Has Meralco’s Takeover Been A Good Sign?

``The main political problem is how to prevent the rulers from becoming despots and enslaving the citizenry.”-Ludwig von Mises, The Theory of Credit and Money

The Phisix defied the world’s seemingly buoyant environment with a 1.2% decline over the week. This comes amidst an early week tumble of 4.66% which saw an extension of the PLDT-Meralco led carnage of the Phisix from last week.

As earlier noted, the combined PLDT-Meralco market cap weighting was about 40% before Monday but fell to 34% at the end of this week. We described the politically driven selling as a foreign investor strike in King Kong Versus Godzilla at the PSE; Where Politics Trumps Markets.

News accounts say that the Lopezes giving up on Meralco had been a winning proposition for the former, we argue that it isn’t.

If the Lopez sellout had been out of voluntary efforts then I would probably agree. Unfortunately, the repeated harassment by the administration on the Lopezes could have been a big factor on their decision to give up their reign of Meralco.

In short, Meralco served as a prized trophy for the political football, where allies of the present administration appeared to have successfully outmaneuvered the besieged Lopezes.

This is a bad precedent.

If the management of Meralco has to be under the blessing of those seated in Malacañang then we should expect structural prices of electricity to go up in the future at the expense of the domestic economy.

Instead of looking for profitability, efficiency and productivity, the management direction of Meralco will be highly political in nature, aimed at gratifying to the whims of those in power.

In other words, the management of Meralco will function as the unofficial de facto extension of the Office of the President.

This implies many costs:

Social Political costs-if the Philippine Presidency decides to lower rates for the purpose of scoring political points on the public, Meralco as a private institution will suffer revenue losses from such subsidies.

Cost of bureaucracy- instead of aiming for professionalizing the institution, Meralco’s organization will likely be stuffed with political appointees which in effect would raise the cost of operations.

As an aside, it risks productivity loses and equally raises the risks of corporate corruption.

Political Costs-the cost of political programs that Malacañang may not want to directly carry may be passed on to Meralco, again raising Meralco’s cost of operations.

Nonetheless accrued losses of Meralco will translate to higher electricity prices as they will be eventually passed on to its consumers. Remember the fate of Napocor?

And high prices will in effect extrapolate to the loss of competitiveness for enterprises covered by the Meralco franchise which means less investments equals less job opportunities equals more poverty.

Were the management of Meralco incur the ire of the Malacañang for one reason or another in the future, we could expect another round of takeover from parties favorable to the palace.

This again sacrifices the stability of the organization which incidentally is a monopoly for Metro Manila’s electricity distribution. And sacrificing stability may raise the cost of obtaining credit or financing cost.

Of course financing cost isn’t just about the organizational stability but likewise the ability to pay which also means bottom line pressures likewise apply to higher credit risks for the company which in turn may raise the cost of Meralco’s operations.

It never seems to occur to most people, not even to our so-called analysts that government intrusion into the private sector has far reaching unintended consequences at a severe cost to Meralco as a company and importantly to the economy.

We should thank our lucky stars that the political costs from today’s political football may be overwhelmed by the surging costs structures from collective government intervention abroad.

Global Property Prices: Still Depressed

The Economist.com recently published market indicators of global property prices. Their conclusion: global property prices remain depressed.

Based on global housing prices, according to the Economist (bold highlight mine),

``WHEN we last looked at global house prices, only six of the countries we surveyed had recorded year-on-year declines. Three months later that figure has risen to 16. In America some saw signs of a bottom in a report on March 17th showing sharp rises in housebuilding starts and permits in February, after months of decline. Others, however, just saw a bigger stack of apartments for sale which no one will be very keen to buy. Fear has now replaced frenzy, and house prices may overshoot on the way down. A recent report by Numis Securities estimated that British house prices could fall by a further 40-55%, saddling millions with properties worth less than their mortgage debt. Long was the uphill march, long will be the downhill descent."

Based on office rents, again from the Economist, ``Office rents in London, measured in dollars, fell by 41% in the year to the fourth quarter of 2008, according to CB Richard Ellis, a property firm. Around half of that drop reflects lower local charges for office space. The rest was down to a fall in sterling against the dollar. Almost all of Sydney’s 25% decline in rents was because of a weaker Australian dollar. Rents in other rich cities, such as Frankfurt, New York and Paris, dropped by less. These places are already cheaper than Moscow. The rise in Tokyo rents makes it the most expensive city in the survey. All and more of the rise in charges was because of the yen’s appreciation. Rents in Beijing were barely changed in yuan, but cost 8% more than a year earlier in dollars."(bold emphasis mine)

Amazing Pictures: Undersea Volcano Eruptions

Magnificent photographs, which captures the explosion of undersea volcano off the coast of Tonga in the South Pacific Ocean, from "The Big Picture" at the Boston.com.

A sample of below...

Check out the rest here.

Cartoon of the Day: Pass The Hat- "For The Next Bailout"

Kal of the Economist makes another germane depiction of the current political trend in the US...

To further validate on Kal's theme, this from last night's the social liberal New York Times,

`` President Obama’s budget proposals, if carried out, would produce a staggering $9.3 trillion in total deficits over the next decade, much more than the White House has predicted, the Congressional Budget Office said on Friday.

``The office’s estimates of deficits in the fiscal years 2010 through 2019 “exceed those anticipated by the administration by $2.3 trillion,” the budget office said in a report.

``The deficits under the Obama plan would be $4.9 trillion more than the deficits that would be projected if there were no changes in current laws and policies — what the nonpartisan budget office calls its baseline assumption."

The Moral: More Bailouts=more wasteful spending (e.g. AIG), more corruption, more mistakes, more dissatisfaction and growing risks of political upheaval.

Quantitative Easing Basics

The Financial Times has an audio explanation of the basics of Quantitative Easing (press on image or link to redirect to the FT.com)

$9.9 Trillion and Counting, Accelerating the Mises Moment

US government's bailout tab has now risen to $9.9 trillion as tabulated by the New York Times.

And as we have said, more of these would be coming until everything becomes unsustainable.

From the New York Times, ``The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on loans of all types."

Gonoism lives!

A reminder from the prescient words from Ludwig von Mises in Human Action, ``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 the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

The Mises Moment seems to be gathering steam.

Jay Leno's Pseudo Altruism?

Media is inherently predisposed to preach about "collectivism" (particularly in the Philippines).

For us, the implicit motivation or the reason for this is about saleability.

People buy mostly on emotions. And to generate more audience means to connect with people's emotions. And collectivist themes of 'equality', 'fairness', 'justice', 'charity' etc... greatly appeals to emotions. And more audiences translate to more ad revenues. Audience plus ad revenues equals the life of the show.

Thus, media content-whether it is news, soap opera, talk shows, movie or reality shows-are almost always scripted or produced to appeal to the emotions.

Occasionally some of these pseudo acts of altruism are unmasked, especially when they "diss" the markets.

An example is from a recent amusing incident where the popular US comedian Jay Leno brings his show to Michigan aimed at helping autoworkers and those displaced by today's recession by giving away free tickets.

Unexpected to Mr. Leno, one of the recipient attempts to sell the "donated" ticket at ebay. The donor discovers the attempt and vehemently objects!

From Mr. Leno, ``Here is something that annoys me. I look on eBay today and I see four tickets to my show for sale. ... You're out of your mind to pay $800 to see me. ... I would like to ask the people on eBay to take the tickets down. There is nothing for sale here.”

Picture from insidesocal.com

Harvard's Greg Mankiw on his blog wrote a caustic but deserving remark (bold highlights mine)...

``So I wonder: If a person down on his luck prefers the cash to the opportunity to watch Leno live, why would Leno object? Is it altruism that is really motivating Leno here? Is he really sure that the unemployed person in Detroit would be better off with an evening of laughs than $800 in his pocket? Or does Leno want to play to a live audience of unemployed workers so he will seem altruistic to his television audience?"

Ouch!

Again Mr. Mankiw, ``Absent externalities, markets improve the allocation of resources. Both the buyer and the seller of the ticket must be better off: otherwise they would not engage in the transaction. The only significant negative externality that I can see here falls on Mr Leno himself. In other words, Leno's objection to the eBay sale is an understandable and fundamentally self-interested act in that the sale impedes his abilty to appear selfless."

This reminds us of a quote from D.W. McKenzie who, in an article at the Misis.org, wrote,``Altruism alone does not harmonize social interaction. On the contrary, a world of altruistic people could easily be more rancorous than the world we know. It is not enough for people to want to promote the interests of others. We must also comprehend the interests of others, and this is impossible."

Showmanship-yes, comprehend the interests of others-no.

So much for altruism.

Global Unemployment or Bread Lines

Global unemployment rates courtesy of Casey Reseach

According to the Casey Research Team,``One estimate warns that job losses during this recession could top 50 million worldwide by the end of 2009."

The Philippines registered a 7.7% jobless rate in January, up from 6.8% last October or about 2.9 million unemployed (IHT).

Heck, that includes me in the stat! I wonder where's my bailout?!

Creative Destruction: Reinventing Models and Forced Entrepeneurship

Every crisis leads to a transformation.

Industries affected by malinvestments or bubbles are destroyed while new enterprises emerges or innovative business paradigms takeover. That's why crisis can always be seen as windows of opportunities as previously discussed in Entrepreneurship During Recessions: Booming Industries, Recession Babies, Reasons to Start and 999 Business Ideas.

People will always toil to look for opportunities in order to survive. And one of the options would be to put up a business. Take for example this article from the New York Times which focuses on "forced" entrepreneurship today (bold highlight mine),

``Economists say that when the economy takes a dive, it is common for people to turn to their inner entrepreneur to try to make their own work. But they say that it takes months for that mentality to sink in, and that this is about the time in the economic cycle when it really starts to happen — when the formerly employed realize that traditional job searches are not working, and that they are running out of time and money.

``Mark V. Cannice, executive director of the entrepreneurship program at the University of San Francisco, calls the phenomenon “forced entrepreneurship.”

``“If there is a silver lining, the large-scale downsizing from major companies will release a lot of new entrepreneurial talent and ideas — scientists, engineers, business folks now looking to do other things,” Mr. Cannice said. “It’s a Darwinian unleashing of talent into the entrepreneurial ecosystem.”

``Even in prosperous times, entrepreneurs have a daunting failure rate. But those who succeed could play a big role in turning the economy around because tiny companies are actually big employers. In 2008, 3.8 million companies had fewer than 10 workers, and they employed 12.4 million people, or roughly 11 percent of the private sector work force, according to the Bureau of Labor Statistics.

``Economists say there are some peculiarities to this wave of downturn start-ups. Chiefly, the Internet has given people an extraordinary tool not just to market their ideas but also to find business partners and suppliers, and to do all kinds of functions on the cheap: keeping the books, interacting with customers, even turning a small idea into a big idea.

``The goal for many entrepreneurs nowadays is not to create a company that will someday make billions but to come up with an idea that will produce revenue quickly, said Jerome S. Engel, director for the center for entrepreneurship at the Berkeley Haas School of Business. Mr. Engel said many people will focus on serving immediate needs for individuals and businesses."

As a saying go, Necessity is the mother of innovation (invention).

And as we earlier mentioned, crisis also induces change in business models.

For instance, we see accelerating signs of transitioning from the old print "newspaper" media model to one of the "online" paradigm.

Again from the New York Times (bold highlight mine),

``The Seattle Post-Intelligencer will produce its last printed edition on Tuesday and become an Internet-only news source, the Hearst Corporation said on Monday, making it by far the largest American newspaper to take that leap.

``But The P-I, as it is called, will resemble a local Huffington Post more than a traditional newspaper, with a news staff of about 20 people rather than the 165 it had, and a site with mostly commentary, advice and links to other news sites, along with some original reporting.

``Other newspapers have closed and many more are threatened. But the transition to an all-digital product for The P-I will be especially closely watched in an industry that is fast losing revenue and is casting around for a new economic model.

``For one thing, the closing may end up putting greater pressure on the surviving and financially struggling Seattle Times, because of the end of a joint operating agreement between the two papers. It may even bring closer the day when Seattle has no local paper at all.

``And the way The P-I is changing might hint at a path for future newspaper closings. To some extent, in shifting its business model, it will enter a new realm of competition. It will compete not just with the print-and-ink Times, but also with an established local news Web site, Crosscut.com, a much smaller nonprofit organization that focuses on the Northwest. The move shows how some newspapers, in the future, may not vanish but move the battle from print to the digital arena."

And this appears to be a firming trend...

chart courtesy of Pew's State of the Media

Cable and online have drawn most of audience traffic at the 'expense' of traditional media.

According to Pew Research, ``Only two platforms clearly grew: the Internet, where the gains seemed more structural, and cable, where they were more event-specific."

In short, real time or "on demand" news or opinion is on the rise, or in the fitting words of the research company, ``People increasingly want the news they want when they want it".

Of course, aside from the shift in viewership traffic preference, the other very important trigger has been no less than the flow of revenues. Ad spending has essentially shifted to cable and online. Put differently, it is basically a "follow the money" dictum.

The dramatic surge in online viewership hasn't not translated to strong flows of ad spending, though. The Pew Research suggests an explanation- strong competition. ``Even while online ad spending grew about 14% through the first three quarters of the year, most of it benefited Google and other search providers. Revenue from the sale of banners and other display ads that news websites depend on increased just 4%, and estimates are that it declined by the fourth quarter. One reason: the infinitely expanding universe of blogs and websites has forced them to cut their rates to compete for advertisers. The cost to reach 1,000 viewers fell by half in 2008 alone, to an estimated average of 26 cents."

But not all countries are incurring a decline in print media as we pointed out in Global Posttraumatic Stress Disorder (PTSD): The After Lehman Syndrome. But that is a topic for another day.

Nonetheless the last word from Internet analyst Clay Shirky who is quoted by the Research Recap, ``That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing.”

Peter Schiff: Why the Meltdown Should Have Surprised No One

In a recent talk at the Austrian Scholar's Conference, Peter Schiff delivers a great exegesis of the present crisis and the possible ramifications from current government policies.

source: Mises Blog

King Kong Versus Godzilla at the PSE; Where Politics Trumps Markets

The seeming resilience of the Philippine equity assets melted away today, despite signs of recuperating global markets. This has been premised mostly on 2 issues; namely PLDT and Meralco which got crushed today, -11.66% and -14.59% respectively.

And because the two issues comprised about 34% (tel) and 4% (meralco) based the adjusted free floated market cap, the magnitude of decline sunk the Phisix (green line) by 4.66%, putting in jeopardy the 5 months of consolidation.

PLDT (yellow orange line) accounted for about 33% of today's trade while MER (black candle) represented a measly 2.8%.

On the other hand, today's net foreign selling registered 241 million pesos where TEL accounted for 90% of the entire foreign exodus.

In addition, what used to be a broad market rout, when faced with such index based collapse, wasn't evident today, despite the whopping 4.65% decline the PSE's market breadth had 24 advancers against 55 decliners.

Plainly stated, this clearly isn't a sign of the previous forcible selling dynamics seen last year, since only one issue accounted for the significant majority of the stampede selling.

It is clearly a sign of an investor strike- against recent management priorities.

So why the investor strike?

Because like San Miguel which overhauled its business model overnight, which turned out to be "partly" politically motivated [see Has San Miguel's Shifting Business Model Been Linked To The Philippine Presidential Elections? Lessons], the precipitate shift by PLDT's leadership to include Meralco in its business model appeared to have been executed out of political exigencies than by strategic business design.

Bluntly put, with PLDT serving as the white knight for the besieged Lopez managed Meralco, politics became the underlying priority of the top telco company at the expense of minority shareholders. Resource allocation by PLDT's management isn't being based on the best probable returns but on political whims for the benefit of the company's top brass.

courtesy of cinemastrikesback.com

As we wrote in Beware Of The Brewing Meralco Bubble!,

``If this floated story is anywhere near correct, then MER, which is a regulation instituted monopoly, whose prized possession is being bitterly contested by politically privileged groups signify an engagement between “crony capitalists” representative of the opposite side of the political fence.

``It’s like a King Kong versus Godzilla movie, where one monster eventually wins but the rest of the city is devastated."

With the Philippine presidential elections around the corner, we seem to witnessing some abrupt changes in the corporate directions of major publicly listed companies. This implies of strong politically motivated actuations instead of profit oriented shareholder friendly actions. Hence such investor strike-especially from foreigners.

Besides, all these reeks of the Keynesian rent seeking crony capitalist model which the Philippine political economic structure has long operated on.

That's why King Kong and Godzilla continues to hold sway over the domestic economic structures (politicians and the elites pick the winners and losers of the society).

And that's also why their "battle for turf" translates to "externality costs"-devastation of the environment, the market or the economic wellbeing of the Philippine society.

Profit From Short Term Dividend Plays

"The margin of safety is the central concept of investment. A true margin of safety is one that can be demonstrated by figures, by persuasive reasoning and by reference to a body of actual experience". Ben Graham

The Phisix’s 3.34% decline this week contravened the surge in global equity markets. This was fundamentally a function of the collapse in the prices of Meralco (-26.59%) and from Philippine Long Distance Telephone (-6.33%). Combined, the free floated adjusted market cap comprised about 40% of the entire index last week, and from this Friday’s close, this has now declined to about 37%.

Meralco’s unraveled its formative bubble the way we hoped it would [see Beware Of The Brewing Meralco Bubble!], and has spared the Phisix of the menace of a full blown bubble.

Meanwhile, PLDT’s decline was basically a function of the company’s dividend ex-date, where share prices adjusted to its dividend yields.

The Case For Dividend Plays

And dividend yields in today’s environment presents us with short term opportunities to dabble with in an increasingly “cash hostile, risk friendly” environment.

So instead of technical or chart reasons to go into the market, I will provide you with fundamental reasons.

Since it is the annual stockholder season, this likewise implies of the “dividend” season.

And corporate financial statements, especially by the heavyweight market cap issues or the “blue chips”, usually reflect on the conditions of the domestic economy.

Despite the unmatched deterioration in the economy as manifested in many of the corporate fundamentals by major public listed companies, even in the face of a steep decline in share prices, many companies will probably retain their previous scale of dividend payouts, which implies select companies with very impressive yields of more than 10%.

In short, depressed share prices with unchanged dividends will likely bring about outsized dividend yields! And this may prompt for a short bout of “yield chasing” by market participants after they are declared by the respective company.

Of course, the optimistic frame here is “unchanged”, because for the mainstream, a global recession prompted downshifting of the domestic economy should also account for a downside adjustment in most of the financial statements of the publicly listed firms.

While we agree that the economy could further weaken as a belated effect from the collapse of global trade last year and or in response to big increases in unemployment levels overseas, we are doubtful if the crash in share prices last year will equally be reflected on the performance of the corporate world.

Besides, our short term dividend play doesn’t consider the future but is a bet on last year’s performance.

On the other hand, what if instead of reduced dividends, a company, because of its strong showing last year in spite of the morose outlook, decides to hike its payout? We’ll make a guess; we get a catalyst for a short term run.

Nevertheless, if we are right about the Phisix drifting in a seeming “bottom formation” phase of the market cycle, then dividends can thereby represent as a “margin of safety” against risks of future price declines-because dividends represent as a value added factor for stock investments-can partially offset cyclical paper losses.

So from a short term perspective dividends can operate as a catalyst for a “short-term” run, and from a medium-long term horizon, dividends can be a cushion against further price decline pressures-our margin of safety-operating under today’s presumptive bottom phase.

Yet unlike the conventional market agents who react only after a dividend has been declared, the key to the game is in the anticipation of dividends. Of course, having a network of insiders could help a big deal.

So if we go by the premise of the short term “play” basis, we should start by looking at the company’s previous payout record and by vetting on its most recent financial statements, as we attempt to establish the speculative premise of whether the company will retain or even raise dividends. From here, we buy the target company before it announces its dividends.

And when the company announces and if they fall in line with our expectations, then we can expect the share prices to possibly surge in order to reflect mostly the rate of dividends which should adjust accordingly on the ex-date.

The dividend play means that we can “advance” the dividend by taking profit prior to the ex-date or as the price target reflective of the dividend level is met or wait for the dividend payout and hope for additional capital gains from the general market’s momentum swings.

The Risks And Recent Examples

Of course, one problem here would be the “timing” of the announcement of the payout. An early entry may reduce or if, fortunate enough, expand the scope of gains (see below examples of PLTL and PSE).

Another problem could be based upon wrong assumptions where the scale of the payout won’t occur.

Faced with such risk factors, however, if our assessment of today’s overall risk environment is anywhere accurate, then even wrong residual risk specific assumptions are less likely to equate to a disastrous portfolio.

For the many reasons cited above, the present environment, at worst may accommodate for a gracious exit with very minimal losses or even a breakeven. At best, if fortuitous enough, our exit might be accompanied by moderate capital gains.

In other words, the dividend play offers a far greater magnitude of gains than the degree of possible expected losses, basically from the premise of the margin of safety based on huge yields.

Over the past weeks, we have seen some of these dynamics at play. Here are some examples…

Figure 4: PLDT: Dividend dynamics

PLDT made its declaration of P 60/ share (special) and P 70/ share (regular) dividend last March 3^rd for a combined P 130/share. At the close of March 2^nd the company’s share price was at Php 2,175 or equivalent to a dividend yield of 6%.

The day from the announcement (blue arrow), the PSE’s largest company’s share prices rose to Php 2,310 basically manifesting the yield of the dividend. And on the ex-date (red arrow), share prices retreated beyond the price level. This sharp decline, however, appears to account for as an overreaction, as in the case of the PSE (below).

Figure 5: PLTL: Same Dividend Dynamics

Pilipino Telephone basically had the same dynamics with its parent PLDT.

The company declared a .52 cents dividend last March 2^nd where its share prices closed at Php 6.8 (blue arrow) or a yield of 7.6%. But share prices even rose beyond the rate of dividend yield but eventually fell back (even below the level from which the announcement was made) on the ex-date (red arrow).

But unlike PLDT, the company surged on 8.8% on Friday for reasons beyond the dividend play. PLTL’s experience shows that dividends can even compliment capital gains under today’s environment.

Figure 6: Philippine Stock Exchange: Dividend Play

As a last example, we see also the same dynamics with the Philippine Stock Exchange .

The non-banking monopoly finance company announced its dividend on February 25^th, which consisted of Php 3.65/share (special) and Php 4.35 (regular) or a total of Php 8/share. The share price on the day of the announcement (blue arrow) was at Php 129 for an equivalent 6.2% dividend yield.

Based on the said yield, the PSE should have climbed up to around to Php 137 per share. But it zoomed all the way to Php 147 a day prior to the ex-date.

While the share prices collapsed on the ex-date (similar to PLDT, red arrow), it quickly bounced back and was last traded at Php 138/share. This implies dividend plus capital gains from the original Php 129 level.

Finally, it is important point out that despite the sharp losses in share prices and a gloomy environment, two of the three issues mentioned above gave out special dividends, namely PSE and PLDT. In addition, while the overall dividends from the PSE (Php 10 per share adjusted on the 100% stock dividend) and TEL (Php 194- but may offer more at the second half of 2009) have been lower from last year, PLTL raised its dividend from .48 to .52 cents per share. Moreover, these issues dealt with less than 10% dividend yields.

Since it is the start of the dividend season, some issues seem as great opportunities from which we may be able to profit from based on this unorthodox tactical approach. If you are interested you can check with your broker if not you can write me by email (benson_te@gmail.com). But, except for clients, this won’t come for free.

Why An Increasingly Asset Friendly Environment Should Benefit The Phisix

``There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it.”- Jeremy Grantham Reinvesting When Terrified

The risk environment seems to be tilting towards an increasingly cash hostile-asset friendly environment from which the local stock market would likely benefit from.

Here are six reasons why:

1. Extremely Depressed Mainstream Sentiment.

After a 55% drop in the Phisix from its peak in October of 2008, the public still sees the equity market as highly “risky” in the “traditional” economic sense (more below).

You can just see this overwhelming dire sentiment in news headlines or TV news shows or from the viewpoints of media’s favorite talking heads. This runs starkly opposite to the dominant sentiment when the Philippine benchmark was at 3,800 when there was a cheery consensus (except for us).

In other words, overtly depressed mainstream sentiment (or sentiment extremities) conveys of nascent signs of a possible inflection point.

2. Creative Destruction

After a staggering $50 trillion loss of global financial assets from which one fifth or $9.6 trillion has been ascribed by the Asian Development Bank to Asia (msnbc.com), a recognition of global recession and the collapse in global trade, investment and financing or deglobalization, such colossal downsizing of financial assets and the massive retrenchment in the global macroeconomic structure, for us, signifies as “creative destruction” which may have reached a near culmination of the process in many parts of the world. Possibly with the exception of the US and parts of Europe.

3. Perspective Shift from the Macro to Micro environment

Despite the latest globalization trends, since the world isn’t “entirely” integrated, where much of the external linkages have been only from the aspects of labor (remittances), trade, finance and investments, the significant market attention on the macroeconomic framework during this adverse adjustment period is likely to shift weight towards to the micro landscape [see Fruits From Creative Destruction: An Asian and Emerging Market Decoupling?], thereby possibly leading to more signs of “divergences” or “decoupling”.

4. Policy Incentives Are Directed Towards Aggressive Risk Taking

Of course, we have to admit that the healing process from today’s major drastic economic shakeup will translate to a time consuming effort or that resource or capital reallocation essentially takes quite a time.

But this doesn’t mean markets can’t progress especially when global policymakers have been working feverishly to impel incentives favorable to risk taking.

One, global central bankers have been squeezing down interest rates nearly to zero…

From Morgan Stanley’s Joachim Fels and Manoj Pradhan (bold highlights mine) ``. Within the G10, official interest rates are virtually zero in the US (0-0.25%) and Japan (0.1%) and just 0.5% in the UK, Canada and Switzerland.

``In the euro area, the refi rate still stands at 1.5% after last week’s cut, but the effective overnight interest rate (EONIA) between banks trades close to the 0.5% floor set by the ECB’s deposit rate. Thus, the GDP-weighted G10 policy rate now has a zero handle. The weighted G10 policy rate is likely to drop further as we expect more rate cuts in the euro area, Japan, Australia, New Zealand, Sweden, Norway and Switzerland in the next few days, weeks or months.”

Next, they’ve also been monetizing debt or printing money…

Again from Fels and Pradhan ``several major central banks including the Fed, the ECB, the Bank of Japan and the Bank of England are engaged in various forms of quantitative easing, which has led to an explosion of excess reserves held by banks with these central banks. The explosion of bank reserves has pumped up the monetary base – consisting of cash in circulation plus bank reserves held at the central bank – in these four countries, as we have illustrated. In the US, the monetary base has more than doubled over the past year, while it is up by 40% in the euro area and 30% in the UK over the same period. The monetary base is also called ‘high-powered’ money, because our fractional reserve banking system allows banks to create many times the dollar amount of deposits from the monetary base through lending to, or acquiring assets from, non-banks.”

It is not much different here in the Philippines see figure 1.

Figure 1: Danske Emerging Market Briefer: Philippine Negative Interest Rates

At least in terms of the interest rate regime, the Philippine overnight borrowing rate has been fixed presently below the (CPI) inflation level by the Bangko Sentral ng Pilipinas (BSP), which makes the domestic interest rate environment essentially negative- net losses for savings compels the public to stretch for yields, which makes the marketplace conducive for speculation.

Furthermore, since the Philippine economy has negligible exposure to leverage, where the underlying risks from the evolving crisis has so far been “marginal” and limited to the external nexus, policies have been mainly directed at the interest rate and fiscal “safety nets”. In other words, no Quantitative Easing required, which should be a strong case for the Peso.

Table 1: IMF: Distribution Share of Global Stimulus Package

Finally global governments have been applying huge-but according to IMF and other ‘Keynesian’ economists-inadequate-doses of fiscal stimulus programs (see table 1) in an attempt to offset growing slack in the global economy.

Figure 2: Ivyglobal: Size of Global Bond Market

With over 75% of the global debt markets, see figure 2, held by the overleveraged economies in the US and Europe, this means that these coordinated measures appears to have been also targeted at “reducing the real debt levels” mostly held by the private sector.

So to rephrase, despite the repeated promulgated goals by global governments to induce “normalization” of credit flows by various ways to replace lost ‘demand’ mostly via government spending, the combined actions of lowering of interest rates, coordinated “various forms of quantitative easing” and massive infusion of fiscal stimulus can also be construed as inflating away debt levels.

What does this imply?

The gradual metastasizing of the risk environment from one characterized by economic recession to one where global currency values are being deliberately debased seems to be intensifying. This increases the opportunity costs of holding cash. And the effects are likely to be felt first in parts of the global asset markets. But there isn’t going to be a revival of the securitization-financial structured-shadow finance markets, the source of the bubble bust though.

5. Signs of Improving Trends in the Marketplace.

We may have begun to witness signs of selective recovery in several asset markets.

There has been significant progress in the technical pictures of primary commodity markets such as oil, copper, gold and the Reuters-CRB index or in the general commodity markets. Importantly the advances in the commodity markets have equally been reflected on Baltic Dry index, a cargo freight weighted index, and several key credit markets.

Moreover, there was an explosive upside action in most of the global equity markets last week.

Figure 3 stockcharts.com: Oversold Bounce

While this huge bounce appears to have been mainly a function of severely oversold conditions, see figure 3, it is important to note that Emerging markets (EEM), at the topmost window, have led the bounce earlier relative to major markets in Asia (DJP2-ex-Japan), European (Stoxx 50) and the US S&P 500.

From the technical perspective since the US S&P 500 have widely departed from its 50-day moving averages, hence, like an overextended rubber, snapped back vigorously.

We are skeptical yet of the US and key European markets as having hit the milestone “bottom”. Material progress in the technical picture, which requires some additional time to reveal on its maturity, plus signs of some economic improvement could serve as key indicators for a turnaround. Besides, the mayhem in the financial sector hasn’t been resolved. But for now, these markets appear to be working off overstretched conditions.

Nonetheless, the oversold bounce, which could probably last 1-2 months, could likely help boost general market sentiment even temporarily. And the progress in general sentiment could function as the necessary fulcrum for an extended and substantial improvement of the technical picture of the relative outperformers, mostly found among Emerging Market bourses, enough to cushion them into the next possible wave of decline.

For instance, the Philippine Phisix, which appears to be in a bottoming process, could be jolted out of its consolidation phase and segue into the early stage of the advance phase of its market cycle.

It could possibly do a Taiwan, whose key bellwether the Taiex index, a surprising outperformer, which appears to have broken out of the consolidation phase on the back of a fantastic 3-week run, even prior to last week’s general recovery in the global equity markets. The Taiex is up by about 17% from its lows last November and is up 6.6% over the year with the gist of gains coming from last week’s 5.24% romp.

6. Phisix: Learning From Market Cycles

In our July 2008 edition, the Phisix: Learning From the Lessons of Financial History, we identified the scalability of the typical bear market cycle for the Philippines.

Since the activities of today’s domestic bear market cycle reflects on principally the global contagion effects from last October deleveraging or “forcible selling” process more than economically prompted, we seem to have accurately read the dynamics where an easing of foreign based deleveraging motion will cease to hemorrhage asset values in the Philippine markets.

And indeed as the share of foreign trade has contracted and where net foreign selling has materially diminished, [see Phisix: Braving The Global Storm So Far], the Phisix appears to have been in consolidation or appears to have been reinforcing this bottom formation dynamics for about 5 months now.

Besides, with the Phisix having to touch losses of 55% late last year, it is has nearly reached its conventional bear market range of retracement of 60-66%. To consider, this bear market hasn’t been “internally” (domestic or regional) generated but instead from contamination overseas. Hence, its recovery will likely be fortified on signs of the more participation from the region’s bourses and from signs of improvements in the national economies in the region.

Together with some developments in the corporate world, the windows for risk taking either for the long term or for the short-term outlook seem to have opened. It is time to take advantage of it by nibbling on the market either by trading or taking long positions or both.

The Asymmetric Odds Of Short Term Trading

``We gamble because we are willing to accept the large probability of a small loss in the hope that the small probability of scoring a large gain will work in our favor, for most people, in any case, gambling is more entertainment than risk.”- Peter Bernstein, Against the Gods, [p.203]

In contrast to the conventional sell side analysts, normally I do not encourage short term trades. That’s because short term trades are not only risky, they also induce relative portfolio underperformance, by reinforcing our cognitive biases or by whetting our gambling ticks. In other words, they promote recklessness than discipline.

As investing guru and author Seth Karman wrote in the Margin of Safety, ``There are no winners in the short-term, relative performance derby. Attempting to outperform the market in the short-term is futile... The effort only distracts a money manager from finding and acting on sound long-term opportunities... As a result, the clients experience mediocre performance... Only brokers benefit from the high level of activity."

While the expected odds may seem like a median risk-reward distribution (50%-50%) for the typical market participants, the truth is short term trades have asymmetric odds or where the payouts aren’t equal.

For instance, short term trades in a maturing bullmarket will likely promote overtrading, where the frequency of gains leads to overconfidence and to constant churning of trades, regardless of the risk environment. The primary basis of trades are usually from charts (where past performance is assumed to deliver the same results) or market rumors.

But as the market reverses, the feckless market punters gets shocked into paralysis, and helplessly watch the cumulative “frequent” gains on their portfolio more than wiped out or expunged by the sheer horrifying magnitude of bear market losses.

This, in behavioral finance, we understand as the Prospect Theory, or where ``we tend to value a gain that is certain more than a gain that is less than certain, even when the expected value of each is the same. The opposite is even more true for losses: we will clutch at straws to avoid a certain loss, even if it means taking even greater risks.” (changingminds.org)

The proclivity for the mortal market participants or even many so-called institutional experts is to read or project interim trends into the future, where short term trends are construed as the “expected value”. For example, in the environment of rising markets, repeated gains from overtrading almost always extrapolate as vulnerability transforming into insuperability, risks are then read as risk free, luck is perceived as expertise and overconfidence morphs into hubris. The essence is that people take more bets than is warranted by the environment.

But as the market goes into a funk, the characteristics of the previous bullmarket as conceit, skills and the apparent risklessness reverses; denial, fear, desperation, despondency and the perception of a perpetually risky environment predominate. Some others will even “double down” to “avoid a certain loss” or “loss aversion”.

This innate tendency for the public to read into the market’s short term horizon signifies as the frequency of an outcome. People tend to tunnel on small but repeated occurrences than to look for probable magnitude of an outcome in a trade opportunity.

In general, the inherent shortcomings of short term trades are mainly due to the overemphasis on the frequency more than the magnitude of an outcome.

Environmental Politics Dottiness: Taxing Cow Farts! Human Farts Next?

The "Green" theme has evolved from science to patent religious zealotry or wanton absurdity...

Take this news from the timesonline.com "What do cars and cows have in common? No, not horns"

Excerpts from the article with all bold highlights mine...

``Proposals to tax the flatulence of cows and other livestock have been denounced by farming groups in the Irish Republic and Denmark.

``A cow tax of €13 per animal has been mooted in Ireland, while Denmark is discussing a levy as high as €80 per cow to offset the potential penalties each country faces from European Union legislation aimed at combating global warming."

``The proposed levies are opposed vigorously by farming groups. The Irish Farmers' Association said that the cattle industry would move to South America to avoid EU taxes.

``Livestock contribute 18 per cent of the greenhouse gases believed to cause global warming, according to the UN Food and Agriculture Organisation. The Danish Tax Commission estimates that a cow will emit four tonnes of methane a year in burps and flatulence, compared with 2.7 tonnes of carbon dioxide for an average car.

``Agriculture, transport and housing are not included in the EU's Emissions Trading Scheme (ETS), which enables industrial companies to buy and sell permits to emit carbon dioxide. Instead, EU member states are obliged to cut the emissions from non-ETS sectors by 10 per cent overall by 2020.

``While Romania and Bulgaria will be allowed to increase emissions, Ireland and Denmark are each faced with cuts of 20 per cent in farming sector emissions.

``The cow tax proposals would raise funds to buy allowances from other member states or to invest in technology that might reduce emissions. Denmark is believed to be further advanced with housing for pigs that captures and stores methane emitted from the animals. The gas can be used as a fuel for power generation."

My comment:

What the article didn't say?

If you want more of a 'thing' you reduce its costs, if you want less of the same 'thing' you raise its cost.

Alternatively, by taxing livestock farming which means raising the cost of meat production, governments in essence wants people to reduce meat intake...unless of course you are willing to pay for it with higher prices.

On the other hand, a shift in production and consumption patterns due to such taxes, essentially leads to higher prices across the board for food items, i.e. production of livestock will be reduced or moved overseas (causing shortages of supplies), while demand will likely shift to non-meat products (raising the cost of seafoods,vegetables and etc.).

The other unseen cost is that the demand substitution as a consequence to such obtuseness will equally strain environments, i.e. overfishing, overcropping etc... will translate to other unintended consequences (drought, desertification, fish depletion, pollution, etc.).

In a choice between human and environment, these taxes are skewed towards preserving environment than people. How sensible can this be?

In short, governments have implicitly been promoting HUNGER out of the ridiculous notion that cow farts have been causing greenhouse gases.

What's next, tax human fart?

Has San Miguel's Shifting Business Model Been Linked To The Philippine Presidential Elections? Lessons

In San Miguel’s Shifting Business Model: Risks and Opportunity Costs, we opined that San Miguel's drastic "overnight" overhaul of its business model could have possibly been partly motivated by tactical political developments than just strategic financial or economic goals.

Here is what I wrote, `` the company’s chairman Eduardo Cojuangco Jr., who is founder of the National People’s Coalition and has ran against Fidel V Ramos for the 1992 presidency but lost, could possibly have politically associated strings to these acquisitions with the 2010 elections only a year away."

And this from today's headlines at the Inquirer.net...

``Defense Secretary Gilbert Teodoro could be the “dark horse” in the ruling Lakas-CMD party’s short list of presidential aspirants, Senate Majority Leader Juan Miguel Zubiri said Thursday.

``The other day, Teodoro, a member of the Nationalist People’s Coalition (NPC) founded by his uncle, San Miguel Corp. chair Eduardo “Danding” Cojuangco, announced that he would run for president in 2010.

Including the fracas over the management control of Meralco, [see Beware Of The Brewing Meralco Bubble!], these actions appear to reinforce the connections of the corporate makeover to the corporate takeover to the political spectrum or the 2010 Philippine presidential elections.

What seems apparent is the solidifying alliance of the PGMA- San Miguel's Danding Cojuangco and possibly Imelda Marcos, wife of ex-President Ferdinand Marcos in preparation for 2010.

But this seems not limited to politics but likewise in the economic arena as the collaboration appears to work on securing economic rent from government imposed monopolies or heavily regulated industries.

Of course we maintain the previously risks enumerated from the San Miguel's business reconfiguration.

Nonetheless all these goes to show how the Philippine political economy functions- operating under the Keynesian framework, political elites battle for control over government ordained economic and political privileges.

And of course the only way to secure such bounty is to assume command of the Philippine government, with the affiliates or political constituents gaining control of the said institutions- we describe this as our "crony capitalist" paradigm.

Hence, the moral is that the belief in "virtuous" leadership to emancipate the Philippines from poverty bondage seems like an eternal fantasy-an impossible dream which almost everyone seem to fail to grasp.

The dismantling of the Keynesian political economic structures and a broader adaptation of economic freedom is required more than just an "honest" bureaucracy, whose underlying incentive is driven primarily by politics than by virtuous.