The Prudent Way To Profit From IPOs!

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

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

The Prudent Way To Profit From IPOs!

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

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

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

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

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

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

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

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

Prevalent IPO Fallacies: Confirmation Bias and the Greater Fool Theory

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fundamental Analysis or Rationalization?

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

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

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

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

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

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

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

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

Market Cycles Determines IPO Activities Over the Long Run

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

Figure 2: PSE: IPO TRENDS follow Market CYCLES!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some important lessons gleaned from the aforementioned experiences are:

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

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

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

Remaining Neutral But On A Bullish Bias As Market Sentiment Recovers

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

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

Figure 4: Stockcharts.com: Falling US dollar

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US Market Internals Indicate of Prospective Heightened Volatility

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

US Subprime Woes Spreading; Feedback Loop Dictated by Market Ticker

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

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

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

Figure 3: BCA Research: Subprime Weakness and Systemic Risks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is where our selling stops should be in place.

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

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

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

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

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

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

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

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

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

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

Every Action Has A Consequence; An Equal And Opposing Force

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

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

Figure 4: Northern Trust: US GDP

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

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

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

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

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

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

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

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

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

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

Until then, MIND your stops!

Our Phisix Outlook: From Bullish to Neutral

``Faced with the challenges of managing policy in an increasingly integrated world economy, the dominant instinct of officials is often to try to shield the economy from volatility. But the crises of the 1990s helped demonstrate why this approach can be both futile and counterproductive. As economies become more open to capital flows, policies designed to insulate an economy from external shocks, whether they be fixed exchange rate regimes or selective capital controls and restrictions on international transactions, rarely offer durable stability, and they bring additional risks. These risks come in the form of additional distortions that might undermine future growth or magnify vulnerability to future financial volatility. The more promising approach is to invest in the complement of institutions and policies that enable an economy to live more comfortably with openness. Focusing on those measures that will enable an economy to be more flexible and to adapt more quickly to change ultimately will be a more effective policy strategy. It is politically more difficult, but economically more effective than those solutions that seem to offer protection from competition and volatility.”-Mr. Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, Trends in Asian Financial Sectors Conference, Federal Reserve Bank of San Francisco, San Francisco, 20 June 2007.

In this Issue:

Introspection on the US Markets and the Phisix
Deterioration in US Market Internals
Taxing Out the Bulls…
As the Yen hits Milestone Lows, We Monitor for Emergent Volatility
Our Phisix Outlook: From Bullish to Neutral

Introspection on the US Markets and the Phisix

THE performance of the Phisix remains remarkable so far, up .81% for the week and up 24.7% year to date. As we have always asserted, this has been so NOT MAINLY because of locally driven factors but because global conditions have prevailed which has been similarly manifested by a mostly buoyant activities in world equities. In our view, it has been the global central banks’ inflationary bias that has determined today’s financially driven asset based world economies.

Where today’s financial markets reflects heightened financial interlinkages and have grown increased correlations relative to its contemporaries compared to the previous years, it has become an imperative to examine the performances of the present stewards in today’s market actions.

Again, US markets has served as a sort of an “inspirational” pacesetter to global markets as much as to our own Phisix. While indeed the US markets have spearheaded a global rebound since February’s “Shanghai Surprise” as reflected by the advances of its key bellwethers such as the Dow Jones Industrials up 6.8%, S&P 500 5.9%, Nasdaq 7.2% based on Friday’s close, this confounding optimism comes curiously in the face of an economic “slowdown”.

What has been observed is that despite the unraveling bust in the real estate sector and continued concerns over the possible ramifications of the subprime mortgage woes, the continued levity in the financial sector has helped buttressed sentiment in the equity benchmarks, giving a picture of a largely unscathed economy, until today…

Figure 1 S & P: Sectoral Breakdown of the S & P 500

According to the sectoral breakdown of the industries of the major broad market barometer in the market value weighted S&P 500, the financials constitute a hefty 21.6% weighting in the index’s universe. What this means is that banks, investment houses, brokers-dealers, mortgage entities, insurances and other financial services represent the largest market cap weightings among US industries.

Figure 2: Yardeni.com: Profits from Financial versus Non-Financial

The significance of the financial sector has not been solely in terms of market value. Relative to corporate profits as shown in Figure 2 courtesy of Yardeni.com, the financial sector signifies about two-fifths of profits generated by Corporate America (All Corporations-Nonfinancial corporations).

Recently, the US financial markets was said to have been rattled by concerns of the recent spike in treasury yields, possibly signifying rising interest rates, as well as, persisting concerns of a possible diffusion by the deterioration in the finances of the housing related sectors. As of late, according to implode-a-meter.com 86 US lenders have now gone kaput.

To add to the lingering anxieties over the broadening of the housing epicenter based tremors, the current brouhaha over the failing hedge funds and Collateralized Debt Obligations or CDO’s appears to have signaled the proverbial “canary in the coal mine” as epitomized by the Bear Stern’s case where the investment house had been forced to bail out one of its two collapsing hedge fund due to substantial losses in the complex portfolio of structured finances (mostly from CDOs).

Lest we fall for the common man’s confirmation bias folly, or a cognitive bias which tends to show how we interpret events to confirm our preconceptions, we’d rather let the market to do the talking.

Deterioration in US Market Internals

Figure 3: Stockcharts.com: Financials Rolling Over?

Earlier we have shown the importance of the US financial sector to the US economy (relative to profits) and to the equity markets (relative to market value weightings). In Figure 3, the charts of the 4 financial benchmarks, S&P Bank Index ($BIX-lowest panel), Broker/Dealer Index-AMEX ($XBD-upper panel below the main window), Dow Jones US Mortgage Finance Index ($DJUSMF-upper window), and DJ US Financial Services Index ($DJUSFI-Center window) appears to be indicating an all important turning or inflection point.

The Bank and the main Financial Index has depicted lower highs and are at present working to test on critical supports, while the Mortgage Finance have broken critical support and appears to be rolling over, whereas the Broker/dealer index is drifting within the support areas.

Figure 4: stockcharts.com: More bad news?

Notwithstanding, we see other sectors of the S & P 500 (center window) likewise in rapidly deteriorating mode, particularly the S&P 500 Consumer Discretionary Sector Index which represents 10.5% of the index ($SPCC-upper pane below the center window), S&P Healthcare Index 11.9% of the index ($HCX-lowest window) and the Dow Jones Utilities 3.7% of the index ($UTIL- above pane).

Even the consumer staples 9.6% of the S&P benchmark (not shown in the chart display), which traditionally represents defensive plays (food/beverages, prescription drugs, tobacco and households products), have been shown on a downdraft much earlier than the recent actions in the major benchmarks, alongside with the Telecom services (3.7%).

Likewise, the Dow Jones Transports, a third component in the Dow theory, where the activities of the Utilities, Transport and the Industrial Averages have been used as indicators to either confirm each others actions in support of a trend or deviate to possibly indicate of an inflection point, has been shown in divergence with the Dow Industrial Averages and seen headed south. If such theory holds its utility then the declining Utilities and Transport are indicative of a declining Industrials.

On the other hand, the sectors keeping up the major bellwethers at their present elevated levels are the Energy (10.1% of the index), the Industrials (10.9%), the Info tech (14.9%), and the Materials (3.1%) sector.

In short, of the ten composite industries of the S&P 500, 6 industries representing a significant majority led by the financials, or 61% of total index weightings are presently showing signs of marked deceleration based on price actions.

So what we are so far witnessing are indicators of degenerating market internal actions which could lead to further selling pressures. As to whether the abovementioned fundamentals have prompted these remains to be seen.

Taxing Out the Bulls…

In addition, there could be other fundamental variables that could weigh in for the advantage of the bears. A much less talked about issue by the marketplace is that of taxation.

One of the structural boosters to the recent bout of buying has been due to the “shrinkage” of equity supplies brought about by the private equity boom, the supposed participation by sovereign wealth funds and massive buy backs from US corporations.

One taxation headwind entails a potential curb to the present pace of buyback based on the amended regulation that would close the circumvention of a tax law covering present repatriated earnings.

There have been some foreign subsidiaries of US companies like IBM that have taken advantage of certain legal loopholes to avoid on paying regular corporate taxes on repatriated earnings (IRS section 367 B) known as “Killer B” transactions which it had used to buyback shares.

Recently the US Internal Revenue Services (IRS) discovered the leakage and acted to plug on it, according to Gwen Robinson, whose article was posted at the FT Alphaville (highlight mine), ``On May 31, the IRS announced plans to issue regulations making companies pay US taxes when they buy back their stock, even if the shares are purchased by an international subsidiary. It said the planned ban on the practice would take effect that day, even though the regulations would not be finalised for some time. The new regulations would treat funds used for buybacks as repatriated earnings, making them subject to US corporate tax rates that are usually higher than international rates.”

Simply stated, by lifting the tax incentives to use repatriated earnings to buyback shares, the issue of equity supply shrinkage as a booster to the markets via buybacks from foreign subsidiaries of US companies could have been effectively reduced.

And as if by sheer coincidence we see MOST of the weaknesses from the US markets coming off after the IRS announcement. This is not to imply that the tax laws had CAUSED the decline, but instead to point out that such actions COULD have contributed to the apparent weakness seen lately.

Then there is another tax aspect. This one had been more visible than the “Killer B” transactions as it takes on the much ballyhooed private equity industry.

The US Congress recently proposed to tax the private equity industry that availed of special capital gains tax rates from “carried interest” provisions, as if direct its target to the recent Blackstone IPO.

According to the CNNMoney (highlight mine), ``Carried interest is a portion of the profits from an investment that's paid to the manager. In the private-equity business, it's often used to compensate managers for investing alongside their clients in a buyout.”

Mr. David Kotok of Cumberland Advisors says that such law/s will unduly undermine the incentives for private equity transactions, another pillar for today’s rising markets, quoting Mr. Kotok (highlight mine), ``Private equity deals are measured by the net present value of the exit strategy. Tax rates are a huge part of that calculation. Hence, this tax change is big and it reduces the present value of any future transaction.”

Adds Mr. Kotok (highlights mine), ``Markets are affected even if this never becomes law. The reason is that there is no way to know if it will pass and therefore any new private equity deal may be subject to the new tax structure. Our system exposes taxpayers to taxation once the law is introduced. If it is passed in the future, the date of introduction can govern the start of the tax impact and not the date of passage.”

With governments attempting to tax at everything that seems profitable, it wouldn’t be long where a series of unintended consequences could arise.

As the Yen hits Milestone Lows, We Monitor for Emergent Volatility

Finally there is the issue of the collapsing Yen.

Figure 5: Jack Crooks: Milestone Low Yen on Huge Open Interest Level

The Yen recently hit milestone lows relative to other major currencies. Against the Euro, the Yen fell into an all time record low level. Against the British Pound, the Yen fell to a fifteen year low, while vis-à-vis the US dollar the Yen fell into a four and a half year low.

This has been astounding in spite of the record trade surpluses and foreign exchange reserve buildup. It is remarkable how Japanese resident investors in search of higher returns have invested enormous amounts overseas compounded by the “carry trade” phenomenon which has led to such disproportionate decline to their currency.

While a declining yen could imply for further marketplace liquidity brought about by increased arbitrage to “riskier” assets, as Jack Crooks of the Black Swan Capital points out, the huge open interest in the bet against the Yen makes it appear as if there is no way for the Yen to go but DOWN!

Open Interest is the total number of futures or options on futures contracts that have not yet been offset or fulfilled for delivery (cme.com).

The significance of an open interest in the futures market is that it reveals the prevailing investor sentiment. According to George Kleinman, editor of Commodities Trends is that (highlight mine)``The size of the open interest reflects the intensity of the willingness of the participants to hold positions. Whenever prices move, someone wins and someone loses; the zero sum game. This is important to remember because when you think about the ramifications of changes in open interest you must think about it in the context of which way the market is moving at the time. An increase in open-interest shows a willingness on the part of the participants to enlarge their commitments.”

In Figure 5, courtesy of Jack Crooks, Yen’s record low decline against the US dollar has been accompanied by a huge spike in open interest.

In other words, investors have taken the decline of the Yen as a ONE WAY BET. And as a market saying goes, when everyone thinks the same then no one is thinking.

One way bets implies that an inflection point is imminent; this should also hold true with regards to the Yen. And a volatile yen could easily translate to equally volatile markets worldwide if one goes by the past behavior of a rising Yen. Recall the May 2006 and Feb “Shanghai Surprise” volatility? They were accompanied by a spiking Yen.

Our Phisix Outlook: From Bullish to Neutral

The coming week could be very interesting indeed. We could probably see a continued selloff in the US markets or a rebound off from the lows or a period of indecision or consolidation with a downside bias.

However, with the sentiment momentum going for the bears, aside from the deterioration in US market internals, and fundamental obstacles to the present bullish drivers, I am inclined to take the position that the US markets could try to ingest more profit taking sessions over the coming week or so.

Note, there is a difference here; I am predisposed to view of the any downdrafts as mere corrections or profit taking than a crisis at work, until of course proven otherwise.

As for the Philippine market context (as well as for most of its neighbors), there are two opposing forces at work.

On one hand, the bearish side is that as mentioned above, declining US markets could imply for a “short-term” spillover into the global markets. This would highly depend on the degree of volatility in the US markets.

However, the present market reactions have been distinct from the past. During the past encounters of volatility, we saw the US dollar firming, a broad “risky” asset class selloff (emerging markets, junk bonds and commodities) and a rally in US treasuries (declining yields).

On the other hand, the bullish premise for the Asian markets remains as formerly argued, the softening US dollar.

Today, we see a semblance of the “stagflationary” outcome similarly seen in the 70-80s, while one week does not a trend make, last week’s actions showed that infirmities in the US equity markets (Dow Jones Industrials and the S&P 500 down 2% over the week while Nasdaq down 1.44%), have been conjoined with a stubbornly high US treasury yields (drifting at the upper range; or at 5.138% from last week’s 5.17%), rising oil prices (WTIC over $69), relatively high commodity prices and most importantly a falling US dollar.

Another interesting aspect is the potential for a divergence to emerge, where Asian markets may continue to rise amidst a struggling US market, which actuality is long term expectation. Be reminded that the divergences could emerge only under the premise of orderly developments and not from excessive volatilities.

Where in the past the Phisix fell hard and steep as the US markets got clobbered, recently we have encountered sessions wherein steep declines in the US markets resulted to marginal declines in the Phisix.

With two contrasting forces, it would be difficult for us to make a short term call on the overall direction of the market.

From our end, we shift our outlook from bullish to neutral stance for the time being and would remain vigilant as to any incidences that may reflect an adverse “tailed event”.

Mind your stops.