Alternative investments: FundKo Peer-to-Peer Lending

[Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.]

(All trademarks, logos, and screenshots are property of FundKo and presented here for descriptive and promotional purposes only.)

2 years ago, some of my Facebook friends urged me to invest in a budding concept. Indeed, peer-2-peer platforms, much like their more mainstream counterparts, Uber and Grab were a booming phenomenon. FundKo, the first peer-to-peer lending platform in the country, operates much like Uber and Grab but instead of connecting or brokering drivers and passengers, FundKo connects lenders and borrowers. It's a pretty straightforward and simple enough way of formalizing the 5-6 lending scheme which have existed in the country from time imemorial. 

I may be late to the party, but FundKo could be one of my favorite investment platforms yet. 

The Philippine retail investment scene had always been lacking in one of the most fundamental capital markets: a bond or fixed income exchange for retail or small investors. As they say, business fills in what needs are lacking and FundKo fills in that space between stocks and money market investments.

It's my first time to actually create my very own loan portfolio and I'm quite excited!

And in doing so I will also gain some insights in creating bond/loan portfolios that I will joyfully share with you here. In the 2 years since they started, I figured that the platform already had enough time to iron out the frizzes, streamline its operations and prove the viability of the enterprise.

On January 16, 2018, I made my first deposit to their bank account and within 2 hours of sending the deposit slip, my deposit was credited to my online account. Spell efficiency! I made an ample deposit of P20,000 just to try it out. 

First thing I noticed on the account home page called "Dashboard" was the Marketplace Historical Yield which was around 12-13% percent. This is significant because on average, stock markets return about 12% a year, considering this return is highly volatile and quite frankly much more difficult to achieve.

Lending money or bond investments have always been easier to predict than say fluctuating prices, hence the popularity of bond issues among conservative investors.

I was also glad to see that information regarding the performance of your portfolio was readily available including your loan defaults, monthly cashflows, interest and principal due at the end of the month, and other graphs pertaining to performance.

It takes about a week or so before your invested loans will be fully funded and released. In just a month I would already be receiving some cash flow. Exciting!

The available loans you can invest in are displayed in the "Marketplace", much like the bond market. The FundKo system has assigned their very own loan grading system "based on years of experience in the lending business". However arbitrary, the loan grading system provides another layer of information on the loans your are investing in. There is information about how much the total amount of the loan will be, the duration of the loan, the interest rate, if it is a personal or a business loan, a quick description of the borrower, how long they are employed at their current job or nature of business, and  a checklist on what documents have been presented by the borrower.

Borrowers may lower their interest rate or borrowing cost depending on the proofs, documents, and collateral they present, as well as their credit history or credit worthiness. Most loans however are unsecured meaning, they have no collateral. In case of default, however, FundKo claims to exhaust all reasonable effort to collect the payments from the borrower.

PROS AND CONS:

CONS: In my years as an enthusiast of security analysis, I would say that it would still be difficult to evaluate the risk of each borrower with the information provided. There is no information provided regarding the financial statements, income statement and balance sheet of the borrower entities, which is quite standard in more thorough due diligence and analysis. The 2008 financial crisis has taught us that one may not also depend too much on loan grades since we have no way of knowing how arbitrary these ratings can be.

What investors can afford is the protection of diversification and limiting your exposure by spreading your portfolio across a variety of different loans. In my initial P20,000 investment, I was actually able to spread it to 13 different loans, but you can spread them to as much as 20 loans for a minimum of P1000 placement for each loan. However it is useful to point out what Ben Graham used to say that this sort of diversification only spans one asset class and the entire portfolio is still under the viability of FundKo as a single enterprise. All investments carry a certain degree of risk, and FundKo is no exception. You should only risk what you are willing to lose; limiting your exposure not only to different loans but to the viability of the FundKo's operations itself.

PROS:

A streamlined website interface and transparent portolio data make it easy to see porfolio performance. 

That being said, in my opinion, that by investing through FundKo, investors already get the benefit and free service of screening the borrowers and loans in the Marketplace. This initial screen takes place as FundKo puts in the effort of collecting required proofs and documents for the credit investigation, approve or reject loans, and assign their individual loan ratings and interest rates.

Lastly, I was delighted to discover that in each of the payments, starting from the very first, you already get paid back a portion of your total principal as well as the interest. This dramatically reduces the impact of loan defaults because you start getting back a portion your principal starting on the first payment and decreases the chance of you losing your entire principal in case of a loan default.

This is my favorite advantage because in getting back your principal as soon as possible, that is every month, you already have cash available to invest in more opportunities. Compare that to the opportunity cost of having all of your funds locked up until maturity. By getting back a portion of your funds as soon as possible, you are able to reinvest and compound them more quickly in other loans and investments, even if the first loan is still ongoing. It's almost like multiplying money.

Compound interest is the engine of capitalism and the possibilities of additional returns are endless because of a faster rate of turn-over of money. Compare all this excitement to slower, more linear types of investments with higher barriers to entry and the principal returned only at maturity. Such set ups have consequently lower yields.

FundKo provides retail investors the opportunity and experience of creating their very own loan/bond portfolios, as the country's first peer-to-peer lending platform.

Happy investing!

-PiliFinance

Filinvest Land Inc., Attractively Priced But may Face Headwinds

Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.

As Philippine equities continue to become more attractively priced, we may now start appraisal and valuation of some securities.

Filinvest's extensive property in up and coming Central Business District of the South, adjacent to the South Luzon Expressway (Metro Manila Skyway under construction).

This scale model shows more plans and room to grow on the property.

Filinvest Land Inc.

Data compiled by Pilifinance:

Computations:

10 year Earnings per Share Average (2005-2015): 0.13

Latest market price as of December 2, 2016: Php 1.72 per share

1) Adequate size of the Enterprise - FAILED
"subject to more than average vicissitudes."

Filinvest Land Inc. is one of the leading developers in the country, however it is a second-liner stock.

2) A Sufficiently Strong Financial Condition
 A - For Industrial Companies, Current Assets should be Twice Current Liabilities. Let us take a look at the latest 2015 Annual Report: - FAILED
Total current assets - 40,345,182,000 (from 2015 annual report: 30,133,130,000)       

Total current liabilities - 15,939,234,000 (from 2015 annual report: 33,426,062,000 - we assumed that all 15,946,927,000 loans payable might be payable short term)

To meet this criterion, Total current assets must at least be at least 2x current liabilities or 31,878,468,000 (or basing on the 2015 annual report: 34,958,270,000 to 66,852,124,000)
But Filinvest Land Inc. may not be fully considered an industrial company.

At best (if the entirety of the loans payable is considered long term):

30,133,130,000 current assets  < 34,958,270,000 (2 x current liabilities of 17,479,135,000)

B - Long-term debt should not exceed the net current assets or working capital: - FAILED
In my understanding, net current assets mean total current assets less total current liabilities:
Total current assets - 40,345,182,000 (from 2015 annual report: 30,133,130,000)        

Total current liabilities - 15,939,234,000 (from 2015 annual report: 17,479,135,000 to 33,426,062,000 if we assumed that all 15,946,927,000 loans payable might be payable short term)

=Net current assets - 24,405,948,000 (from 2015 annual report: -3,292,932,000 to 12,653,995,000

Total non-current liabilities - Bonds payable: 31,749,909,000

At best, 12,653,995,000 net current assets (if loans payable is excluded) < Bonds Payable: 31,749,909,000

To meet this criterion, Net current assets or working capital must be > Total non-current liabilities.
However, this criterion is another for an industrial company, of which Filinvest Land Inc, a conglomerate, cannot be fully classified.

C - For public utilities, the debt should not exceed twice the stock equity at book value: - PASSED
Total Liabilities - 65,497,910,000
Total Equity - 55,600,393,000

Total Liabilities must not exceed twice the total equity or 111,200,786,000

Total Liabilities 65,497,910,000 < 111,200,786,000 (2x Total Equity)

3) Earnings stability - PASSED
"Some earnings for the common stock in each of the past ten years."

4) Dividend Record - FAILED
"Uninterrupted payments for at least the past 20 years."

Filinvest Land Inc. may have only started paying dividends in 2008, or for only 7 years, but showed no default in payment of dividends in those 7 years. 

2008 dividend was Php 0.0200

2015 dividend was Php 0.0560 per share

(7 year dividend growth is 180%)

At the latest market price of December 2, 2016: Php 1.72 per share,

Dividend yield is at 3.26%

5) Earnings Growth - PASSED
A - "A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end."
That means to say at least 33.3% increase in earnings per share for the beginning and ending 3-year averages of the 10 year period.

3 year beginning Earnings per share (2004-2006): 0.049

3 year ending Earnings per share (2013-2015): 0.19

Difference between Beginning and Ending earnings: 0.141

Difference / beginning balance x 100 = 287.76% 

Passed. Not only has Filinvest Land Inc. met the minimum increase of 33% but has made an explosive growth in earnings of 287.76% in the past 10 years.

6) Moderate Price/Earnings Ratio - PASSED
"Current price should not be more than 15 times average earnings of the past 3 years."

Past 3-year average:  Php 0.19

Current price as of December , 2016: Php
Price / Earnings Ratio: 1.72  / 0.19  = 9.05

To pass this criterion, current price must be, at the most, 15 times latest earnings per share or Php 2.85. It's at 1.72.

As an additional computation, here is the P/E ratio for the 10 year period 2005-2015:

10-year Earnings per Share Average (2005-2015): 0.13

10-year P/E ratio: 13.23

In both cases, the P/E ratio poses an attractive purchase by Graham standards.

7) Moderate Ratio of Price to Assets - PASSED
"Current price should not be more than 1 1/2 times the book value last reported."

Book Value per Share: Php 2.3
Current price as of December 2, 2016: Php 1.72

1.5x Book Value per Share: Php 3.45


***"However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier (15) times the ratio of price to book value (1.5) shall not exceed 22.5."

P.s. Some modern versions of this rule make use of the formula called the Graham Number:
 Square root of 22.5 times earnings times book value to arrive at a specific figure in between the two

   ___________________________
  /
\/  (earnings x 15)   X   (book value x 1.5)

OR

   ___________________________
  /
\/  22.5   X   earnings    X   book value

OR

   ___________________________
  /
\/   22.5  X  Php 0.19   X    Php 2.3

=

Php 3.14 Value, with respect to latest 3 year earnings and book value at the prescribed multipliers

>>As you can see Graham uses EARNINGS in the form of historical averages and Net ASSETS in the form of book value to gauge the VALUE in the market price.

>>He also gauges SAFETY by applying certain financial ratios to the debt, equity and current accounts.

The Graham Number, as seen in our previous post: (http://pilifinance.blogspot.com/2016/05/the-graham-number.html)
takes into account the square between these two factors.

However, as Pilifinance prescribed in our post on The Graham Number, we used an even more conservative multiplier of P/E ratio of 10, and an less than or equal book value of 1.
That changes Benjamin Graham's multiplier from 22.5 to 10.
Using 10 as a multiplier, we arrive at the figure:

   ___________________________
  /
\/   10  X  Php 0.19   X    Php 2.3

=

Php 2.09 Value, with respect to latest 3 year earnings and book value at the Pilifinance multipliers

IN CONCLUSION:

I. QUANTITATIVE:

With regards to price, Filinvest Land Inc. already constitutes a considerable bargain with an excellent earnings growth record and assets to back more of the market quotation.

However, Filinvest Land Inc. has also failed 3 tests, ranked according to importance as follows:

A) Financial Condition

B) Size of Enterprise

C) Dividend Record

But, it may be argued, 

regarding A) that these tests were specifically made of industrial companies, and Graham's views might differ with real estate companies, to which Filinvest Land Inc. is a part of.

regarding B) that even if Filinvest Land Inc. is a second-liner or not a leading stock, the Philippine Stock Exchange in general has very stringent requirements for listing companies, and small enterprises that may be vulnerable in "more than average vicissitudes" are usually excluded. However we reserve the example of the Uniwide Sales Group, a PSE listed firm that was insolvent during the Asian Financial Crisis.

regarding C) that Filinvest Land Inc. was only listed in 2007, the same year of its first dividend, and a relatively young enterprise.

So of all these three, the most significant risk might come from the failure of the standard of financial condition of company. More study and prudence must be done by the investor on this part.

II. QUALITATIVE

IN ADDITION to financial ratios and tests, we also look at the qualitative aspect of the business. Recent political and economic developments abroad and locally might have a significant impact on Filinvest Land Inc.'s business.

1) Trump win in the USA. Filinvest Land Inc.'s investment properties and office leasing business heavily rely on the Business Process Outsourcing or BPO Industry. If President Trump proceeds with his protectionist agenda to repatriate jobs to the USA, the Philippine BPO industry may suffer, and so will the demand for Filinvest Land Inc.'s office space.

2) Devaluation of the peso. It has been stated in the 2015 Filinvest Land Inc. bond prospectus that depreciation of the peso may pose a risk to the supply and acquisition of raw materials such as lumber, cement, and steel needed for construction and delivery of projects.

3) Interest rates. A weaker currency may also mean raising of interest rates in the near future, which may pose another problem for the demand of real estate projects. Higher mortgage and bank interest rates will not only make debt servicing more expensive for the company, but make it more expensive for consumers to buy real estate, lowering demand and the company's bottom line.

4) General economic slowdown. Increasing geopolitical risks and instability here and abroad, and the overall prosperity in the past few years may be a precursor to a general slowdown in the economy in the following years. Bloomberg has included the Philippines as one of the most vulnerable ASEAN emerging market to a Trump Presidency, citing its heavy reliance on OFW remittances and the BPO Industry. Increasing political turmoil, a change in Government and agenda are also risks to the continuity to the Philippine infrastructure and economic growth story.

OUR OPINION:

Although Filinvest Land Inc. is priced attractively, backed by its good performance record, the investor must also take into account headwinds that are increasingly probable. The good performance of the company itself may be evidence of management competence, and its relative size and impressive growth record may prove to have more opportunities. But for the defensive and conservative investor, it may be best to wait it out.

In the face of external headwinds and increasing internal debt, it is best to proceed on the side of caution and watch out for more developments, politically and economically. Specifically the actions of Trump. increasing political instability in the Philippines, interest rates ,investor sentiment and the over-all economic conditions in the country. 

However, outside of these factors, Filinvest Land Inc. is a performer, and must not be ignored as an attractive stock purchase, but perhaps, at a less uncertain time.

Ayala Corp: A Study of Graham Principles

With the market falling, it's time again to do our homework in search of bargain opportunities.

Reading Benjamin Graham's The Intelligent Investor, Chapter 14: Stock Selection for the Defensive Investor, we take a look at a real life sample and apply the principles stated by Graham.

Let's look at the 10 year data for Ayala Corp. one of the Philippines' largest conglomerates, a certified "blue chip" or leading company for sure.

The 10 year data that I compiled is:

AYALA CORPORATION
         Book Value per Share     Earnings Per Share   Dividends
2015         298.80                          33.38                        5.76
2014         261.63                          29.35                        4.80
2013         230.68                          20.39                        4.80
2012         208.78                          16.92                        4.00
2011         183.98                          14.43                        4.00,20%
2010                                              17.01                        4.00
2009                                              11.77                        4.00
2008                                              15.17                        4.00,20%
2007                                              31.47                        8.00,20%
2006                                              23.89                        4.00
2005                                              19.82                        0.06

1) Adequate size of the Enterprise - PASSED
One of the biggest companies in the Philippines, it definitely fits this criterion. This is definitely not a small company "subject to more than average vicissitudes."

2) A Sufficiently Strong Financial Condition
 A - For Industrial Companies, Current Assets should be Twice Current Liabilities. Let us take a look at the latest 2015 Annual Report: - FAILED
Total current assets -        262,850,558,000
Total current liabilities -  205,967,464,000

To meet this criterion, Total current assets must at least be - 411,934,928,000
Although Ayala Corporation may not be fully considered an industrial company, it has also stakes in Real estate, utilities, education and infrastructure.

B - Long-term debt should not exceed the net current assets or working capital: - FAILED
In my understanding, net current assets mean total current assets less total current liabilities:
Total current assets -        262,850,558,000
Total current liabilities -  205,967,464,000

=Net current assets - 56,883,094,000

Total non-current liabilities - 259,563,276,000

To meet this criterion, Net current assets or working capital must be > Total non-current liabilities.
However, this criterion is another for an industrial company, of which Ayala Corporation, a conglomerate, cannot be fully classified.

C - For public utilities, the debt should not exceed twice the stock equity at book value: - PASSED
Total Liabilities - 465,530,740,000
Total Equity      - 328,543,983,000

Total Liabilities did not exceed twice the total equity or 657,087,966,000

3) Earnings stability - PASSED
"Some earnings for the common stock in each of the past ten years."

4) Dividend Record - PASSED
"Uninterrupted payments for at least the past 20 years."

5) Earnings Growth - FAILED
A - "A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end."
That means to say at least 33.3% increase in earnings per share for the beginning and ending 3-year averages of the 10 year period.

Let's do the yer 2005 to 2015:
2007                                              31.47                      
2006                                              23.89                    
2005                                              19.82

3-year average for the beginning: 25.06

2015                                              33.38                    
2014                                              29.35                    
2013                                              20.39                    

3-year average for the ending:     27.71

From ending to beginning of the 10 year period, that is only an increase of 10.57%
To pass this criterion, increase in earnings per share in the 10 year period must be at least 33.3%

6) Moderate Price/Earnings Ratio - FAILED
"Current price should not be more than 15 times average earnings of the past 3 years."

Earnings per share in the past 3 years:
2015                                              33.38                    
2014                                              29.35                    
2013                                              20.39                    

3-year average:     Php 27.71

Current price as of November 17, 2016: Php 762
Price / Earnings Ratio:  762 / 27.71 = 27.5 times earnings

To pass this criterion, current price must be, at the most, 15 times latest earnings per share or Php 408.15.

7) Moderate Ratio of Price to Assets - FAILED
"Current price should not be more than 1 1/2 times the book value last reported."

   Book Value per Share     Earnings Per Share   Dividends
2015         298.80                          33.38                        5.76

Book Value per Share: Php 298.80
Current price as of November 17, 2016: Php 762

1.5x Book Value per Share: Php 448.2

To pass this criterion, Current price (Php 762) must not exceed (Php 448.2).

***"However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier (15) times the ratio of price to book value (1.5) shall not exceed 22.5."

P.s. Some modern versions of this rule make use of the formula called the Graham Number:
 Square root of 22.5 times earnings times book value to arrive at a specific figure in between the two

   ___________________________
  /
\/  (earnings x 15)   X   (book value x 1.5)

OR

   ___________________________
  /
\/  22.5   X   earnings    X   book value

=

   ___________________________
  /
\/  (Php 408.15)   X   (Php 448.2)

**See #6 and #7 above

OR

   ___________________________
  /
\/   22.5  X  Php 27.21   X    Php 298.80

=

Php 427.71 Value, with respect to latest 3 year earnings and book value at the prescribed multipliers


>>As you can see Graham uses EARNINGS in the form of historical averages and Net ASSETS in the form of book value to gauge the VALUE in the market price.

>>He also gauges SAFETY by applying certain financial ratios to the debt, equity and current accounts.

The Graham Number, as seen in our previous post: (http://pilifinance.blogspot.com/2016/05/the-graham-number.html)
takes into account the square between these two factors.

However, as Pilifinance prescribed in our post on The Graham Number, we used an even more conservative multiplier of P/E ratio of 10, and an less than or equal book value of 1.
That changes Benjamin Graham's multiplier from 22.5 to 10.
Using 10 as a multiplier, we arrive at the figure:

   ___________________________
  /
\/   10  X  Php 27.21   X    Php 298.80

=

Php 285.14 Value, with respect to latest 3 year earnings and book value at the Pilifinance multipliers

IN CONCLUSION:

Current market price as of  November 17, 2016  (Php 762) is too high a price to pay for Ayala Corporation shares for the conservative investor, as prescribed by Benjamin Graham.

Not only did it fail certain tests such as the minimum 33.3% 10 year earnings growth, and certain tests for the industrial company, which may warrant a higher safety net or risk premium, but the current market price of P762 is too high even if these tests were met.

For Pilifinance, it may be wiser to wait for the prices to go down the following levels:


TARGET or BUY Prices for AYALA CORPORATION based on 2015 Financial Statements:
(BUY ON OR BELOW THESE PRICES)

Following suggested multipliers by Benjamin Graham:

EARNINGS WISE: P 408.15
ASSETS WISE:       P 448.2
COMBINED:           P 427.71


Following suggested multipliers by Pilifinance:

EARNINGS WISE: P 272.1
ASSETS WISE:       P 298.8
COMBINED:           P 285.14

Average of both suggestions: P 356.43

>>>>>>>>>
or ROUGHLY
A price of P300 OR BELOW would be a sure BUY for AYALA CORPORATION SHARES
<<<<<<<<<

Preserving Value: An Endeavor in a Falling Market

Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.

So what do you do with falling prices?

[Photo credits to Philstar.com]

IMPORTANT EDIT 12/14/2016

>> Concept: Every investor looks forward to the future. Nevertheless, the future itself can be approached in two different ways, which may be called the way of PREDICTION (or projection) and the way of PROTECTION.

-Ben Graham, Chapter 14, Stock Selection for the Defensive Investor, The Intelligent Investor

In this section, Graham outlines the difference between two approaches in the future. Based on the factors that determine market price, which are known set of facts and future expectations. One approach is offensive, and the other is defensive. The differences outlined here:

2 Approaches to the future:

PREDICTIONS (Projection)                    PROTECTION

-based on expectations                        -based on facts

-emphasizes future price                      -emphasizes current price

-offensive                                             -defensive

-growth                                                -safety

-predict future strength and                  -adequate margin of safety/value over price

     growth in earnings                               to absorb future unfavorable developments

-qualitative approach i.e. prospects,     -quantitative/statistical/protective approach

management, other immeasurable         i.e. measurable relationships between price

& important factors that fall under          and earnings, assets, dividends

the heading of quality

End of important edit.

The following article written beforehand mainly focuses on the first approach, the predictive approach.

Background 

What do you do when prices are falling? Well you grab something that's not falling. One of the first things that come into mind is gold. Gold has always been regarded as the real money, a safe haven for investors in times of turmoil. Gold is commodity, among others such as barrels of oil, bushels of wheat, grain, rubber, palm oil etc. Holding these physical assets may help preserve value in case of currency devaluation, since these may be resold at fair value or exchange value.

Other options may be holding other assets such as real estate. Just imagine old kings, feudal lords, conquistadors, and haceinderos. Real estate has long been regarded as the real wealth succession strategy by the rich and powerful.

However, gold, commodities, and real estate are not the only options to preserve value. The concept of Utility tells us how something satisfies our wants and needs by reflecting on how much a person is willing to pay for it. 

Anything that has potential use or utility or demand in the future may be used to preserve value or even make a profit, only if you can foresee the future need for it. For example, during times of crisis such as war, food may become scarce. Hence, if you can buy and accumulate canned goods before the war happens, it may be a good way to preserve value. The same can be said in operating a trading business. Buy items that you anticipate will have higher demand in the future, and hence fetch higher prices.

You can see that your main asset is the one in between your ears. As long as you can objectively look at the situation, make accurate assessments, and translate that into probable predictions, you have a higher probability of success.

Going back to your investment portfolio...

What would you do in the case of falling prices in the stock market?



Protecting your gains should be the priority. Going back to the basics:
-When you anticipate the market to go up, you either HOLD your existing shares or BUY even more.
-When you anticipate the market to go down, you SELL your shares.

Even to Benjamin Graham, it is in the investor's interest to sell shares when the prices are exceptionally high. It is acceptable because the investment is made when you buy below the stock's intrinsic value. The investor always has the option to sell his shares at an advantage when he is offered generous prices for it. Graham warns however, on focusing too much on the price since such an attitude inevitably leads to speculation.

To the average Filipino stock market investor, real estate, gold, and commodities may not be readily available. What else could he buy to preserve the value of his portfolio?

A more convenient alternative may simply be switching to another currency. A currency that is not only holding but even appreciating in value. Swiss Francs and Japanese Yen are recognized globally as a safe haven for currency traders, however, these might not also be readily available, unlike the US Dollar which is the global currency.

This now brings us to the question, "Should I convert my pesos to dollars?"

This question has been answered by financial planner Henry Ong in his opinion column in the Philippine Daily Inquirer on November 2013.
Henry Ong says, "The peso-dollar exchange rate is inversely related to the stock market so that when the market falls, the peso depreciates.
About 68 percent of the time, the movement of the peso-dollar exchange rate is explained by the stock market."

In other words, we may not be able to short the Philippine stock market, but we can buy the US Dollar with a 68% correlation.

And this happens as foreigners dump their Philippine shares for pesos, the peso supply increases and then as they convert their liquidated pesos back to dollar to repatriate back to their country, the demand for dollar increases, causing the exchange rate to go up.

During Christmas Season, the reverse usually happens. The peso appreciates when the OFWs send their Aguinaldo's and dollars back to relatives in the Philippines and the supply of dollar increases. The relatives will now need to convert these dollars to peso to spend for their Noche Buena and the demand for peso increases, causing the exchange rate to go down.

It will be useful for the currency speculator to foresee these changes in supply and demand, as well as other factors that might affect the value of the dollar and peso.

For example, what advantages are seen in favor of the US Dollar?
1) The US Dollar is still undervalued relative to a basket of currencies of its trading partners. This is shown in the US Dollar Spot or US Dollar Index (USDX, DXY). Currently these are the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. As long as the USDX is below 100, it means the dollar is undervalued relative to the currencies of its trading partners.

2) The US Elections this coming November 8, pitting Republican Donald Trump and Democrat Hillary Clinton are sending jitters to investors in the US Dollar. It is said that Democrats always have a good effect on the US economy, hence this should be a favorable development for the US Dollar. As of the moment of writing, surveys show that there is a high probability of a Clinton win, hence, this should be a favorable opportunity to buy the dollar before it materializes on November.

3) Low oil prices. Oil price is inversely related to the US Dollar. A falling oil price means higher US Dollar

4) Increasing perception of political instability brought by President Rodrigo Duterte's "inflammatory" and anti-US and EU rhetoric. According to reporter Karen Davila, when a country turns its back on the US, the first that suffers is that country's economy.

5) Doubts surfacing on the competence of the new administration with regards to diplomacy i.e. going into uncharted territory forging new alliances with China and Russia. There have been reports of some US and EU investors putting their plans on hold. The President has also been criticized by various groups on his Drug War with more than 3,600 people killed since the start of the campaign, handling of the issues at the West Philippine Sea, and various other issues, resulting in Filipinos erupting into a virtual "civil war" on social media.

And what might be the disadvantages?
1) A Trump win the upcoming US Elections.

2) Bank of America Merril Lynch issues a recession warning due to central bankers' stimulus efforts such as Quantitative Easing.

3) Removal of the US Dollar as world currency, which is feared by some groups such as Mike Maloney.

Given this data, it is our unsolicited opinion that the peso will continue to fall until the Philippine situation has been resolved peacefully and stability & confidence has been restored. The local Filipino investor can use this information not only to protect his gains from the previous bull market, but to provide additional income in the ensuing bear market while remaining vigilant for bargain opportunities.


The conservative investor is reminded that such an operation is speculative in nature, and anyone willing to engage must consider carefully specific events and understand the overall situation to increase the chances of success.

The preservation of value, wealth preservation or capital preservation is a major undertaking by many wealthy families and countries; from European royalty to American industrialists turned Wall Street asset managers.

For individual companies like Apple, remaining profitable means investing in R&D, research and development, creating new products and solutions, solving new problems, remaining in control of market share, and keeping the profits coming as the only way to maintain their formidable position and wealth. 

For the general public, preserving value may mean maintaining their Purchasing Power amidst rising costs and inflation.

The only way to preserve wealth is to remain relevant, if not cutting edge.
Hence those who wish to preserve their wealth must always be on the lookout for opportunities waiting to happen and develop systems that enable you to automatically take advantage of these situations and opportunities.

References:
Article by Henry Ong entitled "Shall I convert my pesos to dollars?" published by the Philippine Daily Inquirer on November 13, 2013 [http://business.inquirer.net/152019/should-i-convert-my-pesos-to-dollars]

TED Educational video on Utility: [https://www.facebook.com/TEDEducation/videos/1272510129428857/?pnref=story]

How oil affects USD/CAD
[http://www.babypips.com/school/undergraduate/sophomore-year/intermarket-correlations/black-crack.html]

Bank of America Issues Recession Warning
[http://www.cnbc.com/2016/10/09/bank-of-americas-recession-warning-this-market-is-scary.html]

Crash Predictions by Mike Maloney
[https://www.youtube.com/user/whygoldandsilver]

US, EU investors put their plans on hold
http://www.philstar.com/headlines/2016/10/10/1632121/us-eu-investors-put-philippine-plans-hold

Market Update: Final Quarter 2016

The Philippines: Market Update, First 100 Days

Since our last update in May 5 months ago, significant changes have occurred in the market environment and political landscape as a whole.

We admit that such a short term view, and one that focuses on market movements and prices, is actually speculative in nature rather than an investment operation. However, certain factors provide insight to the workings of the economy and might prove useful to the conservative investor.

A confluence of events, foreign and local have resulted in an exodus of funds led by foreign investors out of the country. By this we mean hot money in the capital markets.

Since the winning of President Rodrigo Duterte in May, the Philippine market has rallied back to the 8,000 level in raucous anticipation and optimism prompting us to write a mid-year market update cautioning investors from investing in inflated price levels.

Abroad, there was growing anxiety in anticipation of the US Federal Reserve raising interest rates, that will supposedly make US securities more attractive because of higher yields resulting in fund mangers pulling hot money from emerging markets back to the US.

On the local front, President Duterte throws a series of anti-American and European expletives after being criticized for his costly Anti-Drug war. The Philippine President has been criticized all over the world after more than 3,600 have been killed since the campaign started. The President has also been described as a  "loose-canon" after cursing the US ambassador, the Pope, United Nations Secretary General Ban Ki-Moon and US President Obama. Lately, he has also caused a stir among Jewish people after making Hitler comments.

Since then, the Philippine President has landed cover after cover on international publications such as Time Magazine, Wall Street Journal, The Economist, New York Times, South China Morning Post, Le Monde etc. 

Despite the Federal Reserve not raising interest rates September, foreign funds continued to dump Philippine shares making the Philippine Stock Exchange Index the worst performer among its Asian peers. Foreign funds have sold for more than 23 straight days, the longest outflow since 2007.

US-Philippine diplomatic relations have been strained after the President's series of anti-US rhetoric, and investors are beginning to doubt the future of the Philippine economy since the US is the Philippines' biggest trading partner and largest contributor of foreign aid. US investments amounted to 5 Billion pesos while China, the prefered partner of President Duterte, has investments of only 0.1 billion. We are investing more in China than China invests in us, said former DFA envoy to the US Ambassador Jose Cuisia. American soldiers have also begun to leave, as Mr. Duterte expressed suggestions to end the Philippine-American joint military exercises.

S&P Ratings have warned against increasing political instability and that further upgrades in the next two years are unlikely.

The Philippine Peso slid made its sharpest drop since the 2008 Financial Crisis, from P46 to P48 on the dollar in less than 2 months.