Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Humans are not wired to take the road less traveled. They continually look for the safety and security that is provided by being a member of a larger group. Being part of the consensus crowd doesn’t mitigate the risk of loss or prevent failure, but it does go a long way to easing the mind and the wrath of clients, in the event of failure. Human beings tend to believe mistakes are valid if so many others make the same mistake. This herd mentality overrides rationality and common sense and changes the motives behind our decision making process. As investors demonstrate this phenomena, they end up harboring a greater concern of acting differently and lose focus of the risks they bear. The predominant difference on this occasion as compared with the two previous market bubbles (2000/2008) is the Federal Reserve’s role as an agent encouraging such reckless group-think.-- 720 Global Courage

In this issue:

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

-Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

-The Coming Surprise from the Sharp Flattening of the Yield Curve

-The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

-Bubble Risks Spreads into Mainstream Thinking

-Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights

A) Inequality of Returns

B) Inequality of Valuations via PERs

-Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

While everyone seems fixated on record Phisix 8,100, a tremendous earthshaking activity shook the Philippine treasury markets last week which mainstream or the consensus seems to have entirely missed out.

I have been saying here that the Philippine treasury have represented a tightly held or controlled market by the government and their agents the banking system.

To the point that they have been tightly controlled, I have long expected dramatic interventions to occur given the incipient signs of funding pressures and of the sustained and accelerated flattening of the yield curve since late last year.

April 7 Tuesday, my long held suspicion became a reality.

Faceless treasury bulls launched a broad based orchestrated strike against the bears to massively pull down yields of practically all of the short term yields—from 1 month to 2 years.

The scale of the price or yield change has been so intense where one can infer such phenomenon as a high sigma or a fat tail event! Yields have crashed by 97 bps for 1 month bills, 60 bps for 3 months, 75 bps for 1 year and 65 bps for 2 years!

There had been minor changes at the long end.

Such actions appear directed at fomenting a steepening of the yield curve and to project an image of easing of funding pressures.

Yet here are some reasons why I believe the tail event intervention took place.

First, the growth trend of banking loans continues to slump!   

February’s banking data from the BSP marked the sixth consecutive decline in the banking loans to the general economy (left) which peaked last July 2014. 

The growth rate of system wide banking loans has decelerated to December 2013 levels.

It’s a wonder, has activities in the trade sector picked up in 1Q 2015?

Wholesale and retail lending growth rate continues to plunge (right); they have now descended to January 2014 levels.

If loan conditions to the very popular sector have been retrenching then how will inventory restocking and retail spending be financed? Will consumers yank savings out of their pockets, jars or bank savings accounts? Or will they expand the use of bank credit? 

But bank credit has severely been limited to the few with access to the formal banking system? Besides growth in consumer loans appear to be plateauing. The thrust of consumer loans appear to have been funneled into auto loans which has been surging at a spectacular clip.

As an aside, has the surge in auto loans been due to the uber effect and other online taxi apps?

On the other hand, has the slump OFWs growth rate of remittances suddenly reversed and zoomed? Or has income growth been magnified to offset the decline in credit activities? But where will income growth come from?

Has the decline in loans to the trade industry also reflect on the surplus inventories racked up during 4Q 2014?

If loan conditions to the trade sector serve as indication of its health condition, then what does slumping credit activities mean…a growth revival or a sustained deepening slack?

As I will repeat here, the government can arbitrarily create numbers which they think would necessitate to paint whatever scenario they intend to exhibit for political purposes. But those numbers will not put food on the table or will not be representative of real economic developments.

Second, while the BSP noted that February domestic liquidity data produced an M3 rebound to 7.7% and a month on month gain of 1.4%, statistical inflation eased once again to 2.4% year on year last March.

On a month on month basis, BSP’s statistical inflation relapsed to negative .1%—DEFLATION!!! CPI deflation for the second time in six months (see right chart from tradingeconomics.com)!!

Given the continued weakness in banking loan growth, has the M3 performance of February represented a dead cat’s bounce?

I posted Austrian economist Frank Shostak’s explanation of the relationship between money supply, prices and economic activity to punctuate such development[1]: (bold mine)

While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit.

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down.

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit.

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices.

Has record upon record Phisix been representative of the transition process towards the elimination of the residual ‘monetary surplus’ from the previous 30+% money supply growth through the asset pricing mechanism, while simultaneously signifying the emergence of declining in economic activity that eventually leads to a ‘monetary deficit’? 

In short, has current intertwined dynamics of money supply, prices, and economic activities been a manifestation of a major inflection point?

Besides hasn’t it been that the BSP chief remains transfixed with the risks of ‘deflation’ as revealed via his various recent speeches? So could the interventions at the Philippine treasury been the handiwork of the BSP?

If so, then whom has the BSP been attempting to bailout? Hmmm.

I thought that such interventions would hold on for awhile. Apparently my expectations would be frustrated.

The interventions seemed to have speedily been unwound. 

Friday, Treasury bears mounted a much profound counterstrike than the offensive earlier launched by the bulls.

The powerful counterattack has instead sent short term rates to milestone highs!!! The reversal comes with the exception of 6 month bills.

Yields of 1 and 3 month bills skyrocketed by an astounding 125 bps and 82 bps! Yields of 1 and 2 year treasuries also vaulted by an equally dazzling 134 bps and 73 bps!

Yields of the aforementioned treasuries have all cleared through the taper tantrum levels in May 2013! 

The intended effect of the intervention has been to force up or widen the spread of the yield curve as shown by the 10 and 20 year minus 6 months (right). 

However the unintended consequence had been a fantastic collapse in 10 and 20 year minus 1 year spreads! If we include the 1 and 3 months into the equation, the dramatic flattening would have been accentuated and widespread!

The yield disparity between the 10 and 20 year and 2 year has likewise flatten but at a tempered pace.

At the end of the day, the intervention resulted to what seems an anomaly. The unwinding of the intervention had missed out yield spread between 6 month and 10 and 20 years, though generally short term spreads against 10 and 20 year have all narrowed, with 1 year, 1 month and 3 months in what seems as a collapse mode.

The Coming Surprise from the Sharp Flattening of the Yield Curve

Stock market bulls, particularly the index manipulators, seem to have an enormous problem. 

They have been fiercely trying to prop up the index to show that the Philippine economy has been impregnable from risks whether internal or external.

However, actions at the bond markets which have been dominated by establishment financial institutions seem to have, behind the scenes, been vehemently pushing back. There are 18 accredited PDS Treasury (PDST) fixing banks responsible for domestic bond market transactions

In short, Philippine treasuries and domestic stocks continue to walk on opposite directions. Considering that the diametric flow from these financial assets will have influence to the real economy, eventually one of which will be proven wrong.

Yet those milestone highs of short term rates have most likely represented symptoms of intensifying short term funding pressures.

The accelerated flattening of the yield curve have also likely most evinced symptoms of liquidity tightening as a result from developing balance sheet impairments, presently and most likely being shielded through accounting flimflam. The declining banking loan growth trend appears to manifest such dynamics in motion.

Nevertheless magnified demand for short term funding seems as being reflected on the soaring yields of short term treasuries.

Also the flattening of the yield curve signifies as an “excellent indicator of a possible recession”.

The yield curve according to the New York Fed[2], “significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”

So while the government can churn out whatever statistics to broadcast what they intend the public to see, yet if the current hastening pace of the yield curve flattening continues, then the bulls will get a surprise of their lifetime.

To extend the quote of Austrian economist Frank Shostak from the same post who warned, (bold mine)

The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.

Rings a bell?

The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

Now back to the record Phisix

In context, it’s not just the Phisix, rather the world has been witnessing a renewed risk ON moment.

Numerous national benchmarks have recently reached various record or milestone highs. 

Hong Kong’s Hang Seng has spearheaded this week’s Asian stock market ramp. The Hang Seng index has been up by an astounding 7.9%, as Chinese mainlanders have reportedly been stampeding to bid up share prices not only of Chinese benchmarks, but likewise of stocks in Hong Kong.

Chinese stocks as measured by the Shanghai index also soared by 4.4%!

Yet valuations of Chinese stocks would make Philippine stocks “cheap” by comparison!

Chinese technology stocks reportedly posted PERs of 220 from reported profits to dwarf the US equivalent, the 1997-2000 US dotcom, where PERs had been priced at 156!!! The Nasdaq version of the Chinese stocks, the ChiNext, a benchmark which comprises a basket of technology and other small and medium scale businesses has an average PER of a fantastic 100 for member firms!!![3]

The broad based buying which has reported to include housewives and uneducated traders has even massively pumped Macau’s casino stocks which soared by 10% or more this week. Macau’s casinos stocks has surged even as March earnings continue with its horrific collapse!

Analyst from Deutsche Bank adds a comment on the deepening absurd valuations of Chinese stocks[4]

Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!

And more signs of insane levels of Chinese stocks; the median company forward PER for Shanghai has been at 30x and 39x for Shenzhen! 

To add, in Shenzhen, half of stocks have a forward PE above 50 while 18% of stocks have a forward PE above 100(analyst estimates)! In Shanghai, over a third of stocks have a forward PE above 50 (analyst estimates) while a tenth of stocks have a forward PE above 100!

Philippine index managers must be frothing over the prospects of China’s celestial valuation levels!

The government sponsored stock market mania has been attracting retail participants like a bee swarming over a beehive. 

Based on my compilation of data from the China Securities Depository and Clearing Corporation Limited (CSDC), there have been 4.3 million new accounts over the past 3 weeks, and 8.725 million neophyte punters from the start of the year. This year to date number is about to surpass the 9.028 million new accounts for the entire 2014!

In addition, the pace of which Chinese stocks has been drawing new participants seem to almost match the momentum of the growth rate of the Shanghai bubble which peaked in October 2007. The Chinese stock market bubble then inflated by about 5x before imploding. The ensuing bubble bust erased 66% of the gains from the peak! 

At 4,034, the Shanghai index has still been off by 31% from the October 2007 pinnacle. This is not to suggest that Shanghai index will reach the said levels.

But even with the deluge of enrollments on stocks, equity assets only account for 20% of financial assets of Chinese households compared with cash and bank deposits at 45% based on Charles Schwab survey released last January according to a report Bloomberg.

It would be a mistake to extrapolate that underexposure by Chinese population on stocks would equate to a free lunch for a stock market bubble. As 2007 and its ramification shows, people gravitate to stocks until a certain point where the levels of stocks and or the level credit exposure would weigh on bubble for it to implode on its own weight. Of course government policies like tightening can serve as a prick to any bubble.

Yet I believe that this represents the last straw which the Chinese government has been desperately clinging to. What they have done has been to replace one bubble after another.

The Chinese government seems to be hoping that the stock market boom may provide the economy an alternative of finance. They must be hoping that equity may replace credit as a source of financing for credit trouble firms, thus the stock market frantic pump matched by an avalanche of IPOs.

In addition, rising stocks could have been seen by the Chinese government as having the “wealth effect” enough to ameliorate the downturn in the property sector, spur consumer spending and create the impression that the Chinese economy has been recovering.

Little have they learned from their recent experience that the same credit bubble on the property sector has only incited for a huge imbalances. Huge imbalances that has to be paid for, which has been the reason for the recent downturn in the economy.

Yet once the Chinese stock market bubble crash, such will only aggravate and accelerate the ongoing downswing in the property bubble. 

The lesson is: Two wrongs don’t make a right.

Asia’s magnificent gains have actually been overshadowed by those in Europe’s, where the latter’s advances have made China’s Shanghai index year to date advance of 24.72% look only like a median. 

Week on Week, a big segment of European stocks basking from the ECBs QE has inflated by 3% or more. Year to date, gains of many European stocks has ranged from 18% to over 25%.

Curiously the Institute of International Finance, a trade association of global finance and banking institutions reckoned that the current market sanguinity has hardly been matched by the economic indicators.

They point out that Emerging Market (EM) coincident indicators fell to 1.8% in Q1, the “slowest quarterly growth rate since early 2009 and continues the slowdown of last year when growth fell to 3.6%q/q, saar in Q4 from 4.4% in Q3.”[5]

They also say that except for financial markets, overall growth trend has been disappointing, “trade data declined sharply across regions, industrial production was mixed but generally weak, and business sentiment took a big turn for the worse.”

In addition Manufacturing PMIs has fallen below the 50-threshold mark which means contraction. This has largely been due to “Sharp declines in Brazil, Russia, Turkey and Indonesia contributed to this decline and more than half of the countries we track now have PMI readings below 50”, with an exception of a supposed few bright spot which includes India and CEE (central or eastern Europe) economies.

Finally, the global stock market boom has been propagating euphoria to the extremes. Now publications have been wildly celebrating record breaking stocks. See the pictures here.

I am reminded by the late legendary investor, Sir John Templeton who once said, 

Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

Those pictures seem portentous of things to come.

Bubble Risks Spreads into Mainstream Thinking

By the way, there seems to be growing recognition from the mainstream of the heightened risks of a global crisis.

JP Morgan’s Jaime Dimon predicts a coming crisis. 

Pimco’s former founder and now Allianz chief economic adviser, Mohamed El Erian likewise sees rampant bubbles everywhere from central bank policies which is why he says he is mostly into cash.

Finally, US President Obama’s major crony, the former value investor Warren Buffett, denies a US stock market bubble. 

Yet paradoxically his flagship Berkshire Hathaway has been amassing cash at the fastest rate since 2003. Also Mr. Buffett recently warned in his recent annual report that “Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets.” Curiously the US stock market has been afflicted by the immense absorption of borrowed money! Yet no bubble! Another progressive thinking characterized by "Do as I say, not as I do".

Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights

A) Inequality of Returns

At the local front, there’s more than meets the eye for the record-after-record Phisix.

Record Phisix 8,100 has really been more about headline number than representative of the whole market sentiment. 

To emphasize, headline numbers have usually been intended exhibit form or symbolism rather than of substance.

Let us go through the numbers.

Based on market cap weighted Phisix, the year to date return this week has been 12.4%.

Of the top 15 issues, 10 or two third has delivered 12.4% or more. 

Of the next 15 issues, only 5 or one third generated 12.4% or more.

Overall, one half of the issues delivered gains at par or more than 12.4% while the other half produced lower than the benchmark returns.

Let us dive deeper into the details.

Of the half that outperformed, the average returns had been a stunning 20.3%! Of the half that underperformed the average returns had been at a shocking only 1.96%! So the average returns for the 30 composite members of Phisix registered only 11.124% compared to the 12.4% market weighted returns

The huge disparity (20.3% vis-à-vis 1.96%) represents a sign of growing concentration of trading activities!!!

And for the 10 outperforming issues from the upper 15 bracket, returns have been at an average of 18.43%! The average returns of the top 15 Phisix members had been at 13.6% relative to the latter half of 8.7%.

This means that Phisix 8,100 has mostly been a story of the 10 issues from the 15 biggest market cap heavyweights!!! The other 5 issues at the lower half of the Phisix have merely played a complimentary role.

And for those with the impression that blindly investing in any of the Phisix members would generate returns equal to the Phisix will be up for a big disappointment; that’s because as the above shows “inequality” dominates the distribution of returns!

Despite 8,100, the rising tide has apparently not lifted all boats.

B) Inequality of Valuations via PERs

The distribution of Price Earning Ratios (PER) confirms on the huge tilt in trading activities and price actions towards the most popular issues.

The average PERs of the upper strata of the Phisix has been at a whopping 31.06 as against a still expensive 21.94 of the latter half!

The average PERs of the outperformers from the overall index has been at a staggering 30.59 as against the underperformers at which has been at a dear 22.44. (note I omitted in my calculation Bloombery due to negative PERs so denominator has been reduced to 14 for the latter half)

The average PERs of the 10 top performers from the upper level of the Phisix has been at a colossal 32.9! The distribution of which are as follows: 3 issues with PERs of 20+ (AGI, GTCAP and SM), 3 with 30+(SMPH, ICT and AC) and 4 with PERs at an incredible 45-50 (JGS, ALI, URC, JFC)!

Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Nonetheless, Phisix 8,100 appears to have been divergent from actions of general market activities.

For this year, there has only been one week where advancers took complete command of the stock markets. 

In general, of the 14 weeks through April 10, 2015, declining issues dominated 64% (9/14) weekly trading. 

From this perspective, record Phisix 8,100 implies less support from the broader market than has been conveyed by the headline numbers.

Also such signify as signs that the general market has been looking for a correction from which have been written off by the index managers.

Additionally, the serial record after record stocks has been accompanied by a material decline in peso volume trade (left). 

This week’s the average daily Peso volume has ranked the fourth lowest of the year considering that Friday Php 12.873 billion has helped pumped up this week’s numbers.

As you would notice, record highs have been accompanied by falling volume—this seems hardly signs of broad based optimism.

And I would suspect that the bulk of the daily peso volume may have been cornered by these elite issues.

If only I have time to get the total volume of the 10 issues relative to the overall market from 2014 to date. This would have likely shown the share weights and depict of the influence of these issues on the PSE.

And foreign buying has hardly been a factor in driving the serial record highs.

Based on my tabulation of daily PSE quotes, foreign net buying has been diminishing; specifically January Php 23.6 billion, February Php 16.4 billion and March Php 7.5 billion. As of April 10, net foreign buying posted only Php 940.4 million. In total, net foreign buying accounted for Php 48.444 billion, or a paltry 7.13% of the total peso volume of Php 679.263 billion. 

Also a big portion of foreign buying seems to signify special block sales than from regular board transactions.

So record 8,100 Phisix has been a story of mostly local investors pumping up select issues for the seeming purpose of symbolism.

Working alone gives me little time to delve or pry into more detailed data such as issues above or below 50-day moving averages or number of issues at record highs versus number of issues in bear markets or peso volume per issue relative to total volume. This perspective would surely have added depth to this insight.

Bottom line: Market breadth generally in favor of declining issues, peso volume on a seeming downtrend, measly foreign buying, the deepening concentration of trade activities towards popular issues comprising 10 of the 15 largest market cap which has been supported by increasingly grotesque valuations via PERs on mostly the same issues implies that Phisix 8,100 hardly seems about broad based optimism but about the consolidation of trading and price pumping activities from actions of the index managers.

And such increasing compression of trading activities towards popular issues underscores, matches, and partially affirms my earlier point that the popular perception about sustained generalized phenomenal earnings has been outrageously overrated or exaggerated and instead represents the representative bias, the survivorship bias and the fallacy of composition than from real developments.

Three of the four trading days this week had minor “marking the close” which again reveals of the rampancy of stock market rigging.

So while in the past the bullmarket had almost been a purely market phenomenon, today, record after record Phisix has accounted for the mutation of the Philippine stock market into brazen market manipulation.

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[1] See Frank Shostak: How Easy Money Drives the Stock Market April 10, 2015

[2] Arturo Estrella and Frederic S. Mishkin, The Yield Curve as a Predictor of U.S. Recessions Federal Reserve Bank of New York June 1996

[3] See Chinese Tech Bubble Dwarfs US Dotcom Bubble as Manic Buying Spreads to Hong Kong and to Macau’s Casino Stocks! April 9, 2015

[4] James MacKintosh This is *really* nuts. When’s the crash? FT Alphaville April 10, 2015

[5] IIF.com Weekly Insight: Sunnier Mood, Clouds Remain April 9, 2015