Note: I am supposed to include Friday’s selloff in the US market, the selloffs in global bonds JGBs German Bunds and other Europe’s sovereign bonds , the spike in Hong Kong’s HIBOR that have likely backed the resurgent US-CNH, unfortunately I’m partly indisposed.
In this issue
Phisix 7,580: Media "Cries Uncle" as the Maginot Defense Line Caves In!
-Despite Endless Price Fixing, Maginot Defense Line Caves In!
-Media Cries Uncle! Falling Phisix Blamed on Duterte’s Tantrums!
-Fact: Foreign Selling Has Weighed on the PSEi even Prior to Duterte’s Hissy Fits
-History in Motion: PSEi’s Record Imbalances!
-Ramifications of the Intensifying Schism Between the Government of Philippines and the US
-ASEAN Bourses: What has Plagued Thailand’s SET and Indonesia’s JKSE, Duterte’s Tantrums too?
Phisix 7,580: Media Cries Uncle as Maginot Defense Line Caves In!
With the PSEi’s breakdown from a very narrow (7,800-8,000) trading range, last week’s 2.89% plunge have spurred media to implicitly appeal to the Philippine leadership to moderate on what has been perceived as spate of outbursts that has been “frightening away” investors.
Despite Endless Price Fixing, Maginot Defense Line Caves In!
Yes curiously despite all the massive end of the day pumps designed to prop the artificial 7,800 barrier (the 8,000 Maginot Line), apparently market forces has flexed its muscles anew.
To recall, the week ending September 2 posted only a .49% deficit. And that week’s modest loss was aprincipally a result from a huge (possibly record) 140.61 points or 1.81% marking the close pump in three out of the 4 trading sessions!
Echoing last week’s Maginot defense strategy, last Thursday, during the early trading session, the PSEi delivered a fantastic comeback.
From an early (about 1%) plunge the PSEi skyrocketed by a stunning 103 points or 1.4% surge in exactly 30 minutes! It was marking the close forwarded. Understand that for the PSEi to rise vertically, it needs a concerted and synchronized upside price actions on some of issues comprising the top 10 in terms of market cap.
In short, to achieve a Viagra effect means a coordinated pump on several key big cap issues.
Apparently index managers had been so incensed by the string of selloffs that they felt the urgency to do something to stanch the hemorrhage. The domestic benchmark ended the day up .63%.
It wasn’t just the impressive comeback that makes the day’s trading interesting, more importantly, the wild intraday swing (of no less than 2.5%) reveals of the scale of developing instability within the PSE. It’s a symptom of imbalances that wants to be vented out.
On Friday, sellers had other things in mind, so they reversed the scale of end-of-the-day price fixing to employ a reverse “marking the close” dump: 43% of the day’s 1.1% loss came from marking the close.
What comes around goes around.
All these accumulated episodes of end of the day price fixing process has been happening ONLY in the Philippines!
Unfolding developments at the stock market reflect and or reverberate on developments at the Philippine political front: the entrenched belief in the superhero effects, or of the creed of attaining “something for nothing”.
Learning from history, the Maginot Line was a defensive position constructed by the French army to prevent a World War I battlefield scenario. Unfortunately for the French, Nazi Germany devised its invasion by outflanking the fortification to highlight the advent of World War II. The Germans moved its forces around the Maginot Defense structures through Belgium, Netherlands and Luxemburg to capture France in a very short period.
Media Cries Uncle! Falling Phisix Blamed on Duterte’s Tantrums!
International media says ‘The Philippines’ foul-mouthed president has been frightening away foreign investors’ (Quartz September 7). Also a Bloomberg report (written by a local reporter) bannered “Duterte Outbursts Taking Toll as Philippine Stock Losses Mount” (September 7). To quote the first paragraph: “Losses in Philippine stocks are accelerating, with foreigners pulling more money from Asia’s most expensive market amid speculation the outbursts of President Rodrigo Duterte will have consequences that go beyond politics.” (bold mine)
The report goes on to cite analysts who said that recent actions “didn’t sit well” with overseas investors or one who noted that markets have raised concern over Mr Duterte’s “unpredictable behavior” and for another that one “should take advantage of the weakness and accumulate”.
The report didn’t bother to even explain the possibility that the “most expensive market” rather “outbursts” could have been a factor for the recent spate of selling actions.
The general idea is that without those flare ups, most expensive market doesn’t really matter…at all!!
See what something for nothing means?
Financial markets as discounting mechanism signify a time consuming process. Therefore the question is what new information has been factored in to have changed the equation?
Has the Philippine leadership’s foul language, expletive laced outbursts and confrontational approach been something new?
Here is a brief chronology on the habits of the Philippine leadership
As a leading presidential candidate, didn’t Mr Duterte threaten to cut ties with the governments of the US and Australia for the latter two’s criticism of the former’s rape “joke” (AFP Rappler April 21)? Like today, Mr. Duterte backtracked to say that cutting ties with them was merely “hypothetical” (CNN April 23)
I have recently noted how outbursts, expletives and the subsequent backpedaling have represented a pattern designed to pander to the mob or to the “ochlocracy”
Again the rhetorical pattern of political management has been similar: attack and then downscale.
(see Hayek quote at the latter segment)
Didn’t Mr Duterte, as presidential candidate, curse the Pope over the traffic caused by the latter’s visit to the Philippines? The controversy was again passed off again as a “joke” (Rappler November 30 2015)! Right after victory, Mr Duterte expressed intent to apologize to the Pope (Time May 13) but had a change in mind just a few days after (Time May 17)
So first victim of verbal acerbity, the Pope.
Didn’t Mr Duterte accuse foreign media for being “corrupt” and deserving of assassination in response to the latter’s questioning of the former’s war on drug policies (CNN June 3)?
Even the domestic government censor body (MTRCB) have been lost on how to deal with curses by its leader during the press cons (CNN June 4).
Notice that while all these were happening the Phisix raced from 6,991.87 (pre-election low May 6) to 8,102.38 (July 21) for a stunning 15.9% two month surge! Did anyone from the mainstream say how foul language, expletive laced outbursts and confrontational approach been positive for stocks????
Yet didn’t Mr Duterte hurl invectives at media again for the same criticism on the war on drugs, prior to the ASEAN summit (ABS Aug 29)?
One mainstream article even presciently asked “Will President Duterte curse in ASEAN Summit?” (ABSSeptember 2)
Second party to the conniption fit—foreign media.
Why has media predicted something which economists saw as “unpredictable”?
Has soaring asset prices created such huge blind spots for “experts” to see the “unpredictable” staring and breathing at their faces?
Yet the brewing tensions with US had already been simmering even prior to the ASEAN summit.
Aside from earlier strains brought by the rape joke, the Philippine leadership and the US ambassador met over territorial disputes in June, where the latter pressured the US emissary: “are you with us or not?” (Inquirer, June 22)
In August, the Philippine president cussed at the same US ambassador whom was accused of meddling in the last elections (independent.co.uk August 11): “As you know, I’m fighting with [U.S. Secretary of State John Kerry’s] ambassador,” he said in a televised address. “His gay ambassador, the son of a whore. He pissed me off.”
So two preceding events have not served as clues to the Philippine leadership’s outbursts against the US leadership at the ASEAN summit?
International media have been abuzz over the sensational tantrums thrown by the Philippine leadership now directed at the highest post of the US government, the president. (The Guardian with video September 6). Such hissy fits again were vehement responses to anticipated censures on the Philippine leader’s use of extrajudicial means to resolve its war on drugs. And as counter response to the slur, the US president snubbed the Philippine president by cancelling a scheduled appointment (The Guardian September 5)
Though, Philippine leadership expressed ‘regret’ for the incident (Marketwatch September, 6), later, the Philippine leadership denied that the cussing was directed at the US president but at the US State Department (The Guardian September 6)! Ironically the US state department is under the US executive branch.
So the Philippine leadership applies smokescreen to the damage it has purposely incited
Again the “sleight and mollify” PR pattern
Yet in a speech at the same forum, the Philippine leadership harangued the US counterpart for previous human rights violations in the Philippines: (bold mine) In what attendees described as a "fiery address," President Rodrigo Duterte veered off his prepared speech on Thursday at a meeting of the 18-nation East Asia group including United States President Barack Obama to launch a tirade on US military killings in the Philippines. This was according to three diplomats who were in the room who spoke to Agence France-Presse at the event in Vientiane, Laos. "The Philippine president showed a picture of the killings of American soldiers in the past and the president said: 'This is my ancestor they killed. Why now we are talking about human rights,'" an Indonesian delegate said. The Philippines was an American colony from 1898 to 1946. The delegate described the atmosphere in the room as "quiet and shocked." (GMA, September 9)
Totally awesome!
The above represents a clear employment of the Ad Hominem (Tu quoque): “Description: Claiming the argument is flawed by pointing out that the one making the argument is not acting consistently with the claims of the argument. Logical Form: Person 1 is claiming that Y is true, but person 1 is acting as if Y is not true. Therefore, Y must not be true.”
Anyone who dares criticize on his supposed mandate to use extrajudicial means to his pet project the “war on drugs” will be subjected to ad hominem politics through intimidation, expletives and threats at the very least. The idea is to paint himself as sincere, steadfast in commitment, and morally upright to his followers
Hence the subsequent latest responses by the administration “I am no fan of the US” (Inquirer September 11) and that the Philippines will “pursue an independent foreign policy” (Inquirer September 10).
By the way, presidential candidate Hillary Clinton called for the Philippine president to show “respect” to the US government (Reuters, September 7)
Yet curiously, the Philippine leadership has resorted to using the “law” when he has been placed at a disadvantaged position. The leadership cites the “1987 constitution” as grounds for its sudden embrace of “independent foreign policy”. And oddly, the administration also called the Chinese government to adhere to the “rule of law” in the South China Sea (GMA September 8).
Most of the tensions with its foreign peers have been about “law”. Paradoxically, on demands that Philippine leadership observe the same “law” in the war of drugs, the leadership responds with amazing vitriol!
The Philippine president even intensified his denunciation of the UN chief whom he called a “fool” (PhilstarSeptember 10)!
Again as I noted last week,
And speaking of symbolical PR mileage to justify emergency powers, if the war on drugs has gone out of control in terms of finance, the war on drugs have also run amuck in terms of foreign policy.
Despite the insults, the US government have stated that it will provide planes to the Philippine Coast Guard (Global Times September 8). Likewise, the Japanese government promised to supply the Philippine government with ships to counter China’s military expansion at the disputed islands (Financial Times, September 6)
Peculiarly, the Duterte regime appears to be making overtures for a closer relationship with China. The Philippine government thanked its Chinese counterparts for building a drug rehabilitation center at Nueva Ecija (GMA, September 10) while disparaging the US government by saying that the latter only “give you principles of law and nothing else.” (GMA September 10)
The administration seems to be applying a tacit blackmail stratagem at the US: “if you push hard on my war on drugs, then we will shift allegiance to China!”
Of course, the North Korean government is THE expert in the geopolitics of blackmail. Last week, not only has the North Korean government reportedly fired 3 ballistic missiles (CNN September 5), they reported of successful nuclear test (CNN September 10). The North Korean government uses signs of military aggression to get deals from the west. So perhaps we see some resemblance. Perhaps it is time for the Philippines to acquire nuclear weapons too!
And these have been so hard to see and interpret?
As I pointed out before, what makes this current epoch a historical landmark appears to be a marked shift of Philippine political economy to the left. The leadership has not only been a self-declared socialist (InquirerApril 18), hence his soft heart for the NPA, but most of what has been declared as war on everything else (policies) has had neo-Maoist origins (death penalty, economic zones, 3 child policy and etc…).
Fact: Foreign Selling Has Weighed on the PSEi even Prior to Duterte’s Hissy Fits
Back to stocks.
Ever since the July 21 pinnacle, the headline index has been adrift at a very narrow range, specifically 7,800-8,000. Or the PSEi has traded sideways over the past 7 weeks. A significant reason for the sideways movement has been from rigid index management activities.
This week’s 2.89% plunge intriguingly affected ALL 30 PSEi issues.
Except for the financials, all mainstream sectors closed materially down. The mining sector was unchanged.
The reason financials (+1.25%) braved the wave of broad based selling was mainly because of one issue: Security Bank’s 13.97% jump for the week.
Starting September 13, Security Bank will replace Bloomberry to become part of the Phisix. So last week’s pump in SECB may have been in anticipation of its inclusion to the PSEi basket.
The SECB’s entry to the PSEi means that the banking industry will get a significant boost or secure a larger share on the major headline benchmark. This comes mostly at the expense of the services and possibly the other less significant sectors (industrial, mining) based on total % share. Of course, the rebalancing means that this should affect the holding and the property sectors too.
SECB is likely to take on the 10-15th spot in the PSEi basket. Based on the financial index, SECB has already surpassed MBT by a slight margin. MBT ranked 11th in the PSEi basket as of Friday.
Financials accounted for 14.83% share of the PSEi as of Friday, fourth only to the holding sector (40.35%), property (18.21%) and industrials (15.49%).
The entry of SECB also means that the local benchmark has been constructed with the predisposition towards incorporating outperforming issues at the cost of underperformers. This is called the survivorship bias.
Or said differently, the PSEi basket tends to represent the most inflated or most expensive assets.
The broader markets hardly shared on the skewed selloff in the PSEi. Decliners led by a modest margin of 139—from the weekly aggregate of 400 advancers and 539 decliners.
The previous larger margin of 153 (in favor of losers) occurred during the week of August 12 where the PSEi posted only a .18% deficit.
In short, there has been a notable deviation in sentiment between the PSEi 30 and the broader market.
Aggregate foreign trade posted net selling worth Php 7.46 billion for the week. This was marginally lower (-1.8%) than the last week’s selling at Php 7.6 billion. Foreign money sold local equities in 4 straight weeks, although the scale of weekly selling for this week and for last week has been the largest since 3Q 2015.
Foreigners accounted for a slight majority or 51.37% of total trade last week. Foreign trade remains consistently a dominant force as revealed by its ratio of contribution to overall turnover at the PSE.
Meanwhile, the average peso daily turnover was down -17.58% to Php 8.6 billion this week from last week’s Php 10.4 billion
Basically, each transaction has a buyer and a seller. So net foreign selling alternatively means net local buying. Net transactions only indicate of the changes in the composition of ownership. They do not establish changes in price direction.
The most important thing to understand is that price formations are determined by either the marginal buyer or the marginal seller.
To piece together and interpret the four numbers—net foreign selling Php 7.46 billion, PSEi down 2.89%, lower volume (-17.58%) and disparity between PSEi and broad market performance—postulates to foreigners as signifying the net marginal seller who were responsible for the material deficit at the PSEi.
Foreigners own or hold mostly PSEi issues principally due to liquidity, as well as benchmarking or index tracking concerns, like ETFs, e.g. MSCI Philippines. Hence, the selloff on the PSEi by foreigners has hardly been shared by the broader markets, which had less foreign exposure.
This shows of the growing divergence in the outlook between locals and foreigners.
In the meantime, the deceleration of volume indicated of insufficient support on price levels determined or set by the marginal net sellers, or by foreign money. Though amount of foreign selling hardly increased from last week, volume on the bid side materially slowed. Sellers had to exit at lower prices. Hence, such signified as the prime reason for the substantial loss in the headline index..
Again to reiterate, market facts tell us that foreigners sold local equities in four consecutive weeks. Or net selling occurred even prior to the available or recency bias of “foul language”, expletive laced “outbursts” and confrontational approach that hounded the Phisix this week.
Hence the notion of tantrums equals selloff has not been entirely true
History in Motion: PSEi’s Record Imbalances!
Why should foreigners not sell?
As the Bloomberg article admitted, the PSE signifies as the most expensive bourse in Asia.
Despite this week’s selloff the ‘official’ PER (PSE published) of the PSEi remains at 26.32 (average) based on 2015 eps and 27.2 calculated from market cap weighting.
And it’s not just imbalances from price and valuations, but also on unsustainable vertical price actions, skewed distribution of record runs towards 11 issues (PSEi 8,050: Why Momentous History is in the Making, The Bernanke Helicopter Money Factor July 17), as well as on record highs in the activities of several market internal measures.
Despite the seemingly smooth headline number for the past 7 weeks, internal price volatility had basically been unhinged! Upside and downside spirals have become a defined character.
Add to this the BSP Chief’s warning to the industry: “Do not be oblivious to financial stability issues.” (History in the Making: BSP Chief Warned on Financial Instability Risks! Castigates Fund Management Industry to Uphold Standards! August 7)
Moreover, for whatever published reasons tycoons, John Gokongwei and the Ty family sold shares from their flagship companies. The act of selling and the preference for cash have likely indicated of a market top!
Furthermore, index managers have increasingly and desperately been using record marking the close pumps to manage the daily headline index
Finally, Newton’s third law of motion in the context of price actions has not only reappeared but appears to be spreading.
JGS appear to be the first among the 11 issues that hit a new record high in 2016 to drop to bear market levels (as of Friday). The share sales by Mr Gokongwei last May make him look very much like a stock market sage!
Ramifications of the Intensifying Schism Between the Government of Philippines and the US
To be clear, this is NOT to deny the adverse impact from the US-Philippine spat, but rather to emphasize that last week’s events only functioned as an aggravating circumstance to an existing dynamic. Or last week’s unfortunate political bickering signified as a secondary cause—a trigger, a venting from the opening of an outlet valve
The gullible public are largely seduced to post hoc explanations and thus some of their actions have most likely been guided by them.
Yet a sustained dynamic of what seems as a progressing foreign policy debacle predicated on a “sleight and mollify” would have nasty interim to long term consequences. Of course, all such tensions have been predicated on the administrations’ bullheaded predilections to impose an ochlocractic dictatorship founded on the “war on drugs”.
As an aside, the obsession to the superhero effect by the Philippine leadership, with the implicit goal to gain sustained popularity (ochlocracy) through myth creation comes at the expense of economic and political reality. This has daintily been summed up by the great Austrian economist F.A. Hayek (Road to Serfdom, p 157, Xenopraxis.net)
The most effective way of making everybody serve the single system of ends towards which the social plan is directed is to make everybody believe in those ends. To make a totalitarian system function efficiently it is not enough that everybody should be forced to work for the same ends. It is essential that the people should come to regard them as their own ends. Although the beliefs must be chosen for the people and imposed upon them, they must become their beliefs, a generally accepted creed which makes the individuals as far as possible act spontaneously in the way the planner wants….
More… (p 159)
The moral consequences of totalitarian propaganda which we must now consider are, however, of an even more profound kind. They are destructive of all morals because they undermine one of the foundations of all morals, the sense of and the respect for truth. From the nature of its task, totalitarian propagandacannot confine itself to values, to questions of opinion and moral convictions in which the individual always will conform more or less to the views ruling his community, but must extend to questions of fact where human intelligence is involved in a different way. This is so, firstly, because in order to induce people to accept the official values, these must be justified, or shown to be connected with the values already held by the people, which usually will involve assertions about causal connections between means and ends; and, secondly, because the distinction between ends and means, between the goal aimed at and the measures taken to achieve it, is in fact never so clear-cut and definite as any general discussion of these problems is apt to suggest; and because, therefore, people must be brought to agree not only with the ultimate aims but also with the views about the facts and possibilities on which the particular measures are based.
Understand now why the administration’s recourse to ad hominem politics?
Such has never been meant or intended to address issues “because the distinction between ends and means, between the goal aimed at and the measures taken to achieve it, is in fact never so clear-cut and definite as any general discussion of these problems is apt to suggest”.
Instead, they are designed to generate soundbites enough so that they’d be “connected with the values already held by the people” for people to “come to regard them as their own ends”.
Brainwashing, in short!
Back again to the untoward side effects from the US-Philippine rift which I previously wrote
-This would eventually prompt US rating agencies credit downgrades—especially if US military interests are compromised.
-This would reduce investment and portfolio flows from US and allied nations.
-Credit flows will likely ebb too, thereby putting pressure on access to international credit markets and thereby tightening financing conditions. This will be baneful to a leftist government with a penchant for political spending profligacy: social spending (welfare state), bureaucracy, infrastructure, and most importantly, the military institution.
The reduced access to credit and fund flows will likely accelerate on the unraveling of the mounting economic and financial imbalances inherited by this government from the previous two regimes.
-The Philippine government will be alone to deal with territorial disputes. (This should be a good thing if only the Philippines government’s response would be to increase trade rather than through brinkmanship politics)
-Finally, it would be a lot cheaper or cost effective for the US government to engage in covert operations to influence the domestic political environment than to pullout from the country. The US government may surreptitiously work to offset whatever leverage the administration has been building to countermand the US government’s influences in the country. The US government has been no stranger to the financing, influencing and orchestrating destabilization to regimes it perceives as hostile to its interests. Operation Gladio should be stark reminder.
And Mr Duterte’s confidante ex president Fidel Ramos (FVR) knows this.
As an aside, curiously too, Mr Duterte announced that FVR has been the source of his roster for the publicly divulged drug network which “The Philippine Drug Enforcement Agency (PDEA), the National Buerau of Investigation (NBI), and the Department of Justice (DOJ) have all denied that they helped in preparing Duterte’s narco-list.” (GMASeptember 7). So whatever FVR says the Philippine leadership does. Does this include the path to dictatorship?
Oh as a final thought, the next thing to monitor is what the administration will do with its newly obtained emergency powers. If the administration cracks down on leaders from different branches of the government then martial law will likely be the next thrust. After which, congress will be blackmailed to pass constitutional changes, asap, or if not congress will be abolished and replaced.
If so, the Philippines can be expected to gradually close its doors with the world. And today’s pugnacious approach could be just signify the tip of the iceberg. That's a conditional IF.
ASEAN Bourses: What has Plagued Thailand’s SET and Indonesia’s JKSE, Duterte’s Tantrums too?
Speaking of ASEAN, it’s also a fascination to see that after the PSEi peaked in late July, two better performing neighbors appear to have equally reached an apogee a few weeks after.
The Phisix’s seeming identical chart twin, the Indonesia JKSE lost 1.34% this week but remains up a striking 15% year to date. The JKSE has been off 3.77% from the latest August highs.
Thailand’s SET plummeted 5% this week. The SET still has been up by a considerable 12.2% year to date. As of Friday, the SET has been off 6.9% from the August highs.
The Phisix has likewise been 6.4% down from July highs.
Has Duterte’s tantrums provoked similar selloffs in the bourses of the high flying asset peers? Or has foreign money been selling ASEAN high flying bourses even prior to the ASEAN summit? And has the mercurial hysteric episodes by the Philippine leadership provided the rational or excuse for global investors to dump ASEAN assets?
Well, though the current events may signify a kneejerk reaction, much will now depend on the feedback mechanism between the parties involved as with those associated with them.
Of course, politics can hardly stand alone, economic and financial conditions will also carry a substantial weight in the performance of the region’s asset markets in the coming days.
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