Thinking can never quite catch up with reality; reality is always richer than our comprehension. Reality has the power to surprise thinking, and thinking has the power to create reality. But we must remember the unintended consequences – the outcome always differs from expectations—George Soros
In this issue
An Oil Shock is Not Favorable to the Stock Market; PSEi 30 Violates the BSP’s 2020 Trend line!
I. Amazing Pumps and Dumps
II. An Oil Shock is Not Favorable to the Stock Market
III. PSEi 30 Energy Stocks and ICT Defy Drawdown
IV. PSEi 30 Violates the BSP’s 2020 Trendline; China’s Shanghai Index Plunge Anew as Credit Stress Mounts
An Oil Shock is Not Favorable to the Stock Market; PSEi 30 Violates the BSP’s 2020 Trend line!
I. Amazing Pumps and Dumps
One can only watch in amazement the remarkable transformation of the PSE into a menagerie of pumps and dumps.
Figure 1
The cumulative pumps and dumps totaled about 4.3% or 320 points of the closing price of the index a week ago! These may be signs of cracks in the consortium of institutional players who have been supporting the index. (PSEi 30charts from Technistock)
The magnitude and frequency of the pre-closing pumps and dumps reveal the extent of mispricing and distortions in the stock market. Yet, such activities are the observable aspect of the increasing likelihood of the gaming of the stock market.
II. An Oil Shock is Not Favorable to the Stock Market
Let us cut through the chase: an oil shock will not be favorable to the stock market.
After hitting a high of USD 130 per barrel, the West Texas Intermediate crude fell by 4.9% to USD 109.33. Oil prices have gone parabolic.
History provides an example.
WTI crude soared from about USD 55 per barrel in 2007 to a peak of USD 145 per barrel in 2008. The PSEi 30 climaxed in late 2007 and fell as oil prices raged. Yes, the implosion of the US housing bubble was the principal trigger, but the oil shock also delivered the crucial follow-up blow.
Though past performance may not guarantee future results, spiking oil and commodity prices from massive disruptions in the supply network could compound the current economic burden. It would aggravate the imbalances caused by the political responses to the pandemic. Importantly, it will also exacerbate the malinvestments from the easy money policies of the BSP.
Unless caused by the government/s, an oil shock is usually a temporary event. Also, supply disruptions can’t last if there is no money to support demand.
So yes, central bank policies are likewise behind the ballooning economic mismatches.
Oil shocks benefit producers at the expense of the general industry and consumers. Think of the stagflation of the 1970s.
That said, positioning on commodity upstream or producers may function as a hedge against oil and commodity shocks.
III. PSEi 30 Energy Stocks and ICT Defy Drawdown
The Philippine headline equity bellwether closed the week down 3.13%, the most in 2022.
Of the elite 30, only three issues, primarily energy firms MER, AP, and ACEN, posted positive returns.
Figure 2
Their outperformance resulted in a jump of their share weight of the free-float market cap. Meralco’s share represented the second-best gainer this week.
Interestingly, the outperformance of the energy stocks is understandable if authorities allow them a pass-through of the surge in inputs (oil and natural gas) to the consumers.
Otherwise, market participants may be overestimating the role of these midstream (storage) and downstream (distribution) firms.
Meanwhile, ICT hit a fresh record this week before retreating.
Based on the free-float market cap, ICT wrested the fifth slot of the top 5 from Ayala Corp. While ICT benefited from price surges from the global supply chain dislocations, the accelerating pace of de-globalization puts into doubt the sustainability of such windfall.
IV. PSEi 30 Violates the BSP’s 2020 Trendline; China’s Shanghai Index Plunge Anew as Credit Stress Mounts
Figure 3
While we are agnostic on short-term chart patterns, the PSEi 30 broke its March 2020 support trend for the second time in 2-years. Further, the 7,400-7,500 level appears to be rolling over, perhaps exhibiting an acceleration of distribution.
With the front to the belly of the curve up this week, treasury traders appear to be pricing in rate hikes from the BSP. This outperformance relative to the 10, 20, and 25-year bonds signify a flattening slope, signaling deteriorating liquidity conditions and the heightened risks of a nasty economic slowdown.
Eroding liquidity conditions point to lower volume transactions in the PSE. It also advances the prospects of liquidations.
Figure 4
And speaking of liquidations, a whale, China’s Shanghai Composite index continues to exhibit signs of a meltdown. It plunged 4% this week.
Resurgent Covid-19 cases may be a convenient pretext. But my bet is that the Chinese economy is reeling from the real estate liquidations. Dollar junk bond yields soar to new record highs as YoY changes in money supply posted their first decline.
Pressures on global stock markets will likely diffuse into the local contemporary.
Yours in Liberty,
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