servant to the hedge fund managers, the prop desk traders, the structured finance masters of the universe, etc. Under this set of circumstances, our best near term investment returns lie where these aforementioned allocators choose to position the Fed liquidity largesse at any point in time. And that's currently in the hard asset complex. Simple enough? Until these forces or dynamics change, we need to stay long energy, long equities benefiting from higher commodity prices, in short duration fixed income if at all, as well as long precious metals.

In short, it would be hard to call for on an interim “top” on the present momentum of the Phisix yet, if the US dollar index continues to fall on the back of increased “stimulative” conditions that has prompted for augmented inflationary expectations. Further as the financial sector liability expansion continues to feed on inflating assets and or asset markets worldwide, heightened speculative leveraging creates their own source of liquidity...

Nonetheless, the world financial markets appears to be too complacent, wearing rose colored glasses...and a word of caution from Dr. Marc Faber...``Right now, risk appetite is at an extreme and everybody is bullish about something. Investors are also extremely optimistic about the global economy. Hence the significant rise in commodity prices. However, given tighter international liquidity and weakness in U.S. housing, and the potential for equity markets to undergo a nasty correction in the next three to six months, the global economy could — for a change, after having surprised on the upside for the last three years — disappoint. If such a scenario were to play out, U.S. bonds could rebound, while industrial commodities and precious metals could sell off. Therefore, short bond positions should be covered, and traders might consider buying ten-year treasuries at yields above 4.80%.”

In short, be wary of a short term jolt. Keep your mental stops on.

Improving Your Portfolio Returns by Seeing the Unseen

``There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!”- Edward Lefèvre, Reminiscences of A Stock Operator

I have been requested by some to help improve on their portfolio returns, something which I have been attempting to do through this newsletter since 2002. Let me reword, the reason for this newsletter is to help you identify and act on investment themes or trends with an objective to attain returns greater than what is offered by the respective benchmarks in the marketplace. Unless you obtain the services of a portfolio manager, which I highly recommend for the purposes of specialization, the task to improve on your portfolio essentially falls on you, as the investor/prospective investor.

However, as stated in numerous occasions investing is fundamentally or most importantly psychological more than anything else, in contrary to what is commonly known or assumed. In the words of author Edward Lefèvre in his investment classic (said to have written on the account of the legendary trader, Jesse Livermore), Reminiscences of A Stock Operator (emphasis mine), ``But not even a world war can keep the stock market from being a bull market when conditions are bullish or bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions.” If you have noticed, appraising psychological conditions that constitute the cycles have been the focal point of this outlook since I began this lowly information crusade. All other concerns have remained subordinate. And this applies not only to the stock market but to all aspects of the financial markets as well.

Moreover, investment forecasting is NOT a practice thaumaturgy (performance of magic or miracles). In alot of instances I found it intensely difficult and even frustrating to preach about absolute returns, when expectations of me are usually predicated on short term moves. I found a passage from Mr. Lefèvre’s book applicable to my plight (emphasis mine)...

``I NEVER hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they all go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull market or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to think. It is too much bother to have to count the money that he picks up from the ground.”

Essentially this is what the public fails, if not refuses, to understand; that cycles caused by psychological shifts by the investing community underpin the marketplace. While there maybe sizeable accounts of randomness or “noise” on its daily activities, fundamentally, markets, like any aspect of our corporeal life operates under cycles.

And accordingly, as stated above, in most instances, similar to the narrative of Mr. Lefèvre, I find that the average investors indeed want something for nothing, such that in most cases, I am often expected to deliver short term winning formulas or a nostrum which essentially is a deliverance from one’s “gamblers’ ticks”.

And this is where the stock touts as seen in most conventional brokers and their coterie of analysts thrive, by mostly advancing PAST information and projecting them into the future. By deluging you with stock particulars, they induce you to trade frequently, which basically go against the goal of achieving above average returns, in the treasured words of the Oracle of Omaha, Mr. Warren Buffett, ``For investors as a whole, returns decrease as motion increases.” These stock touts often cannot distinguish the proverbial ‘forest from the trees’ simply because it is not their interest to do so. Their revenues models are not derived from bolstering your returns but from churning transactions.

Further, by pounding on you with past financial details aggravated by the “implied effects” of current events, they foster upon the public the fundamental foibles of the average investors; the mental short cuts or “heuristics”, namely the survivalship bias, overconfidence, anchoring, Loss Aversion/prospect theory, framing, mental accounting/rationalization, Regret theory and the comfort of the crowd/fallacy of the typicality (see August 18 to 22, 2003, Stock Market 101 on Cycles, Investor Psychology and Behavioral Finance). For instance, journalists from the mainstream media are wont to paint the picture (“framing”) abetted by the experts, during days when the markets traded lower as oil prices coincidentally goes up, of a causality based on oil price movements on the market. Sounds familiar no?

Figure 1 Dow Jones World Stock Index (black line) and the WTIC Crude benchmark (red line)

Say it isn’t so! The Picture is a fact as Ludwig Wittgenstein, Austrian-British philosopher once wrote; the three year chart of Crude Oil West Texas Intermediate (WTIC) and the Dow Jones Word Index certainly disproves such assertion so far. Yet, as mentioned above, you would hear commentaries flooding allover mainstream media from the so called experts to the lay persons of the highly touted “inverse correlation”. Such is an example of mental short cuts called as the fallacious “rationalization” of events to the markets. ``Either they're trying to con you or they're trying to con themselves.” observes Warren Buffett on financial analysts.

This is not to suggest that such correlation will be perpetual. A correlation is a correlation until it is not. For me, the reasons why oil and global stock markets have shadowed each other are due to the following:

One, oil has not yet crossed the ‘threshold of pain’ as to drain liquidity away from the financial system.

Second, speaking of liquidity, inordinate amounts of money and credit has been flooding the global financial system, causing the purchasing power of fiat currencies to fall against assets or, as seen on a mirror viewpoint, excess money have been simply chasing for yields, driving a diverse range of asset prices higher...including oil.

Figure 2: Gavekal Research: US and Japan Dumping Money in to the System

Figure 2 from Gavekal Research shows that the Japanese monetary base has been allowed to double in very short periods of time or in about three years, thrice since 1971. In fact, according to Gavekal Research, the Japanese Monetary base is currently even larger than the US! They are suggesting that the gradual reversal of the current monetary Quantitative Easing (QE) policy and the prospective lifting ZIRP (Zero Interest Policy) could lead to a possible meltdown in global bonds bolstering my case (see March 27 to 31 edition, Listen To Your Barber On Higher Rates and Commodity Prices!), as exported Japanese capital ($1.8 trillion!!!...or about 15% of US GDP or 3% of US assets) may find its way back home. But that is another story for our future outlook.

Lastly, the synchronized movements of oil prices and equity assets could be reflective of a global economy running on full throttles.

So essentially, it does not necessarily follow that high oil prices would lead to a lower market, as the causal association has rather been flimsy or outright tenuous, for the time being. In fact based on the historical data, as shown by Figure 1, it could be said of the reverse; particularly higher oil prices have led to higher markets values for equity assets or in a different plane, higher assets values for global equities have led to higher oil prices! Take your pick.

Going back to the main issue, it is also in the marketplace where such inferences (the act of deriving a logical conclusion from a premised believed to be true), assumptions (something accepted as true without proof) and cognitive illusions (illusion of knowing) are largely utilized by the average investors as basis for their decisions, the major attributes of investor losses. Unless one learns how to separate the “chaffs from the grains”, when the tide goes out one will learn who’s been swimming naked or who’s been surfing on plain ol’ Lady Luck.

You see, rising markets breeds many soi-disant geniuses. Rising markets will similarly lead to investor overconfidence. And since markets operate on cycles this means that many of the late comers and their attendant ‘genius’ experts will get burned arising from sheer imprudence or recklessness in the future as the cycle turns. Count that as a fact, it always does. Greed, Fear and Hope always dominates the market, as it has been, since time immemorial. As George Santayana wrote in The Life of Reason, ``Those who cannot remember the past are condemned to repeat it.”

I have dealt frequently with the unseen variables over the mostly macro facets and on some domestic economic and financial market issues. The information I have imparted to you have not been conventional, yet, they would appear to have validated my prognosis over time’s progression. I know it could have been outright serendipity or just plain luck. But at least, I am pleased to have been fortunate or blessed enough to have rightly called on the major turns or inflection points in the financial markets, be it the Phisix, the Peso, the Mining index/industry, the US dollar, Gold or commodities. Thank you, Lord.

Yet, all these could also have been a matter of visual processing, or the sequence of steps that information takes as it flows from visual sensors to cognitive processing (wikepedia.org), at the margins. The picture below (Figure 3) is a test of your visual processing, something which is commonly applied to investing.

Figure 3: Visual Processing Test, from Robert Ringer of Early to Rise

According to Mr. Ringer, If you are able to spot the object above then your visual processing is probably good. If you can’t get it, then try rotating the picture clockwise or look at it on a landscape format. If you are still having a hard time figuring it out, then probably it is an indication that you have probably some difficulty with your visual processing.

This isn’t an abstraction or illusion, it’s an actual picture. It’s actually a picture of a cow or of a cow’s face.

The point is, to quote Mr. Robert Ringer, ``we often look directly at things, yet still do not see them.”

Reuters: Commodities hold key to economic power

According to Pratima Desai of Reuters, ``Raw material resources will determine country rankings in the world economic pecking order in years to come as strong demand and limited supplies ensure commodity prices hold their upward trajectory.”

"But in the main, investments will be concentrated on things to do with commodities, whether they be stocks, bonds or currencies such as the Canadian or Australian dollars." Notes David Murrin, chief investment officer at hedge fund Emergent Asset Management.

Oops, Record High Oil Prices Means Higher Mining and Oil Stocks!

I have to admit, the recent “euphoric” bouts of buying activities in the mining and oil sector has given me some apprehensions about a possible “top”. In fact, I’ve taken such opportunities to liquidate some of my trading positions. Yet it appears that the gravity defying momentum of oil and mining stocks appears to remain solid amidst an overbought backdrop.

Technicians or price action watchers known as Chartists have been blown off by the recent surge. Most of them have sold out or have been left behind, following the two week frenetic run, where the Mining and oil index have gained by almost 1,000 points or about 25% (and is up about 77% up from the first week of the year). Such is the flaw of trying to “time” the markets, because markets can remain irrational than one can remain solvent to paraphrase the preeminent economist John Maynard Keynes.

Nonetheless, in the past three trading sessions, from April 11-17, the Mining and Oil Index took the top spot in terms of Peso trading volume relative to the different sectors! Moreover, the mining and oil index appears to have generated its distinct sentiment relative to that of the Phisix. Put differently, the performance of the sector has been independent to that of the Phisix. Apparently, these are seminal manifestations or indications of the times to come.

At present, the Mining and oil index appears to be at still overbought levels, hence, a trading sell, in my view. However, despite the overbought conditions, one may be compelled to buy back ASAP due to Friday’s noteworthy surge to nominal RECORD highs by the world oil benchmarks, the West Texas Intermediate Crude (WTIC), as shown in Figure 1, and the Brent Crude, accompanied by a broadbased metal rebound. In New York, WTIC closed at $75.15 per barrel while Brent crude closed at $74.56 in London.

Figure 1: WTIC Crude courtesy of stockcharts.com

Of course, rising crude also translates to rising prices in other commodities. After a severe one-day profit taking last Thursday, Copper and Gold staged a dramatic reversal on Friday with Copper on a FRESH RECORD high, up 11.38% for the week to $3.0985 per pound! Gold, the metal sibling of oil, likewise stormed back to over $630 per oz also at milestone highs!

One has to keep in mind that rising commodity prices could be indicative of declining values of Paper based money or the present US dollar standard system. Even the proponents of deflation have now been raising concerns about the attendant emerging incidence of growing inflation.

You see by theory, paper based money and credit can be issued infinitely relative to the finite supplies of commodities, ergo, too much supplies means falling values of paper money or as manifested in the present case, the surge of commodity prices. For instance, while media has noted of rising Gold prices quoted in US dollars, what has not been said is that Gold has surged across the spectrum of major Fiat Currencies, as shown in Figure 2. Even against the top performing Canadian dollar, Gold still asserting domination.

Figure 2: Gold Surging against the Canadian "Loonie" Dollar and the Japanese Yen (courtesy of Fullermoney.com)

This means that global investors have been slowly monetizing gold as an alternative currency, something we have argued about since 2003. The public has taken gold as a safehaven against the loss of purchasing power by the overissuance of paper based money and credit.

Now, since the locals have gradually imbued of these developments and learned how to price mining and oil stocks with that of its underlying products; with the present surge in commodity prices, you can expect another round of frenzied buying frenzy at the Philippine Stock Exchange next week.

Notwithstanding, the nominal record high set by Crude Oil prices, aside from the inflationary manifestations, are also about investment cycles and geopolitical considerations, something we discussed last May 2 to 6, 2005, The Cure Is Worse Than The Disease. One can expect that, with the present imbalances that have led to a tight margin exacerbated by present geopolitical conditions, these are recipes for new RECORD oil prices...Think $100 per barrel!

For instance, the 15 permanent and elected members of the United Nations Security Council are scheduled to meet on April 28 at its New York Headquarters. The US and Britain have been rallying for support on tougher actions against the largely defiant Iran. A sanction against Iran could be imposed and the drums of war can now be heard from a faint distance.

We must not forget that an estimated 743 billion barrels (see Figure 3) or over 66% of accrued world oil reserves are held by the Mid-East countries. Such that any military conflict or escalating unrests, e.g. Iraq’s majority Shia is supported by Iran, in the region could affect or risks cutting off or destabilizing the world’s oil supply link.

Figure 3 Distribution of World’s Reserves courtesy of Martin Weiss of Money and Markets

Furthermore, any events that may lead to the closure of Strait of Hormuz (see Figure 4) where 40% of the internationally traded oil’s passes through could cause an oil price spiral to over $100 per barrel!

Figure 4 Strait Of Hormuz courtesy of globalangst.blogspot.com

Notwithstanding you have further tensions in Nigeria, Chad, and Latin American States as Venezuela. Aside, you have news about the declining or “peaking” of oil output from major oil field as the Burgan oilfield in Kuwait, and the second largest producing oil field in the world, the Canterell oilfield in Mexico. In short, whether you believe about the Peak Oil theory or not, present demand and supply conditions are so tight that any incidences or events that may snap or tilt the present imbalances may lead to spiraling oil prices! The greater risks is for an upside rather than a downward move for oil.

To repeat the my above quote of Albert Einstein “We must learn to differentiate clearly the fundamentally important, that which is really basic, from that which is dispensable, and to turn aside from everything else, from the multitude of things which clutter up the mind and divert it from the essential.” What is essential to understand with the current developments is that the publicly listed oil companies act an insurance against any risk of an oil price shock which may worsen as geopolitical conditions have been threatening to escalate. Put bluntly, it pays to be invested in oil explo companies as an insurance against escalating oil prices.

Since oil exploration and production companies have existing reserves, even when most of them are not operational, rising prices of oil would translate to an increase of their asset values and should likewise be reflected in the share prices.

As discussed last year see August 1 to 5 edition, Hidden Wealth in Philippine Black Gold Stocks, oil stocks remained at the fringe for quite a time until its recent renaissance.

For the week, local investors bidded up domestic oil companies as Oriental Petroleum (+33%), Philippine Overseas (+29.03%) and PetroEnergy (+82%). With oil prices carving out new highs, one can expect these companies to shadow oil prices and similarly outperform together with the movements of their siblings, the mining stocks.

As for me, I would be compelled back into the market given the present circumstances regardless of what the technical indicators say. Besides since commodities are presently in a bull market, any mistakes should easily be covered, to quote the veteran Richard Russell, ``A bull market tends to bail you out of all your mistakes. Conversely, bear markets make you PAY for your mistakes.”

For one to achieve outsized returns, it takes to know WHEN to have the fortitude to take the necessary risks. And Time is NOW!

Philex and Copper: Testing the Limits!!!

Interesting times indeed. Defying gravity and chart indicators, the exemplary strength exhibited by Philex has been simply amazing. Aside from leading the Mining index, its present price dynamics has now turned parabolic!

Figure 1: Philex B

In trying to figure out why Philex has behaved in such bizarre manner, your analyst stumbled on a paragon that appears to resemble its present comport. Philex’s major product Copper has likewise done an equally breathtaking stunt! A historical record run out of severe fundamental imbalances....

Figure 2: Copper Prices courtesy of stockcharts.com

Notice that while copper has consolidated sometime February, Philex, after having peaked in January, has basically mimicked its moves with both breaking out of the area of indecision by March to carve fresh record heights.

In short, Philex has been priced by the market, thus far, as a proxy to copper such that for as long as copper continues to defy gravity, outperformance from the Philex can be expected should the correlation persist. As the illustrious John Maynard Keynes once said, the market can remain irrational longer than you can remain solvent.