Market bubble or froth

Wall Street’s major indices continued to hit all-time highs, again, last week.

In particular, the Dow Jones Industrial Average (DJIA) ended last Friday with a new high at 15,961.70, after notching another gain of 85.48 points or 0.54 percent for the day.

The S&P 500 also hit a new high at 1,798.18, as it climbed higher by another 7.56 points or 0.42 percent at the close of trading last Friday.

Nasdaq, the benchmark index for US technology and biotech stocks, closed with a new high, too, at 3,985.97 last Friday, with a gain of 13.23 points or 0.33 percent for the day.

As these three major indices of Wall Street were soaring—in the process, establishing fresh record highs one after the other—US investors and market observers also started to express some apprehension on the ongoing market run-up, questioning what exactly could be propelling it and just when it may stop.

A growing number summarily feel that the market rally is no longer running on fundamental grounds. They observe that some parts of the economy could be improving but also claiming that it’s still too weak in most parts to be able to support a broad and relentless advance just like what it is happening, much less at a pace stock prices have been driven up in the last six weeks.

Thus, some US investors and market observers cannot help but conclude that the market is now most likely riding on a bubble.

Local front

A similar consciousness is also growing among local investors, especially now that the market had been moving sideways to lower after its amazing performance in October, which ended two weeks ago.

To recall, the market made headway in October contrary to popular commentaries that it was a bad month for stocks.  As it turned out, while the market only went up in three out of the four weeks of trading in October, it logged a substantial net gain of almost 400 points for the month.

On Oct. 31, however, the market fell 11.83 points or 0.18 percent on a sell-off, which appeared to be motivated by nothing more than profit-taking.

The timing of such downturn was uncharacteristic and unexpected.  It ran against the usual tendency of the market to end higher every end of the month owing to the usual window dressing done by professional money managers to enhance the valuation of their investment portfolios at these times.  On second thought, this may just be a confirmation that investors, both local and foreign, are currently more bearish than bullish (which means that they are inclined to be sellers than buyers, at the moment).

Thus, the sell-off continued when the market opened for trading on Monday, Nov. 4. The market dropped another 41.99 points or 0.64 percent that day.

Supertyphoon “Yolanda” (international codename “Haiyan”) made landfall on Thursday, Nov. 7. While the market’s losses for Nov. 7 and Nov. 8 looked relatively small as to ascribe any impact from Yolanda, it still certainly had a hand in further fueling the ongoing sell-offs in the market.

The market’s sell-offs on Monday, Nov. 11, were abetted by concerns about the damage the typhoon may have inflicted in the economy, in general.

With more fresh news about the economic impact of the typhoon and outpouring of help from here and abroad, the market performed better the following day, Tuesday.  The market rebounded with a gain of 58.94 points or 0.94 percent as it closed at 6,324.17.

But the market dropped lower the next day, sustaining a loss of 3.21 points of 0.05 percent.

On Nov. 14 and 15, the market rebounded.  The effort, however, was not enough to blunt the downward trend of the market.  As of the close of trading last Friday, the market still ended with a weekly loss of 8.79 points or 0.14 percent.

Bottom-line spin

As of last Friday, the DJIA was up 24.51 percent since the beginning of the year and is about 30.05 percent up year-on-year. The S&P 500 was up 28.46 percent year-to-date, and up 35.58 percent in the last 24 months or one year.  The Nasdaq, on the other hand, is now up 33.53 percent since the start of the year and is 42.68 percent up the last one year.

The time they took to rise to these levels is fairly ordinary.  In addition, they are still at levels that, as experience dictates, can hardly be considered technically overbought or overpriced. In short, they are at some levels where there is more latitude to climb higher.

The point can be more easily explained when we go to the supposed condition the local market shares with Wall Street’s major indices. As of last Friday, as the benchmark index stood at 6,346.40, it was only 11.54 percent higher than it was at the beginning of the year and only 17.25 percent up in the last one year.

To appreciate what these means, using one pricing matrix everyone knows about, you may be surprised to realize that at current index level, the price of some heavily-traded index stocks are still trading at low price-to-earnings multiples based on estimated 2013 earnings issued by Bloomberg.  For instance, at last Friday’s closing prices, First Philippine Holdings Corporation (FPH) was still trading at 10.29x, First Gen Corporation (FGEN) at 7.81x, Aboitiz Equity Ventures Inc. (AEV) at 12.67x, Aboitiz Power Corporation (AP) at 12.55x, DMC Holdings Inc. (DMC) at 12.03x, Megaworld Corporation (MEG) at 13.84x, Philippine Long Distance Telephone Company (TEL) at 15.79x, Metro Pacific Investments Corporation (MPI) at 16.0x, and GT Capital Holdings Inc. (GTCAP) at 16.12x.

To me, these means that the market is not yet riding on a dangerous bubble. It is just frothing on unfolding developments, discounting from the bigger picture world markets that have positive implications on the local market.

(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