Firm Peso Reflects Flood of Foreign Capital into Philippine Assets

``There is a tendency for things to right themselves." - Ralph Waldo Emerson

Similar to the previous weeks, Philippine assets have been on a roll!

Local sovereign bonds continued with its upward march, which brought down yields, as the Bangko Sentral ng Pilipinas (BSP) restructured its lending rates, notes Clarissa Batino of Bloomberg, ``The central bank yesterday introduced three rate levels for bank deposits, maintaining a 7.5 percent payment on amounts of up to 5 billion pesos. Interest on deposits of up to 10 billion pesos was cut to 5.5 percent, while sums in excess of 10 billion pesos will get a 3.5 percent rate.”

In the meantime, the Phisix was equally in a bedazzling motion to post another exceptional week up 2.39%. However, despite its outstanding performance, the Phisix landed only fourth in the region, following the phenomenal advances of China’s Shanghai composite (+3.27%), Indonesia’s JKSE (+2.55%) and Hong Kong’s Hang Seng (+2.47%).

And in contrast to country-specific vainglories attributed by our local “experts”, our position has been that these unfolding developments has been a global phenomenon with the Philippines benefiting from the flux of excessive creation and intermediation of money and credit on an international scale, as shown in Figure1.

Figure 1: stockcharts.com: Dow Jones Asia Ex-Japan (candle), and Dow Jones World (black line)

Like our Phisix, global markets have been on a tear. Albeit, the Dow Jones World Index appears to phase in an incipient correction mode as US markets take a breather. Notice too that like our Phisix, at the lower pane, technical indicators as the Relative Strength Index (RSI) have been drifting in the highly overbought zone.

Of course, we do not discount local developments as possible variables that could HELP influence present market psychology or sentiment, as the recent upgrade of the international rating agency, Moody’s Investors Services, on our credit rating outlook. Although, my view that is that the Moody’s upgrade has been simply a consequence to the gains of Philippine assets or that they have positively reacted to the snowballing trend of portfolio money flooding into Philippine and emerging market assets, which prompted such upgrade. Just consider, over the past three weeks, the Phisix recorded an accrued gain of 8.2%, which means even without the latest Moody’s edict issued last Thursday, the Phisix has been on a winning streak.

Naturally, the tidal wave of foreign money flows into Philippine assets reflects on our local currency, the Peso (up 6.4% year-to-date), as shown in Figure 2.

Figure 2: Rising Peso Correlates to an Ascending Phisix

In the previous rising stockmarket cycle during 1986-1997, I do not recall (sorry, no data on this, although I’ll try to work this one out with the BSP/PSE) the Peso as having been a significant factor in buttressing its past ascent. This makes the recent developments of rising currencies in the region a structural factor which should further boost the region’s financial markets over the LONG RUN. According to Denise Kee and Wes Goodman of Bloomberg (emphasis mine), ``The Asian bond market outside Japan will grow 10 percent to 15 percent a year to $10 trillion by 2015, said Heng Swee Keat, managing director of the Monetary Authority of Singapore. The market has grown to $2.7 trillion this year, making up 45 percent of Asia’s gross domestic product excluding Japan…That’s up from $600 billion in 1997, when the bond market made up 20 percent of GDP, he said.” If such projection materializes for the bond markets you can likewise expect the region’s stockmarket to likewise flourish. Since markets are mainly about expectations, I’d like to reemphasize the phrase, OVER THE LONG RUN, as to clear myself.

Over the short-term, I have made my case on the Phisix last week, having said that the GIST of the GAINS have had already been made, or to put bluntly, the Phisix nears its interim zenith. Yes, all these DEPEND on the external activities or conditions thereof which are centered mainly in the US.

I do not dispute that the Philippine benchmark may be headed for 3,000, if the momentum continues, despite its strenuously overbought conditions. Because markets are mainly psychological based, emotional rapt may bring market levels to the extremes, which may be described as parabolic movements. There could be short-term pullbacks though, as we have seen in the Dow Jones World Index led by the US over the week, which could also inspire a related retreat in the domestic arena, but what concerns your analyst is the major one, one that could see the Phisix drop by as much as 10-15% as discussed last week.

Figure 3: Number of Trades per Day

For the moment, we can expect the Phisix even amidst any minor correction to be engaged in sector rotational plays. While the locals have been as bullish as overseas investors, as measured in the number of trades, we have yet to attain the height of overconfidence similar to early May of this year, where the number of trades hit 9,000 to 11,000 per day, as shown in Figure 3 to signify a TOP! The momentum appears to be building for another spike ~of investor overconfidence (see red arrow and take note of the twin spikes).

And to remind you that markets operate under mean reverting tendencies, such that any further outperformance by the PHISIX, which is up 32% year-to-date on its 4^th year of consecutive advances, enlarges our risk factor of having a negative annual return for the Phisix in either 2007/2008.

On the other hand, a bullish trend of the local currency or peso may yet underpin the persistent vim in the Phisix if one would consider the outlook of Morgan Stanley’s chief currency analyst Stephen Jen (emphasis mine), ``In recent weeks the CNY (China’s Yuan), the SGD (Singapore Dollar), the THB (Thai Baht), the KRW (Korean Won) and the INR have outperformed the IDR (Indonesia’s Rupiah), the MYR (Malaysian Ringgit), the PHP and the TWD (Taiwan Dollar). I expect the latter four to gradually catch up: There is no reason why the still high-yielding IDR should not benefit from the normalizing risk pattern, and the MYR should rise with the SGD.” What Mr. Jen suggests as driver to the prospects of the firming four currencies is of the underlying currency’s yield premium/spread, or interest rates on the respective local currencies relative to the US Dollar or to the other ascribed pairs.

Of course, Mr. Jen’s forecast are predicated on the following conditions: US having a soft-landing, ``benign rotation of growth away from the US to the rest of the world” or essentially a decoupling, continued net equity inflows to the region, USD/CNY steady but orderly decline, continued retention of the Hong Kong Dollar’s peg and lastly, due to saturated levels of US dollar reserves, Asia ex-Japan Central Bank’s lesser degree of intervention.

While I am acquiescent with most of the conditions, the US soft-landing side is a continuing concern where because of the past occurrences, probabilities makes a soft landing a very unlikely scenario, in my view, in contrast to the consensus. In the invaluable words of Bond Guru Pimco’s William Gross (emphasis mine), ``Financial innovation, central bank transparency, and even globalization’s great moderation of economic volatility are powerful arguments suggesting the old days of copious Alpha and Beta are over because 5% GDP growth and compressed risk spreads are not likely to permanently return to historic levels. Yet we have a collective sense that risk spreads will not remain so low over the next 12-24 months, and that instability – whether it be sparked by U.S. housing, global overinvestment, or geopolitical events – will one day temporarily resurface.” Mr. Gross’ 12-24 months probability of a volatility spike resonates with my risk factor of a negative annual return for the Phisix in 2007/2008.

Figure 4: Chartoftheday.com: Breakdown by US Single-Family Home Prices

As we have previously noted, loose money and credit conditions still overwhelm any weaknesses seen in the US real estate sector that has prompted significant “rotational” activities such as a boom in US equities, corporate M&As, commercial real estate, etc. The full impact of an economic slowdown brought about by the retreat of the US real estate industry, which is already in a recession, has yet to be felt (with the consensus largely dismissing the prospects of a recession). Figure 4, courtesy of chartoftheday.com shows of the breakdown of the US Single-home prices.

Figure 5: stockcharts.com: Bottoming out of Treasury yields?

Yet, if expectations for a continued loose credit and money conditions or Fed rate cuts have been the impetus for the recent explosion in equities, then Friday’s activities in the bond markets as signified by 10 US Treasury year yields could possibly be ominous or the proverbial “taking away of the party’s punchbowl” as shown in Figure 5, where US T-yields (red candle) have declined (red arrow) in conjunction with the a Dow Jones Industrial Averages (black line; blue arrow). The yield spike was mainly a reaction to the declining unemployment rate.

While of course, we know that one day does not a trend make, what is notable in the chart is that the benchmark yields appears to form a double bottom pattern which could mark an important inflection point, if the succeeding price actions will affirm such behavior.

Notice too that the recent bottom has also coincided with the peak in the main Dow Jones equities bellwether.

This leads us to assess and/or project that a breakout of the Treasury yield at 48.5 (resistance level) would imply a confirmed reversal of the bond rally, heightened inflation expectations, an increased possibility of the US Federal Reserve to take additional action or increase its short-term rates and increased pressure on equities. Until then, I think, the Dow’s recent decline has been mainly due to technical factors.

Asia’s Micro Bullish Case: Dividend Yields and RoE

``ASEAN is something of the forgotten entity in Asia these days as investors obsess over China and India. Still it is a very large region with many unique strengths and we remain focused on its long-term potential as a home to many excellent Asian companies. Thailand is one of the world’s great tourist destinations and one of the largest agricultural exporters. It has quietly built a significant automotive industry in recent years. Singapore has come out of a long slump and is enjoying the lowest unemployment rate in over a decade. Indonesia has been a darling of global investors and its very young democracy continues to make progress against a host of challenges. The region is finding a way to provide goods and services to China, Japan and India, with entrepreneurs as the real driving force, not the politicians or generals.”- Mark W. Headley, President and Portfolio Manager, Matthews International Capital Management, LLC

Finally, going back to Asian markets, the bullish case for investing in equity markets in Asia aside from the macro prospects are also due to the corporate fundamentals, i.e. steady improvements on Return on Equities (RoE) and above par dividend yields

Figure 6: Guinness Atkinson Funds: Steady Improving Returns on Equity

According to the latest Asian Brief by Guinness Atkinson Funds (emphasis mine), ``Over the last eight years attitudes in Asia have changed; markets and customers have grown more sophisticated as have the companies that serve them. Asia is still a high growth area and there are young and high growth companies emerging all the time. But there are now many more established businesses operating in this high growth region. These businesses now focus more on their main activities, have divested non-core divisions and are concerned more with profitability than empire-building.

``This has led to a big increase in the number of dividend paying companies in Asia and has also led to Asia becoming one of the highest yielding regions in the world…It stands in marked contrast to stocks in developed markets such as the US where the dividend yield is hovering around 2% and where the payout ratio has declined over the past 10 years.”

	Dividend Yield 2006E (%)	Dividend Yield 2007E (%)	Payout Ratio 2007E (%)
China	3.17	3.83	41.86
Hong Kong	3.64	3.99	52.97
Indonesia	3.52	4.50	49.10
Korea	2.23	2.54	23.63
Malaysia	4.62	4.62	57.85
Philippines	3.89	3.38	45.60
Singapore	4.58	4.11	58.88
Taiwan	3.95	4.48	55.45
Thailand	4.83	4.92	44.82
India	1.70	1.89	20.94
Asia ex Japan	3.29	3.65	41.43

Table 1: Guinness Atkinson Funds: Asian Dividend yield

Corporate fundamentals, aside from the hunt for yields, have been the flanking support drivers for the Asian Markets, backed by many high growth areas/opportunities, improving returns on equities and rising dividend yields in general (except the Philippines, Singapore and Malaysia), as shown in Figures 6 and Table 1, courtesy of Guinness Atkinson Funds.

This should enlighten us why the region has become a magnet for cross-border capital flows and reinforces my belief that the secular advance phase of the Philippine financial markets has an ocean of expanse for growth OVER THE LONG TERM HORIZON.

Should You Invest in the Phisix Today?

``People still want to believe in magic. Newsletters are the equivalent of magic. They are like prayer wheels for Tibetan monks. "Just write down a few prayers, paste them on a spinning wheel, and put the wheel in a breezy location. Then forget about it." They expect the wheel to bring blessings...People say, "I want specific advice." Most people really don't. Instead, they want pages of specific advice, so they can say in two years, "There was just too much advice, so I did nothing."...Why else do they read investment newsletters? For the same reason that men read "Car and Driver." It's low- risk fantasy...”-Prof. Gary North

With the Phisix successfully carving out a new landmark high, I know, many of you are now close to celebrating a festive Christmas season, especially those with well-cut diversified portfolios. However, expectations and realizations of such goals are two distinct animals. The Christmas Bonus question is, will the Phisix continue with its serendipitous roll?

First of all, to broaden our visual spectrum, it is not only the Phisix that have been on a streak, Philippine assets as a whole as signified by the Peso, sovereign bonds and to even credit default swaps have either hit new landmark territories or are close to establishing milestone records.

The local currency, the Philippine Peso broke its psychological threshold level of Php 50 to a US dollar, was up .57% for the week at Php 49.82, marking its highest close since May 23, 2002, according to Bloomberg. Yet, but before anyone gets too agog to cite the wonders of “stabilizing” domestic politics or progressing microeconomics as the marvel behind this unfolding phenomenon, one must not forget that the Asian Currency universe has been mostly treading on new heights even prior to our Peso’s renascence. For instance, this week, coincidental to the rising Peso, the politically scourged Thai Baht likewise etched record levels, according to Bloomberg, ``Thailand's baht climbed to the highest since January 2000 (emphasis-mine), as foreign investors bought equities on optimism growth will accelerate.” Ergo, we are not alone.

Figure 1: Asianbondsonline.com: Fierce Rally in Philippine Sovereign Bonds

While it took a rather lengthy period for Philippine bonds to rally (since 2004), following the May’s ‘risk aversion’ scare, our sovereign instruments took off dramatically over the past quarter, as shown in Figure 1 (Falling bonds yields are inversely related to Bond prices). According to the Philippine Daily Inquirer, ``Philippine 2016 bonds were traded at 111.50 and its 2031 bonds were at 109, a record high.”

Not limited to bonds, even derivative contracts as Credit Default Swaps have been gaining new record levels, again from the same Inquirer report, ``Five-year Philippine credit default swaps -- insurance-like contracts that offer protection against debt default or restructuring -- came in to a record low of 135/138 basis points.” With investors pricing our default swaps at a record low, this suggests that the Philippines would be less likely to emulate the Argentine paradigm.

Even the Philippine government’s Napocor which had in previous outings encountered difficulties raising funds, recently reaped a whirlwind of demand for its securities from the international credit markets to raise $500 million in a breeze; its offering was reportedly oversubscribed by 5 times!

No, I think that Philippine assets have not been rising primarily out of country-specific developments, as some others suggest, but rather surfing on a wave of a backstop of exploding liquidity in the global financial realm.

Back to the Philippine Stock Exchange; our Phisix indeed had a rather awesome week topping Asia’s key benchmarks with a sizzling 3.25% advance. Including the previous week’s advance, the Phisix has had a cumulative gain of about 145 points or an eye-popping 5.67%! And to consider, since the week that ended on August 25^th, the local bellwether has been up in 8 out of 9 weeks to post a whopping 18.8% gains!

While on a year-to-date basis, the accrued gains of the Philippine benchmark has reached 28.93% as of Friday’s close. To consider, based on seasonality factors, the last quarter of the year has, statistically speaking, been the strongest or the most favorable environment for equities!

Year End
	Phisix	Y-o-Y variance
27-Dec-96	3,170.56
29-Dec-97	1,869.23	-41.04
29-Dec-98	1,968.78	5.33
29-Dec-99	2,142.97	8.85
29-Dec-00	1,494.50	-30.26
28-Dec-01	1,168.08	-21.84
27-Dec-02	1,018.41	-12.81
30-Dec-03	1,442.37	41.63
29-Dec-04	1,822.83	26.38
29-Dec-05	2,096.04	14.99

Table1: Phisix Year on Year Changes since 1998

Defined in the following table (see table 1) is the year-on-year changes by the Phisix in the course of the past ten years. It must be remembered that during this span of time, the Phisix appears to have segued into two phases; first the declining phase of 1997-2002, then the recovery phase, 2003 until the present.

At the present circumstance, the Phisix looks poised to match or even possibly supplant the gains erected in 2004 (+26.83%), if it manages to hold current levels by the end of this year. Moreover, if the present momentum persists, the baptismal surge to hallmark the Phisix’s pivotal reversal could likely be an achievable target.

Now to offset my ‘framed’ optimism on you, I wish to also point out that despite the declining phase of 1997 to 2002, there had been two years where the Phisix actually registered advances. This means that it is natural to expect a cyclical rally within a secular bear market phase and conversely, a cyclical decline within a secular bull market.

Now if the Phisix would for instance, continues to prove its ‘Midas Touch’ to possibly end this year for its fourth successive yearly gain, especially with continued clip of outsized returns, then the law of averages or the market’s mean reverting tendencies could translate to a larger-than-average probability that the Phisix could suffer a pullback by next year. Put bluntly, you should expect negative annual returns in the future even if such cycle remains on the upside. One must be reminded that NO trend goes in a straight line!

Figure 2: Stockcharts.com: Phisix’s Peaks and Troughs

It is said that one of the key defining advantage of mankind over its antecedents is our ability for pattern recognition. This method of supervised learning enables us to manage our lives for the better with constant invention and utilization of various tools or instruments to measure, control or manage risk. Applied to the markets, such variegated templates of patterns can usually be seen through the price behavior of securities, which incidentally signifies the collective investor’s outlook as determined by actual transactions (not polls/surveys).

			Approx Period				Approx
			Peak-to-Peak				Peak-to-Trough
Date	Peak	Gains	in Months	Date	Trough	Declines	in Months
22-Jan-04	1,572.21
28-Apr-04	1,620.37	3.06	3	29-Mar-04	1,385.16	-11.90	2.00
05-Oct-04	1,865.64	15.14	6	19-May-04	1,465.36	-9.57	0.50
08-Mar-05	2,172.76	16.46	5	12-Nov-04	1,734.10	-7.05	1.00
08-May-06	2,602.46	19.78	14	4-Jul-05	1,805.49	-16.90	4.00
				21-Jun-06	2,034.49	-21.82	2.00

Table 2: Phisix Peak-to-Peak and Peak-to-Trough Patterns

Since the Phisix has broken past its critical threshold level of 2,602 with much OOMPH, as shown in Figure 2, maybe history could help us identify where this should lead us, in the assumption that external developments remain favorable to equities.

Table 2 in support of the chart, shows that since the Phisix reversed from its descending phase in 2003, the previous 5 watermark highs, as manifested by blue circles, over the present cycle reveals that gains based on a peak-to-peak basis have been ratcheting upwards. While the said sample is insignificant to draw a valid qualitative forecast, my four-leaf clover guess is that if the present momentum holds, then a 15% gain (it took 5 months to overtake the previous high, so I took the least % of returns over a similar period) from its previous peak of 2,602 may imply a 2,992 or a 3,000 target for the Phisix. Essentially, on a year-to-date basis, this translates to more or less 42% gain which fundamentally surpasses that of 2003!

In the same context, one should note that higher gains have likewise meant greater volatility. The same table shows that on a Peak-to-trough basis (troughs represented by red circles), the arithmetic mean for the 5 episodes of retracement is roughly 13%. Put differently, once the Phisix concludes a new high and goes into a “major” correction mode, the likely target for a retracement bottom would be 13% off from the Phisix’s new high.

So, at this instance you are equipped with a guidepost or an estimate of the possible price behavior of the Phisix. Yet, how I wish markets could be as simple as this, but they are not. They are hardly an exact science. But we can definitely work on playing the odds.

Now, given such approximations, would it be feasible to inject new money into the Phisix in light of the present circumstances?

If our target for the Phisix (30-company index) is 3,000 as explained above, then from Friday’s close of 2,702.37 suggests of a yearend % potential gain of 11%. On the other hand, based on my computed arithmetic mean, the possible downside is 13% from an upcoming peak which has yet to be identified.

Let us assume that if the Phisix does hit the 3,000 target by yearend and a possible 13% decline ensues, this should translate to a Phisix at 2,610 which is essentially lower than Friday’s close, and therefore implies that positioning at current levels would be a losing proposition, unless of course we can get to be lucky enough to accurately time the markets or if the Phisix manages to run past 3,000 by a significant margin.

In a different perspective, given the context of my assumptions, with an 11% prospective gain slightly eclipsed by a potential 13% prospective loss, the risks factors have evidently grown larger than potential gains, while simultaneously the present climate tells me too that our cost of capital have risen significantly relative to the potential returns on our invested capital and most importantly, considering today’s “euphoric” sentiment, there appears to be more “greater fools” found in the market today rather than “money” to be made. In short, before one reckons on investing on Phisix issues, one must be made to understand that the GIST of the present gains APPEARS TO HAVE ALREADY been made!

Therefore, in consideration of the persistence of today’s buoyant sentiment, I would reckon to either invest on issues with potentials to deliver over 15%, possibly on second or third tier issues which should benefit from the ongoing market’s rotational activities, or stay on the sidelines and await better times. Remember, should you decide to take upon today’s risks, then managing risks means knowing how much stake to put at risk.

Another not so bright scenario working against today’s high octane markets is that based on the charts, the Phisix has been quite overextended in terms of being overbought and is due bound for either a short-term pause or a natural corrective phase within its present momentum. I say present momentum with reference to the continuity of its interim uptrend, in contrast to a “major” corrective mode (potential 13% decline). Yet it is important to note that in bullmarkets, overbought conditions could go into the extremes, and vice versa for bearmarkets, which makes trading anticipation rather complex, if not abstruse. As mentioned above, patterns in markets are not something definite as to repeat exactly, but as Mark Twain puts it, it may “rhyme”. Prudent investing means measuring your potential gains against your potential losses and naturally, take on the appropriate action.

Excess Liquidity: Finding a Home in Assets Despite A Looming Slowdown

``There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”-Ludwig Von Mises

Taking the insulated prism of the Phisix without considering global fund flow dynamics into our markets lends to serious misdiagnosis, something so prevalent in today’s media, whose penchant is to oversimplify, in describing today’s activities.

Foreign money flows are at the margins LARGELY responsible for the appreciating Peso, surging domestic sovereign instruments and rampaging equity prices.

This globalization of cross-border portfolio flows could be seen even in the US, which has capitalized heavily on global flow dynamics to fund its debt-driven asset-dependent economy as depicted in Figure 3, courtesy of Yardeni.com.

Figure 3: Yardeni.com: Flow of Funds: Foreign Capital Flows in the US (upper pane) Financing Its Trade Deficit (lower pane)

Therefore understanding the mechanics of money flux by overseas investors or institutions has been the locus of our analysis.

I noted in the past that Global markets have been synchronically rising on expectations that a cooling off in the premiere consuming economy of the world would result to a more conducive financial environment for the asset markets; euphemistically, more leveraging for speculation purposes.

It is in the theatre of the absurd where we would find the investing public applauding on the expectations that record high corporate earnings will maintain its robust levels in the face of an overall cooling growth climate to justify for higher multiples.

The significant upside rally seen in the leadership of US equities, specifically the Dow Jones Industrial Averages (+12.8% year-to-date) since its July lows (+12.6%~gist of the gains came from the July 14th rally and so as the Phisix 22.27% out of the 28.93% year-to-date gains or 77% of the y-t-d advances) essentially boils down to Friday’s US GDP report as shown in Figure 4, courtesy of Northern Trust, which finally has given the major benchmark a raison d'être for a pause from its extraordinarily high adrenalin motion during the last quarter...a probable sell on News. It is in high likelihood that the Phisix will equally find a reason to correct on Monday.

Figure 4: Northern Trust: Declining GDP Reflects Soft Landing?

According to Asha Bangalore of Northern Trust, ``Real GDP grew at an annual rate of only 1.6% in the third quarter -- the smallest gain since the first quarter of 2003 when the economy poked along at a 1.2% clip. The U.S. economy has recorded the weakest 2-quarter growth since the two quarters ended 2003:Q1...The prospects of a quick pickup in growth in the fourth quarter are dim. Output of motor vehicles made a hefty contribution 0.7% point to real GDP growth in the third quarter.” In other words, a statistical fluke from the output of motor vehicles was responsible for giving US GDP a hefty lift, such that withholding these factors, the stated GDP figures could have been drastically weaker.

Yet with such dour outlook, the Dow and other US benchmarks fell modestly, instead of a rout.

There are those who argue that in spite of the Dow Jones’ reanimated rebound, the supporting indices as the Nasdaq or the S & P 500 have not risen to surmount their previous highs as the (30-company) Dow index. Moreover, there are those who question that the resurgent Dow Jones has been limited to a select few issues whereby none of the components have broken to NEW record highs, despite the record levels attained by the major benchmark, while about half of the component issues are still trading considerably underwater (over 20% below) relative to their 2000 highs. Even some argued further, that the Dow Transports which if based on the Dow Theory has so far failed to confirm the rise of its sibling index (Figure 5), aside from arguments that the Dow’s rise has been due to its structural composition being mainly price-weighted.

Figure 5: Stockcharts.com: Dow Theory Non-Confirmation? Dow Transports (red candle), DJIA (black line)

While these views have my sympathy, I think that most of these observations are in a state of denial considering that Dow Jones Industrial Average (DJIA) has actually led if not inspired all other benchmark higher, despite their below record performances including that of world indices.

Even if such actions were borne out of surreptitious intervening activities of the Plunge Protection Team, or Executive Order 12631-Working Group of Financial Markets, a supposedly covert US government body led by the US Federal Reserve with purported ``goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence”, my point is global markets have chimed. They can manipulate one or two markets but for a whole spectrum of markets around the world would be close to impossible. Besides, manipulative activities have short-term effects and the likelihood is that the present underlying efficacies will erode over the long run, if indeed downright cooked.

Yes, the Dow and other key US benchmarks are likewise in strenuously overbought conditions and may retrench as they find an opportunity to do so, but my point is unless we see a genuine divergence, or moving in the opposite direction in contrast to the DJIA, by one or some or a combination of the other indices, to wit, the Nasdaq, the S & P 500, the NYSE, Russell indices or the Dow Transports, et. al., it would be impractical to dismiss outright the actions transpiring in the US equity markets as a nonevent.

Figure 6: Stockcharts.com Bullish signals from Gold

In addition, if one vets on the intermarket activities, only POLITICAL “INFLATION” associated commodities, particularly Gold (see Figure 6) and Energy commodities appears to be under pressure, despite the “significant” moderation seen in the US economy. Now with US elections coming in early November any incentive to “manipulate” these markets or any other markets may eventually wean.

In essence, mainstream economists and pundits will argue about the technicalities of the opposing potential directions of inflation (as measured in goods) in the backdrop of a supposed cooling of world economic growth led by the US, yet we are seeing a rebound in most asset prices globally, which is quite ironic. The US economy may have slowed during the third quarter, but obviously friendly and loose credit conditions have softened the impact of such slowdown. Will these conditions continue?

Since I think that today’s markets have been mainly liquidity and liquidity “expectations” driven, any furthering or reversal of these conditions will lead or dictate upon the directions of the world financial markets, be it in bonds, currencies, commodities or the equities or our own Phisix.

As liquidity conditions remain lax, and bountiful credit intermediation persists, and importantly, expectations of such conditions to remain in place; excess money will be finding a home in assets, notwithstanding a slowdown.