Turning to value investing

The market fell on Monday and Tuesday last week and rallied from Wednesday to Friday.

This was exactly the opposite of how the market played out the week before. And, unlike how it ended the week before, too, the market closed at near session’s high of 6,245.28 last Friday. This marked a big comeback for the market, posting a weekly gain of 283.11 points or 4.58 percent.

It was the market’s first and only big rally in June and it happened this way: The market lost 211.12 points on Monday and another 181.99 points on Tuesday; it rallied the next three days with gains of 329.88 points on Wednesday, 209.06 points on Thursday and 137.28 points on Friday.

This, however, was still 556.67 points or 7.92 percent lower than where it started in June and 926.98 points or 12.54 percent below the all-time high of 7,392.2 posted on May 15.

Confusing developments

When the market posted its stunning rally of 329.88 points or 5.70 percent on Wednesday, it was immediately felt that something was not of the ordinary.  This was because when the market fell to 5,789.06 on Tuesday, the drop was 1,603.14 points or 21.69 percent.

Such loss or depth of fall was much more than what is called a “correction.”  Following the common rule in technical analysis, a correction is a reverse movement equivalent to 10 percent of a stock’s or market’s primary trend.

The reverse movement was much more.  It could be technically interpreted as a reversal of the market’s original direction.  Yet, the market rallied the following day, and ended with a huge gain.  This turned out to be the market’s single-biggest daily trading gain.

It was indeed a confusing technical development.  For non-believers or those who do not subscribe to technical analysis, this was nothing but a market reality. No one knows when it is going to happen but one needs to be ready for it. To do this, one should pay more attention to fundamental than technical factors.

The market is a complex and unfathomable element.  Like the ocean, you cannot control it.  You must learn only to float on it safely.  Otherwise, you will be overcome by it.

Actually, all of the market’s intractability at the moment springs from the current instabilities happening worldwide, particularly the lingering financial and economic weakness in Europe, the apparent slowdown of China’s economy, the anxiousness on the real state of the US economy and the trading trends on Wall Street.

Wall Street’s reaction to the current position of the US Federal Reserve (Fed) on the stimulus program affects the local market sentiment the most.

US investors feel the US economy is still recovering from recession.  “Over a million people were reported to have filed for bankruptcy last year,” and the situation does not seem to be improving up to now.

“Unemployment is also reportedly still higher than average.  And the slow rise in inflation is because wages are low and people are spending less.”  Thus, the quantitative easing measure of the stimulus program has to continue.

Some think the quantitative easing measure is not really that good.  The Fed had been keeping interest rates low for an abnormally long time.  This, in turn, had been hurting long-term savers.  As reported, they had “not been generating the returns on their retirement accounts that they needed in order to retire comfortably.  They have turned to cutting back on expenses and spending less in order to save more for their retirement, thus keeping inflation low and slowing full economic recovery.”

Quantitative easing is also not good for the government. To quote one report, “the Fed created money out of thin air and loaned it to banks at almost zero interest to finance the public debt.  This results in a hidden form of bank bailout as the banks make 3 percent profit on free money and the government can pretend that it isn’t bankrupt.”

Due to this act of the government, it will inevitably cause inflation.  The report added that “the only reason why inflation hasn’t been 100 times worse than what it currently is because the Fed (continues to) pay banks to hold on to all that money it printed.”

Nevertheless, the consensus from both government and American populace is that the bond purchase program has helped more than harmed the US economy; it has been “the impetus that has been spurring economic growth.”

More than that, the best way the program will end is for consumer spending to rise.  But, according to the same report, this is unlikely to happen soon.

“There are still a large number of people who are unemployed or under-employed and worried if they will be able to retire comfortably,” the report added.

Bottom line spin

As of last Friday, though, US investors were reported to have accepted the plan of tapering the bond purchase (QE) program.   Wall Street indices are still declining because US investors are adjusting their strategies.

A friend who has heavy exposure in the local market says the best way—and the only way to stay ahead—in the present market situation is to turn to value investing.

According to him, it was value investing that saved his heavy exposure in the market.  The strategy has led him to pick stocks that stood firm against the market’s recent volatility.  It has as well earned him a handsome return despite the market’s recent sudden plunge.

As an example, Ayala Land Inc. (ALI) did better than Century Property Group Inc. (CPG) in the recent market plunge despite the latter’s more standard financial ratios. There is more value in ALI when you look closer at its business model.

Value investing also saved him from the allure of the market performances of recent market favorites like Cosco Capital Inc. (COSCO) and the like.

With the expected continued market volatility in the second semester, we should turn to value investing.  It deals on measuring the intrinsic value of a stock.  It’s a method that also responds to the market adage that “making money in the stock market does not necessarily mean knowing forecasting future market prices.”

Let’s have more on value investing next time.

(The writer is a licensed stockbroker of Eagle Equities Inc.  You may reach the Market Rider at [email protected] , [email protected] or at www.kapitaltek.com)