Phisix 7,150: Team Viagra Closes April With Another Huge Pump!

As expected, after failing to hold onto 7,200, Team Viagra won’t just allow the headline index to scuttle further. So they had to double their efforts to ensure that losses today won’t be deep. The end session pump have been intensive because today's session marks the last trading day of the month. And this may have accounting significance.

As a side note, let me add that Team Viagra’s actions have not been limited to cushioning losses but likewise amplifying gains during runs

Down .35% a second prior to the runoff phase, Team Viagra used marking the close during the market intervention phase to wipe off an astounding 90% of today’s losses. So the day closed nearly unchanged (-.05%)

Team Viagra had to make sure that each sector was covered, so they pumped select issues from each of the following major sectors 

As one would note, JGS has become one of the latest favorite. Deep losses by JGS suddenly became unchanged for the day due to a staggering 1.2% pump.

Today’s push on JFC contributed to 28% of the stock’s weekly gain 

Oh, before I close I included last Tuesday’s minor marking the close. 

As one would note, the rampant and intensive use of last minute pumping happens ONLY in the Philippines!  

Such rigging of the marketplace tell us why unscrupulous activities--like an international online hacking-heist, which ended up on a local bank--occurred. Add to this accusations over DBP's bond market manipulation.

And the public has been made to believe that the Philippine credit fueled boom has been puritanically based.

Charts and Images from PSE, Bloomberg, Colfinancial and Technistock

Bank of Japan’s Kuroda Stiffed Casino Addicts by Withholding Stimulus, Nikkei 225 Plunged 3.61% as Yen Rallies

If the Venezuelan government has run out of the money to print money, their counterparts in Japan, particularly the BoJ, seem to run out of spunk to deliver what they recently promised.

Casino addicts recently drooled over previous promises by the BoJ for more stimulus. Unfortunately, the BoJ duped them with a no-show today.

From Bloomberg

Shares in Tokyo tumbled, sending the Nikkei 225 Stock Average to its biggest loss since February, after the Bank of Japan maintained its monetary policy, confounding forecasts it would add to record stimulus.

The Topix index declined 3.2 percent to 1,340.55 at the close in Tokyo after the BOJ kept bond-buying, its negative interest rate and exchange-traded fund purchases unchanged. Volume on the Topix was about 48 percent higher than the 30-day average. Most economists surveyed by Bloomberg expected additional easing, with the stock gauge rising as much as 1.5 percent in the morning session. The Nikkei 225 retreated 3.6 percent to 16,666.05, its worst decline since Feb. 12. The yen surged 2.5 percent to 108.76 per dollar.

“It’s a total shock,” said Nader Naeimi, the Sydney-based head of dynamic markets at AMP Capital Investors Ltd., which oversees about $120 billion. “From currencies to equities to everything -- you can see the reaction in the markets. I can’t believe this. It’s very disappointing.”

The Nikkei’s 225 chart has been a wild roller coaster ride marked by stunning volatility. The Nikkei has been having a hard time to breach the high from the NIRP announcement. Today’s 3.61% brings the benchmark back below the resistance levels.

Increased incidences of heightened volatility only signifies the accumulating imbalances. As said last weekend,

Maladjustments, distortions and mispricing from sustained interventions have only been mounting. Politicians will never come to realize that there is no such thing as a free lunch until it is too late.

In Socialist Venezuela, Even Money Printers Run Out of Money to Print

When governments spend more than the tax revenues and or resources it generates, they eventually first run out of money. And if they continue to do so, they then eventually lose access to credit or money.

And given the dearth of resources, desperate governments usually resort to internal financing or the monetization of political spending via the printing press or the modern day printers the digital press (inflationism).

These usually ends up with the destruction of the currency via inflationism—hyperinflation

All these goes to show that the more a society relies on government, the more funding pressures, the greater the risk of inflation or even hyperinflation.

Well, when it comes to impoverishing constituencies through inflationism, socialism provides many modern day examples.

And one of the shining template has been current developments at Venezuela

UK’s former Prime Minister Margaret Thatcher once said that “The problem with socialism is that eventually you run out of other people's money [to spend].”

In socialist Venezuela, Ms. Thatcher’s keen observations can be construed literally. To paraphrase: The problem with socialism is that eventually you run out of money to print.

From Bloomberg:

Venezuela’s epic shortages are nothing new at this point. No diapers or car parts or aspirin -- it’s all been well documented. But now the country is at risk of running out of money itself.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases. Most of the cash, like nearly everything else in the oil-exporting country, is imported. And with hard currency reserves sinking to critically low levels, the central bank is doling out payments so slowly to foreign providers that they are foregoing further business.

Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.

This article is based on interviews with a dozen industry executives, diplomats and former officials as well as internal company and central bank documents. All of the companies declined official comment; the central bank did not respond to numerous requests for interviews and comment.

Here’s more

The story began last year when the government of President Nicolas Maduro tried to tamp down a growing currency shortfall. Multi-million-dollar orders were placed with a slew of currency makers ahead of December elections and holidays, when Venezuelans throng banks to cash their bonuses.

At one point, instead of a public bidding process, the central bank called an emergency meeting and asked companies to produce as many bills as possible. The companies complied, only to find payments not fully forthcoming.

Last month, De La Rue, the world’s largest currency maker, sent a letter to the central bank complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming. The letter was leaked to a Venezuelan news website and confirmed by Bloomberg News.

“It’s an unprecedented case in history that a country with such high inflation cannot get new bills,” said Jose Guerra, an opposition law maker and former director of economic research at the central bank. Late last year, the central bank ordered more than 10 billion bank notes, surpassing the 7.6 billion the U.S. Federal Reserve requested this year for an economy many times the size of Venezuela’s.

The above shows of the continuing to collapse by Venezuela’s currency the bolivar

The following accounts for Venezuela’s implied inflation rates (monthly and annually). (charts from Cato's Troubled Currencies web page)

Socialism has populist appeal, but they are uneconomical or unviable. 

At the end of the day, the socialism equates to social decay. Venezuela should serve as a paragon.

Quote of the Day: Enough is Enough. No Endorsement to State Plunder of People Through Elections

Austrian economist Robert Higgs posted at his Facebook page:

I realize that the suspense may become unbearable unless I make the following announcement, so here it is: I will not be endorsing any of the candidates seeking the Republican or Democratic Party nominations for president nor any of those seeking nomination by the minor parties. Indeed, I will not be endorsing the election itself. Finally, I will not be endorsing the continued existence of the nation-state over which these aspirants seek to preside. Enough is enough. I will not give my endorsement to politics as usual, a process by which competing parties seek to gain control the state's powers in order to plunder and bully the people at large for the sake of their principal supporters. Oh that all other people would join me in withdrawing their endorsement -- indeed, their acquiescence and blessings. Decent people ought to flee the whole diabolical process, leaving only the criminally inclined to go to war exclusively against one another without sacrificing the bodies, souls, and wealth of innocent parties.

Walter Williams: Self Ownership is the Foundation of Freedom

The great economist Walter Williams explains the ethics of private property: (courtesy of lewrockwell.com) [bold added]

My initial premise, when looking at all human issues, is that each of us owns himself. I am my private property, and you are your private property. If you agree with that premise, then certain human actions are moral and others immoral. The reason murder is immoral is that it violates private property. Similarly, rape and theft are immoral, for them, too, violate private property. Most Americans will agree that murder and rape violate people’s property rights and are hence immoral. But there may not be so much agreement about theft. Let’s look at it.

Theft is when a person’s property is taken from him — through stealth, force, intimidation, threats or coercion — and given to another to whom it does not belong. If a person took your property — even to help another person who is in need — it would be called theft. Suppose three people agreed to that taking. Would it be deemed theft? What if 100,000 or several hundred million people agreed to do so? Would that be deemed theft? Another way to ask these questions is: Does a consensus establish morality?

Self-ownership can offer solutions to many seemingly moral/ethical dilemmas. One is the sale of human organs. There is a severe shortage of organs for transplantation. Most people in need of an organdie or become very ill while they await an organ donation. Many more organs would become available if there were a market for them. Through the National Organ Transplant Act of 1984, Congress has made organ sales illegal. Congress clearly has the power to prevent organ sales, but does it have a right? The answer to that question comes by asking: Who owns your organs? One test of ownership is whether you have the right to sell something. In the case of organs, if it is Congress that owns our organs, then we have no right to sell them. That would be stealing from Congress.

People have the right to take chances with their own lives. People do not have a right to take chances with the lives of others. That is why laws that mandate that cars have brakes are consistent with liberty and seat belt laws are not. You might say, “Aha, Williams, we’ve got you there because if you don’t wear a seatbelt and you have an accident and turn into a vegetable, society is burdened with taking care of you!” That’s not a problem of liberty. It’s a problem of socialism. Nobody should be forced to take care of me for any reason. If government assumes the job of taking care of us, then Congress can control just about every aspect of our lives. When I was a rebellious teenager, my mother frequently told me, “As long as you’re living in my house and I’m paying the bills, you’re going to do as I say.” That kind of thinking is OK for children, but not for emancipated adults.

I have only touched the surface of ideas of self-ownership. The immorality associated with violation of the principle of self-ownership lies at the root of problems that could lead to our doom as a great nation. In fiscal 2015, total government spending — federal, state and local — was about $6.41 trillion. That’s about 36 percent of our gross domestic product. The federal government spent $3.69 trillion. At least two-thirds of that spending can be described as the government’s taking the property of one American and giving it to another. That’s our moral tragedy: We’ve become a nation of people endeavoring to live at the expense of others — in a word, a nation of thieves.

This applies universally and not just to the Americans.

Ludwig von Mises: The Impossiblity of Economic Calculation Under Socialism

Excerpted from the great Austrian Economist Ludwig von Mises' magnum opus Human Action (source: Econolib) [bold added]

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.

For more than a hundred years the substitution of socialist planning for private enterprise has been the main political issue. Thousands and thousands of books have been published for and against the communist plans. No other subject has been more eagerly discussed in private circles, in the press, in public gatherings, in the meetings of learned societies, in election campaigns, and in parliaments. Wars have been fought and rivers of blood have been shed for the cause of socialism. Yet in all these years the essential question has not been raised...

It is the two fundamental errors of mathematical economics that must be indicted.

The mathematical economists are almost exclusively intent upon the study of what they call economic equilibrium and the static state. Recourse to the imaginary construction of an evenly rotating economy is, as has been pointed out, an indispensable mental tool of economic reasoning. But it is a grave mistake to consider this auxiliary tool as anything else than an imaginary construction, and to overlook the fact that it has not only no counterpart in reality, but cannot even be thought through consistently to its ultimate logical consequences. The mathematical economist, blinded by the prepossession that economics must be constructed according to the pattern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations. He no longer deals with human action but with a soulless mechanism mysteriously actuated by forces not open to further analysis. In the imaginary construction of the evenly rotating economy there is, of course, no room for the entrepreneurial function. Thus the mathematical economist eliminates the entrepreneur from his thought. He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary system from reaching the state of perfect equilibrium and static conditions. He hates the entrepreneur as a disturbing element. The prices of the factors of production, as the mathematical economist sees it, are determined by the intersection of two curves, not by human action.

Moreover, in drawing his cherished curves of cost and price, the mathematical economist fails to see that the reduction of costs and prices to homogeneous magnitudes implies the use of a common medium of exchange. Thus he creates the illusion that calculation of costs and prices could be resorted to even in the absence of a common denominator of the exchange ratios of the factors of production.

The result is that from the writings of the mathematical economists the imaginary construction of a socialist commonwealth emerges as a realizable system of cooperation under the division of labor, as a full-fledged alternative to the economic system based on private control of the means of production. The director of the socialist community will be in a position to allocate the various factors of production in a rational way, i.e., on the ground of calculation. Men can have both socialist cooperation under the division of labor and rational employment of the factors of production. They are free to adopt socialism without abandoning economy in the choice of means. Socialism does not enjoin the renunciation of rationality in the employment of the factors of production. It is a variety of rational social action.

An apparent verification of these errors was seen in the experience of the socialist governments of Soviet Russia and Nazi Germany. People do not realize that these were not isolated socialist systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of the prices established abroad. Without the aid of these prices their actions would have been aimless and planless. Only because they were able to refer to these foreign prices were they able to calculate, to keep books, and to prepare their much talked about plans.

Quote of the Day: Prohibition Is The Major Cause Of Crime

Austrian economist Mark Thornton in an interview with the Daily Bell

Prohibition is the major cause of crime. There are the crimes associated with buying and selling prohibited products like heroin and services like prostitution. Then there are crimes and violence associated with prohibition like those related to street gangs and organized crime, such as drive-by shootings, mafia "hits," racketeering, etc. Violence basically replaces the rule of law when markets are prohibited. Prohibition is the fountainhead of corruption. Without prohibition, corruption would be limited to things like elections and government contracts. With prohibition an enormous incentive (due to high prices) is created for black marketeers to offer bribes to law enforcement, the judicial system, bureaucrats and politicians to protect the bribe payer from being caught and punished. In addition, the bribe payer may offer government officials information about competitors, making law enforcement look competent and keeping prices high.

US Economy: Retail Woes Means Bad News for Shopping Malls

I previously mentioned about the ongoing retail woes in the US.

And one of the symptoms can be seen below.

The above chart reveals that inventory has been rising faster than sales. Even more, the ratio has now reached 2008 or recessionary levels!

A big influence on this has been that sales growth for both food and non food outlets has been steadily trending down since 2012 (charts above from St. Louis Federal Reserve's Fed Fred)

Apparently, financial strains in the US retail industry has now diffused or spread to their domestic shopping mall industry

The Business Insider reported (bold added)

Retailers like Sears, JCPenney, and Macy's have been closing hundreds of locations over the last several years, leaving dead or dying shopping malls in their wake as they try to remain profitable amid the growing threat of e-commerce.

But these closures are just the tip of the iceberg, according to a new report from real-estate research firm Green Street Advisors.

Department stores need to close as many as 800 more locations — or one-fifth of all anchor space in US malls — to return to the levels of productivity they saw 10 years ago, according to the report, which was first cited by The Wall Street Journal.

Sears would have to close about 300 stores (or nearly half of its existing locations), JCPenney would have to close 320 stores (31% of its current fleet), Nordstrom would have to close 30 stores (25% of its fleet), and Macy's would have to close 70 stores (9% of its total) to generate the kind of sales per square foot they saw in 2006.

The closures could force hundreds more shopping malls in the US to shut down, according to Green Street.

Department stores, known as mall anchors, have traditionally been major traffic drivers for shopping malls.

But their sales have been declining industry-wide for nearly a decade. Overall, departments stores' average productivity — or sales per square foot — has dropped 24% to $165 per square foot since 2006, according to the report.

Once anchors shut down, mall owners can have a difficult time finding retailers large enough to replace them.

Many owners are aiming to replace department stores with movie theaters, restaurants, and discount retailers like TJ Maxx, Ross Stores, and Marshalls.

Nicholas Eckhart Rolling Acres Mall.

But if a mall is hit by two or more anchor closures at once, then it's harder to stay afloat. That's typically the beginning of a downward spiral leading to ultimate extinction.

Here is the boom bust cycle of US department stores (clients of shopping malls).

Just a reminder, while e-commerce may be a factor to the retail sector's predicament, it has been a minor contributor. 

The share e-commerce sales to total retail sales was just 7.5% as of 4Q 2015. It was 7.4% in 3Q 2015. On a quarter to quarter basis, e-commerce grew by .1% or only 1.2% annualized. From Y charts

Well, symptoms shown above seem to replicate Philippine conditions, although the latter has been in the early phase of the inflection process.

As I have been saying here, the US Dead Malls and China’s Ghost Malls will serve as templates to the Philippine equivalent.

Socialism via QE: Bank of Japan 'Whale' Now Owns 55% of ETFs; also Top 10 Shareholder of 90% of Nikkei Stocks!

At the end of March I wrote,

In the political spectrum, the BoJ's increasing ownership of the factors of production simply means nationalization of assets or increased embrace of or the slippery slope to socialism.

Now for the proof.

From Bloomberg: 

They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank.

While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.

Wow, top 10 shareholder in 90% of stocks comprising the Nikkei !

Here's more. (bold added)

Under the BOJ’s current stimulus plan, the central bank buys about 3 trillion yen ($27.2 billion) of ETFs every year. While policy makers don’t disclose how those holdings translate into stakes of individual companies, estimates can be gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. The BOJ declined to comment on Bloomberg’s findings.

The estimates reveal a presence in Japan’s top firms that’s rivaled by few other big investors, often called “whales” in the industry jargon. The BOJ ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies, effectively controlling about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder.

If the BOJ accelerates its ETF purchases this week to an annual rate of 7 trillion yen -- the pace predicted by Goldman Sachs Group Inc. -- the central bank could become the No. 1 shareholder in about 40 of the Nikkei 225’s companies by the end of 2017, according to Bloomberg calculations that assume other major stakeholders keep their positions unchanged. It could hold the top ranking in about 90 firms using HSBC Holdings Plc’s estimate of 13 trillion yen.

Astounding, 55% of ETFs now owned by BoJ!

The BoJ's QE program, which has partly been intended to bolster the stock market, implicitly means the use price controls. Such tacit price controls were originally designed to favor stock market owners through the mechanism of increased demand provided by the BoJ and reduced supply from the public in order to push equity prices higher.

Yet increases in BoJ's share ownership of a corporation means decrease in the public's share ownership.  Remember, the BoJ buys these shares from the public. Hence, intensifying implicit price controls through the deepening of BoJ's asset buying extrapolates to the path of complete nationalization of the Japan's stock market.

Furthermore, as the BoJ increases its ownership in the stock market, liquidity is reduced if the BoJ does not sell. Eventually, the greater the BoJs ownership, the lesser the trading volume/liquidity. In essence, sustained BoJ QE would mean monopolization, and thus, the end of the stock market.

Additionally, sustained QE would translate to BoJ's direct and indirect control of corporate (internal and external) activities through its increased share of ownership. 

So instead of corporations focusing to serve consumers, these corporations would have mutated to become state owned enterprises (SOE). And priorities of such SOEs would instead be directed at the attainment of political objectives of Japan's political leaders. 

Moreover, with greater government interference, employment in these firms will likely be dictated by patronage politics

All these indicate that by virtue of sustained BoJ's QE, Japan's economy would likely transform into a socialist paradise overtime!

The great Austrian economist Ludwig von Mises was prescient, there is no middle of the road policy. Price controls, in this case BoJ's monetarism, only serve as one of the main channels to achieve socialism

But when this state of all-around control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be produced and how. The power to decide these matters has devolved upon the government. This is no longer capitalism; it is all-around planning by the government, it is socialism.

Phisix 7,250: Team Viagra (Log April 25), How Team Viagra Contributes to the Bubble

Just a reminder, based on government’s own Securities Exchange Commission SEC Code (section 24) mandate, "marking the close" supposedly represents an illegitimate activity ...

Apparently, because the establishment benefits from these, authorities seem to keep a blind eye on such incidences. Such is a manifestation of selective application of self-imposed regulations. When the establishment benefits, these rules become obsolete or irrelevant. 

Nevertheless, it isn't my duty to ferret out on these irregularities.

However, I feel that it is my task to reveal to the public of the anomalies that not only exists, but has rampantly been practiced by some unidentified unscrupulous entities at the PSE. 

Worst, such manipulations has contributed to the severe distortions on market prices of the Philippine equities. Having said so, falsification of market prices, which exacerbates on the mispricing of domestic securities, only reveals why the Philippine stock market has signified a huge bubble. 

As explained yesterday, these actions has contributed vastly to the immensely skewed distribution of PERs in the PSEi index. 

So while the average PER or the PSEi's PER has been at 18+ (as of April 21), that's because the lesser half of the PSE has LOW PERs (11.5). Issues from the latter half of the PSEi ranking have been least used in "marking the close" activities so partly explains their low PERs

However, the latter half's LOW PER essentially conceals on the marvelous 25+ PERs of the top 15 issues! And PERs at 25+ resembles that of 1996 levels! 

And a major the reason why PERs of the top 15 composite members have been at nosebleed 25+ levels has been from the contributions by the above manipulative practices!

I would add that if one would calculate on the average weighted PER of the PSEi this would show a stunning PER of 23.62!

This only shows that none of these has been about G-R-O-W-T-H, but about an amalgam of implicit subsidies or transfer of wealth process, price fixing operations, propaganda and the transmogrification of the Philippine stocks into a loaded casino den. 

And as I keep repeating here, there has been no country in this world that applies "marking the close" with such frequency, regularity and intensity!

Today marks another huge “marking the close” session courtesy of Team Viagra. 

The PSEi was down .32% just a second prior to the market intervention phase. Then all of sudden, at the runoff period, the headline index was down by only .07% So a stunning 78% of the session’s loss was wiped out because of “marking the close”! 

The audaciousness of the rigging of the Philippine stock market can be seen in practically the four major sectors, led by the holding sector. 

And the pump on the following issues has boosted the aforementioned indices

Note of unchanged prices of two issues (AEV and BPI--orange pre runoff prices) which suddenly zoomed at the close. This means that the entire or 100% gains of the day for the said issues had been a product of the end session pump!

As one would notice, the Phisix can’t stand on its own based on normal trading activities, so it has to depend on market manipulators to keep their artificial price levels up. 

All images above from Bloomberg, PSE, technistock and colfinancial.

Phisix 7,250: Philippine Peso Tumbled by 1.3%! Why?; The Perspective from the Stock Market Cycle

By its very nature, a government decree that “it be” cannot create anything that has not been created before. Only the naive inflationists could believe that government could enrich mankind through fiat money. Government cannot create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make him poorer—Ludwig von Mises

In this issue

Phisix 7,250: Philippine Peso Tumbled by 1.3%! Why?; The Perspective from the Stock Market Cycle

-Philippine Peso Tumbled by 1.3%! Why?

-Global Governments Desperately Try To Reflate The Risk Markets

-How Traders Can Profit from the Stock Market Cycle

-Defining the Stock Market Cycle

-The Stock Market Cycle Circa 1986-2003

-The New Millennium Stock-Market Cycle

-The Fundamental Case of the Distribution-Decline Phase

-Can The Stock Market Cycle Be Broken? Yes By Destroying the Currency

Phisix 7,250: Philippine Peso Tumbled by 1.3%! Why?; The Perspective from the Stock Market Cycle

Philippine Peso Tumbled by 1.3%! Why?

Just what happened to the Philippine peso?

The Philippine peso unexpectedly got creamed last week. The peso was crushed by a shocking 1.3%! This happened when neighboring currencies were largely serene, had seen less volatility and has posted mix performance for the week.

The USD php closed at 46.65 last Friday

Media largely attributed the pesos’ weakness on election uncertainties. Perhaps.

Has this been about “Comeleak” where online hackers reportedly infiltrated a government agency responsible for the national elections? Hackers were able to compromise the agency’s database of 55 registered voters. If so, then this should be knee jerk.

Or could these have been writing on the wall for the sudden upsurge in the popularity and the likelihood of a strong man rule bubble-‘leftist’ regime?

If so, then this should be expected. A leftist regime means bigger government at the expense of the private sector. This not only means lesser economic freedom, it means civil liberties will become repressed.

From an economic viewpoint, how will big government be financed? More taxes to fund bigger government spending in the face of lesser economic activities?

Yes, lesser economic activities should be expected from a flurry of mandates, regulations, prohibitions, expanded bureaucratic-welfare-warfare spending (or even possible nationalizations) and, wider capital controls as well as from the feedback of higher taxes and deepening use of inflationism.

Will the regime resort to more debt in order to finance burgeoning deficits from increased spending?

While the two (higher taxes and debt) won’t automatically translate to a weak peso, the question is what happens if the taxes will not be enough to satisfy political spending goals or even interest payments on debt? Will the BSP be compelled to monetize debt and spending? Well, the latter represents a surefire way to destroy the peso.

There are so many examples of how leftist governments maim their constituents rather than advance their welfare. Apparently soundbites matter more.

Yet hasn’t recent election developments manifested a stark irony?

What has happened to all the years of headline boom? What happened to record Phisix and the landmark high bonds, the previously strong peso, zooming property prices and soaring GDP? If surveys have been accurate, then why has a big segment of the population drifted to embrace leftist utopia? Why has the same segment distanced itself from the incumbent which has supposedly delivered an economic boom? To consider, a big following of the self-declared leftist candidate has been from the upper class. Some real world disconnect eh?

As it appears, asset bubbles have made people believe in short term fixes for social malaise.

As I have previously discussed, they have come to believe in the superhero effect. The image of the superhero is one of an almighty supernatural being (authority) who would swoop down and vanquish the villains (oppressors) while rescuing the damsel in distress (oppressed). The difference is that the superhero is a (comic, movie or media) fantasy, while the superhero effect as political solution would account for a critical tradeoff between populist short term remedies as against its longer term socio-economic consequence, where the latter likely will be accompanied by a shroud of unintended, if not tragic, effects.

And another paradox, it’s interesting to see people passionately ramble about “change” in defense of their candidates. But national candidates have almost all been attached to, or have roots to the old guards of the political establishment. Furthermore, has there been any difference from them but to offer to the voting public free lunches?

Plus ça change, plus c'est la même chose!

Back to the Peso.

It’s been a satire to see the peso fall amidst the BSP’s recent announcement where OFW remittances jumped by pretty hefty numbers in February. But as I have pointed out, the BSP massages its data according to how they data would look good. Besides, one month does not a trend make. The overall OFW growth trend remains downward (see lower window above)

Yet I posit another angle for last week’s fall of the peso. Two weeks back I have noted that the BSP’s forex holdings under its GIR has skyrocketed to milestone highs. I then asked¹, “Could it be that derivative forward cover contracts could soon be expiring that would lead to a hefty decline in GIRs for the BSP to have borrowed from the national government in order to cushion on the coming drop?”

If this has been accurate, then this could explain the peso’s weakness. The BSP will have to rollover these contracts, otherwise the GIR shrinks.

Don’t forget of the inverse relationship between the Phisix and the Peso. The Phisix and the peso have been trading at a tight range over the past two weeks. Yet the USD Peso broke out on Friday.

Has this week’s peso fall been an anomaly? Will it rally back? Or will the inverse relationship be sustained where the Phisix will play catch up and fall along with the peso?

Truly interesting developments.

Global Governments Desperately Try To Reflate The Risk Markets

Another very intriguing development: Increasing signs of desperation by governments to shore up or rescue asset markets since the January meltdown.

Last week, the central bank of Sweden, the Swedish Riksbank announced that they will expand on their QE program, while leaving their negative interest rate unchanged.

The ECB released its guidelines for corporate bond buying this week. Apparently, overseas entities with euro area exposure are likely to be beneficiaries too²: Corporate debt instruments issued by corporations incorporated in the euro area whose ultimate parent is not based in the euro area are also eligible for purchase under the CSPP, provided they fulfil all the other eligibility criteria.

So the ECB’s upgraded QE or ECB subsidies will now spread to some of the privileged enterprises abroad. The net result: European stocks flew! German Dax soared 3.2% while the French CAC advanced 1.6%. Most of US stocks, particularly banks, moved higher this week.

And in the realization that negative interest rates have instead backfired, such that bank credit growth has stalled, the Bank of Japan (BoJ) has floated on possibility of providing subsidies to commercial lenders by offering “a negative rate on some loans, according to people familiar with talks at the BOJ” last Friday, as well as, “a deeper cut to the current negative rate on reserves”, according to Bloomberg.

Early this week, the BoJ signaled that they might also increase their stock market purchasing activities through ETFs, according to the CNBC. And at the start of the month, the Japanese government has also indicated that they might use “helicopter money drop” by “distributing child care vouchers and shopping coupons to encourage consumer spending” according to the Nikkei Asian Review.

How stock market gamblers loved these Keynesian subsidies; Japan’s equity benchmark Nikkei 225 spiked by 4.3% this week!!!

Remember, the Japanese economy has had three recessions over the past 5 years! This means practically all the stimulus thrown by Abenomics has only been sucked into an invisible black hole!

Additionally, even with Friday’s rally, the Nikkei remains 15.8% off from its June 24 2015 highs! And because of the recent slump in stocks, and because Japan’s JGB market has been rendered almost entirely illiquid from BoJ’s buying, Japanese corporate pensions suffered its “the first drop in their overall asset value in five years” according to Nikkei Asia. The BoJ now holds a whopping 35.2% of the JGB market as of March 2016, according to Japan Macro Advisors. And the drying up of liquidity has forced yields even lower! This week alone, 40 year JGB fell to a stunning record low of less than .3%!

JGB markets have entered the twilight zone!

In spite of the BoJs action, Japan’s economy remains in doldrums as people increasingly hoard cash and where even some elderly citizens purposely commit crimes so they may get caught and imprisoned. With reduced income from BoJ’s intrusiveness, what better option for these senior citizens to live under government custody thereby compounding on the increasingly burdened Japan’s welfare state!

Maladjustments, distortions and mispricing from sustained interventions have only been mounting. Politicians will never come to realize that there is no such thing as a free lunch until it is too late.

The embrace of free lunch by the government has been even more frantic in China.

China’s government reported a runaway in credit boom in the first quarter as total social financing soared to $766 billion as shown above courtesy of yardeni.com! This is a record of sorts.

The Chinese government has been desperately trying to maintain or buoy asset price levels to prevent a credit meltdown by injecting even more credit into a system already drowning and choking in credit.

Yet money from credit expansion has to flow somewhere.

Obviously it has rekindled or reignited a property boom, where new home price rose in 62 out of 70 major cities, according to the SCMP. China’s property bubble has become “two tiered” with the high end cities experiencing rapid growth as against a slower appreciation for less prominent cities.

Additionally, retail speculators appear to have jumped into the commodity sphere that has prompted authorities to clampdown on such activities.

From Reuters/Resource Investor³: China's commodity exchanges are trying to cool their markets as benchmarks rallied rapidly this week, with turnover of a single rebar contract on Thursday worth nearly 50% more than the total value traded on the Shanghai stock exchange. Chinese investors - both funds and individuals -- appear to be making big bets that a rise in infrastructure spending will be positive for battered commodities such as steel and iron ore, turning their interest away from equities after a crash last summer that has driven.

For instance, steel reinforcement or rebar futures has spiked by 54% in 2016 as of April 21, according to Bloomberg.

So whatever rally that has been appeared in the commodity markets may have been an outcome of China’s runaway credit. Said differently, China’s credit boom has spilled over to the global commodity markets.

But as the credit boom spreads, so has defaults. From Fitch ratings⁴: Thus far in April, two other SOEs have missed bond payments while a third has had trading of its notes suspended. These were on top of a number of other onshore corporate bond defaults by private-sector firms so far this year

And surging accounts of defaults has been pushing up yields of corporate bonds as well as government bonds. And it appears that even when the Chinese government “pumped in 680 billion yuan through reverse repo auctions, shy of a record 690 billion yuan it injected in January, when demand for cash spiked before the Chinese New Year holidays”, “China’s benchmark money-market rate climbed the most since June, reflecting tight cash conditions”⁵

So instead of participating in the asset inflation bacchanalia, China’s Shanghai index tumbled -3.86% over the week

So even when government tries desperately to reflate their respective markets, there have been to many cracks in the system, where money printing doesn’t produce results as expected—even in the short term where they are supposed to matter most!

How Traders Can Profit from the Stock Market Cycle

Every stock market participant is fundamentally a trader. And a stock market trader is one who seeks to acquire advantage or to generate profits from the price spread between entry and exit points in a specific security.

Yet traders are categorically different. They vary in the means to accomplish their desired ends, namely:

One, traders contrast in the time dimension of consummating transactions. There are day traders or scalpers. There also those who take on extended holding period, say a week or weeks, or a month or months. And there are many others where time investment involves even longer durations, that may span from a year/s or even decade/s. The latter are usually considered as “investors”.

Aside from capital gains or profits from price arbitrages, corporate dividends may play an important role in the portfolio of usually long term traders or investors.

Two, traders use different tools such as chart analysis and or fundamental analysis (e.g. economics, finance, statistics, behavioral science/psychology and or others) to establish their trade positions.

Many traders also utilize on informal means to acquire trade position. Such informal tools includes hearsay, information from insiders, tips derived from social networks or from media, recommendations of analysts or experts, whether from mainstream institutions or from independent operators and more.

Three, though the basic goal is to profit, there are different juxtaposed objectives for participants to engage in the stock market.

There are traders who depend on trade for a living. Other traders manage their own or family’s portfolio. Professionals manage other people’s money which may include the matching of asset and liability (e.g. insurance and pensions). Some traders use the stock market to seek thrill or to get satisfaction from a dopamine release. For many others, the stock market can be an instrument for social signaling or to bolster their testosterones or uplift one’s social status. The stock market can also be used as a device fulfil gambling impulses, to dawdle time away or even to seek diversion from other activities.

Fourth where there is little time and effort to dwell on the stock market, some people ‘trade indirectly’ through placements into financial vehicles operated by mostly institutional fiduciary agents (mutual funds, UITFs, ETFs).

On the other hand, investors may piggyback on the putative track records or historical performance of certain money manager/s through the latter’s managed financial vehicles.

Portfolios managed by professionals are usually not limited to the stock market. Or professional portfolios usually include other asset classes such as bonds and currencies. They may employ “shorts” or even sophisticated hedges through derivatives. But this is beside the point.

So there hardly is a one size fits all formula to satisfy objectives of individual traders/ investors.

Having shown the difference in the objectives and the conduct of affairs by traders/investors/professionals on the stock market, it is important to focus on a key aspect on the treatment of stock market trade: TIME relative to volatility

As a general rule, the shorter the time frame, the more sensitive trade positions are to volatility.

For instance, day traders rely on the intraday gyrations of prices of securities for trade. The greater the volatility, the more opportunities for trade. So volatility should be a magnet for day traders.

On the other hand, investors, whose objectives have been formulated based on the longer term risk-reward tradeoff considerations, will be less concerned of short term volatility. That’s unless their objectives have suddenly been accomplished (for rewards) or triggered (for risk).

Longer term traders and investors are likely to see short term volatility as “noise” rather than “signals”. Value guru and mentor to Warren Buffet, Benjamin Graham has a popular axiom which captures such essence, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Hence, in the face of volatility, perspective over the time horizon is of quintessential significance for one’s calculation of the risk reward conditions.

Defining the Stock Market Cycle

Stock market prices have a natural proclivity to establish general movements or set trends.

As noted above, these trends occur in the short term (seconds, minutes, hours, days) and simultaneously over the longer term (weeks, months, years). Think of such dynamic as trends evolving within trends.

Nonetheless, established trends eventually break, or set an opposite direction.

Moreover, long term trends signify as the outcome of cumulative short term trend actions. Yet long term trends follow the same sequence: they are established, they break, where counter trends are subsequently shaped, and which eventually becomes entrenched to assume the general trend in motion.

The transitional changes in the major price trends constitute as the distinctive phases of what is known as the stock market cycle. The reason it is called a ‘cycle’ is because of the repetition of same set of disparate sequential major trend actions or ‘patterns’.

Hence, volatility embedded in the financial markets, or in the stock market in particular, can be depicted as cyclical (reinforcement of the underlying trend) or countercyclical (opposed to the main trend). And the unfolding series of price volatility, for or against a major trend, could highlight on the transitional phases of the stock market cycle. For instance, a succession of short term price actions in contravention to the main trend may suggest of an inflection point or a reversal of incumbent major trend.

Again the stock market cycle primarily comprises a sequence of four distinct correlated phases of long term trends in transit.

The phases are according to Visual Economist/Alpha Trends:⁶

1) Accumulation: Occurs after a drop in prices. Process of buyers gaining control from sellers which leads to markup.

2) Markup: Bullish phase of a stock’s life is defined by higher highs and higher lows. This is where you want to get long on breakouts and after short-term pullbacks. Rallies are “innocent until proven guilty”.

3) Distribution: Occurs after a prolonged price advance. Sellers gain control of prices, which leads to decline.

4) Decline: Bearish phase of a stock’s life. This is where you want to be short, so look to sell short fresh breakdowns after minor rallies have exhausted themselves. Rally attempts are “guilty until proven innocent”.

The stock market cycle serves as an important guide to traders/investors in the context of the general direction of prices of stocks or indices.

By identifying the particular phase of the cycle, a trader may be able to assess on the price directions, and consequently, construct their trade positions based on the risk reward conditions.

The Stock Market Cycle Circa 1986-2003

Historical price trends at the PSEi (courtesy of chartsrus) have been no stranger to the stock market cycle.

Hindsight is 20/20.

The four different phases that evolved in 1986-2003 reveals of the existence of the stock market cycle.

The accumulation phase happened in 1986-1992. Within the stated period, though the Phisix had an upside tendency, it experienced wild volatility.

In the aftermath of the Philippine balance of payment crisis (1983-84), which was a product of the boom bust cycle of the 1970s, and the overthrow of the authoritarian Marcos regime in 1986, the Phisix experienced two booms which were ironically truncated by two botched coup attempts. Political obstacles proved to the barrier and source of volatility.

The Phisix found its bottom in 1991 following a short bear market which was triggered by political uncertainty from the second aborted coup

A year after, the Ramos administration, which emerged triumphant from the presidential elections of 1992, ushered in the mark up phase which it helped catapult

Understand that the boom in the Phisix then had also been reflected on her neighbors.

Such mark up phase climaxed with the astounding 173% returns in a single year or in 1993!

The January 1994 top eventually became THE critical obstacle to the bulls. This marked the beginning of the distribution phase.

The blitzkrieg by the bulls in 1993 spawned intense volatility. And such volatility was vented in 1994-1995, where the Phisix endured three accounts of bear market selloffs (bear market strikes). The Phisix wanted to correct the imbalance accumulated from the one year spike, but apparently, the bulls wouldn’t hand it to them on a silver platter.

At the end of 1995, the bulls got a second wind to drive the Phisix back into the 1994 high. Unfortunately, after marginally breaking out of the January 1994 watermark, in February 1997, the wheels came off for the bulls.

After three years, February 1997 marked the advent of the declining phase. The February peak and its consequent string of crashes brought to the surface the Asian crisis in July of the same year.

It took six long years for the Phisix to cleanse itself from the blight of the boom bust policies of the 90s.

Nevertheless, the four transitional phases highlighted on the completion of the 17 year stock market cycle.

The New Millennium Stock-Market Cycle

Yet the closure of the 1986-2003 stock market cycle appears to have brought about a NEW or today’s contemporary stock market cycle.

Because current actions are still evolving, identifying the phases of the stock market cycle have been more like looking at road signs or at a compass to establish or approximate one’s whereabouts.

In response to US recession brought about by the dotcom bubble bust, the US Federal Reserve imposed a series of rate cuts (6.5% to 1%). Apparently, the Fed’s actions spurred a global carry trade which helped put a floor on the Phisix in 2003.

The end of the Phisix secular bear market in 2003 was simultaneously the baptism of the new millennium generation of the Phillippine stock market cycle. Such marked the onset of the accumulation phase.

Like in the 1980s, where the accumulation phase ended with amplified volatility, the culmination of the same accumulation phase transpired with the US mortgage bubble bust in 2007, which triggered the Great Recession. The Phisix slumped 51% with hardly any structural economic or financial blemishes.

The 2007-2009 bear market of the Phisix was mainly impelled by external influence.

The BSP’s pivot towards monetary accommodation in 2009 in response to the Great Recession must have served as the catalyst to the transition from the accumulation phase to the mark up phase. The then relatively clean balance sheets of the Philippine economy functioned like a sponge to the BSP’s free money giveaway. 

 

A bank credit boom sparked a widespread inflation on Philippine assets as property, stocks, bonds and the peso soared (see blue trendline). Statistical Nominal GDP also surged (see red bars). Bank credit ballooned by 140% or a CAGR of 15.7% from end 2009.

The Phisix roared to a record high in May 2013. But this was stalled by the Fed’s taper tantrum. Yet on the same year, money supply surged by 30% annualized for 10 consecutive months as consequence from sustained torrid pace of credit expansion.

The spike in M3 ensured that bear market of 2013 proved to be transient (see red trend line). A new high was forged in April 2015. Yet such high was equally a product of the rigging of the headline index.

But as the rate of growth of bank lending began to ebb, the same declining dynamic has also been reflected on the money supply growth which filtered into the NGDP during the last two years.

So the new Phisix high eventually lost ground. Worst, two market crashes emerged in August 2015 and January 2016.

The stock market cycle suggests that when “sellers gained control of prices” such is sign of a distribution phase. Additionally, when rallies become “guilty until proven innocent”, such likely heralds a transition towards the declining phase. 2015’s 2H activities resonated with both of this.

Narrowing breadth also adds to the signs of distribution phase, or when “interest from momentum traders shifts to more active issues”.

Today’s fast and furious rally, as with April 2015, has been spearheaded by mostly eight issues.

And signs of incipient decline were apparent in the January 2016 crash when a “pattern of lower highs and lows below the declining longer term moving averages” transpired.

In other words, present symptoms suggest that April 2015 has most likely served as the end of the mark up phase and a possible transition to distribution-decline phase.

Also, from the trough of 2003 through the landmark high of April 2015, the bull market has reach about 12 years of age. This would be a little over the age of its predecessor 11 years, or when the Phisix peaked in February 1997 from a bullmarket which began in 1986.

It is important to understand that the stock market cycle is purely a perspective of price patterns. Chartists tacitly embrace the efficient market hypothesis (EMH) where “asset prices fully reflect all available information”, so their focus on price actions rather than fundamentals.

However, my narrative of fundamentals has been intended to explain price actions.

The Fundamental Case of the Distribution-Decline Phase

Fundamentals support the changeover to the distribution-decline phase.

One, 2015 has shown a significant decline in earnings growth of publicly listed firms. Additionally, Philippine bank lending growth which has pillared NGDP has been decelerating. Or NGDP has mirrored on bank credit growth activities.

To add, M3 crashed in late 2014 through the first semester of 2015 which almost resonated with NGDP and earnings growth. The crash of M3 growth from its previous boom has been instrumental in the direction of CPI.

In the previous M3 spike which was reflected on CPI these proved to be emergent strains on the purchasing power of residents. Pressures on the purchasing power compounded by increasing signs of excess capacity, I believe, has meaningfully contributed to the declining trend in NGDP for both government national income accounts as well as in (the top line) listed firms.

Furthermore, PSEi’s annualized returns have been trending down too. (see blue bar charts above)

Even more, valuations bolster the transformation case to the distribution-decline phase.

The BSP’s data on the Phisix annualized price earnings ratio (PER) points to 2015 PER levels at 1995-96 highs! Awesome!

So eps levels seem to resonate with the transitioning stage of the stock market cycle.

Understand that Phisix 2016 has not been similar with Phisix 1995.

The index composition has been different. The same variances should apply to regulations, trading platform and PSE and broker operations. Importantly, the way to the present level of overvaluations may have also been unique. 

 

For Phisix circa April 2016, the top 5 biggest market cap issues which carries a 37.99% (as of Friday) share weighting at the PSEi, has an average PER of 27.58%!!! (as of April 21)

The top 10, which has an aggregate market share weight of 65.19%, has an average PER of 25.55!!!

The top 15, which has an aggregate market share weight of 80.12%, has an average PER of 25.12!!!

So the top half of the PSEi has reached 1996 levels in the context of valuations!!

However, the average PER of the Phisix 30 as of April 21 was at 18.317.

This means that the average PERs of the lower 15 or the PSEi benchwarmers at 11.5 has diluted on the PER of the top half to reduce the PER average of the headline index.

In short, what you see is not what you get. The latter’s 11.5 has offset the top 15’s 25.12 to generate an average of ONLY a PER of 18.32 for the headline index.

So while weight of the PSEi’s price movements have been concentrated on the top 10, the lower 15’s diminished PERs effectively sanitizes or camouflages on the significant overvaluations embedded on the headline index.

The mirage of statistics.

Even Warren Buffet’s favorite stock market indicator, the market cap to gdp seem to resonate or converge with the stock market cycle and the PER levels.

At 2014’s 91.95, the PSEi’s market cap to GDP is just shy a few points shy of the 1996’s 97.35 high, based on World Bank data!

I am not aware of how the World Bank comes up with their numbers but based on the BSP’s data on the PSEi’s market capitalization divided by the National Statistics Nominal GDP I get a 101.35 in 2015 and 112.73 in 2014!

The Phisix closed at 7,230.57 in 2014. The Phisix was last traded at 7,255 in April 22, 2015. In short, after two years, the Phisix remains at 2014 levels.

None of these suggest of a worthy reward -risk tradeoff in favor of reward. Instead current conditions tilt the balance to risks relative to potential returns.

So even if the bulls succeed to break past the 7,400 threshold level, the stock market cycle, valuations, economic fundamentals serve as considerable headwind for a sustained thrust upwards.

That’s unless the fundamental function of the stock market to allocate capital has totally been broken.

Besides, it is not just 7,400, the previous high of 8,127.48 is now a key resistance level.

Can The Stock Market Cycle Be Broken? Yes By Destroying the Currency

One may ask: can the stock market cycle be broken? But of course! Why not?

Prices essentially depend on fundamentals—earnings, liquidity, economic, financial or even political conditions.

If the Philippines should have a leftist administration who will rigidly adapt leftist political programs, then the Phisix may indeed break to record highs.

Question is, at what cost?

And such record highs won’t stand on a similar ground as today. The record highs won’t be reflective of policy induced market mispricing or even economic conditions. Instead, like her Latin American peers say Venezuela or Argentina, where their respective equity benchmarks are shown above, they are likely to reflect a run on the currency—a crack up boom!

So one can have record stocks in the face of massive supply (food, energy, toilet paper) shortages in the economy and a capital city branded as the most violent in the world, all because of a collapsing currency, such as Venezuela.

____

1 See Phisix 7,250: More Proof of 2015’s EPS Fiasco: Crashes in JOLLIBEE and MEGAWORLD’s EPS Growth! PSEi’s Record 8,127’s First Anniversary April 10, 2016

2 ECB ECB announces details of the corporate sector purchase programme (CSPP) April 21, 2016

3 Reuters.com China commodity exchanges crack down on speculation as rebar volumes soar Resource Investor.com April 22, 2016

4 Reuters.com Fitch: China SOE Defaults Pose Credit Tightening Risk April 21, 2016

5 Bloomberg.com China's Money Rate Gains Most Since June While PBOC Injects Cash April 22, 2016

6 Visual Capitalist This Market Cycle Diagram Explains the Best Time to Buy Stocks April 19, 2016