PSEi 8,050: Why Momentous History is in the Making, The Bernanke Helicopter Money Factor

In this issue

PSEi 8,050: Why Momentous History is in the Making, The Bernanke Helicopter Money Factor

-Bernanke’s Helicopter Money Drop Sends Global Stocks and the PSEi into a Meltup Mode

-The Unfolding Historic Moment: A Terminal Manic Phase: Price and Distribution

-The Unfolding Historic Moment: A Terminal Manic Phase: Price-Valuation Imbalances

-The Unfolding Historic Moment: A Terminal Manic Phase: Market Internals Shows of Explosive Greed!

-The Unfolding Historic Moment: A Terminal Manic Phase: Weak Peso

PSEi 8,050: Why Momentous History is in the Making, The Bernanke Helicopter Money Factor

Bernanke’s Helicopter Money Drop Sends Global Stocks and the PSEi into a Meltup Mode

Former Fed chair Ben Bernanke’s meeting with Japanese authorities early last week sparked fervid speculations that the fresh electoral victory by PM Shinzo Abe would extrapolate to the administration’s introduction of the “helicopter money”.

The proposed adaption of Helicopter money represents essentially a fiscal policy. However, the difference with that of QE is that such increase government spending will be financed directly by the central bank through the printing press via debt purchasing. Or central banks will monetize government spending via the printing press. Another difference, spending targeted on the real economy rather than merely through financial channels.

Thus the prospects of helicopter money combusted global stock markets. And Asia’s stock markets caught fire: Japan’s Nikkei +9.21%, Hong Kong’s Hang Seng +5.38%, Taiwan’s TWII +3.58%, Australia’s S&P/ASX +3.81%, China’s Shanghai +2.2%, Indonesia’s JKSE +2.79%, Thailand’s SET +2.5%, South Korea’s KOSPI +2.76% and Malaysia KLSE +1.45%.

Given the tailwind of excessive bullishness, the global sentiment had been rationalized or used to compound further on the frantic price pumping at the Philippine Stock Exchange.

And as I have been pointing out here, it is as if participants at the PSE suffer deeply from the Post Traumatic Stress Disorder (PTSD). Such PTSD had been brought about by two crashes in the span of 7 months (from August 2015 to January 2016). And the agonizing anxiety from the said episode has only prompted for a series of violent price pumping in response to each account of losses. Or, NEVER again shall the PSEi endure the same fate! The Phisix shall only rise!

Hence the .75% decline of the other week was countered by a brutal MELTUP: 3.3% gains which represented the third largest weekly winner for the year!

The other biggest gains were the week after the post January 21 low or January 29’s 7.72% and at post-election week of May 13’s 6.36%. Yet two crucial events highlighted such intense bounce, the first was a cyclical trough (backed by the BSP’s backdoor or silent stimulus) and the second was a political event.

This week’s vicious 3.3% headline blitzkrieg pump would have been larger if it had been supported by dramatic gains by most of the key PSEi 30. Apparently while most of the PSEi 30 had aggressively been bid, the price gains had been concentrated in the property sector.

Spearheaded by the majors ALI +6.54% and SMPH +9.09%, the property sector’s stunning 6.95% weekly gains vastly eclipsed the gains of all other sectors: Holding +3.14%, Financial +2.02%, Services +2.07% and Industrial +1.75%.

A common trait of bullmarkets is one of a rising tide lifts all phenomenon.

So seen from a standpoint compared to the week ending January 29 and May 13, the less than spectacular performance by the rest of the mainstream sectors perhaps has been indicative of a narrowing dynamic in the distribution of gains.

Said differently, this could account for signs of exhaustion (or distribution phase).

Nonetheless what makes this week’s gains even more prodigious was that even at 8,030 or 1.2% off April 10, 2015 high at 8,127.48, SEVEN issues closed SIMULTANEOUSLY on a RECORD HIGH last Friday! The MAGNIFICENT SEVEN by pecking order based on market cap: SM, SMPH, AC, AEV, GTCAP, JFC and MPI. And Friday’s close came with insanely vertical finishes! Four of which can be seen in the lower chart above (MPI, AEV, AC and SMPH).

And there are 9 stocks that have carved a record in 2016 where the magnificent seven has served as the core. With just a breath away, Ayala Land and Robinsons Land seems poised to take on the 10th and 11th slots.

The Unfolding Historic Moment: A Terminal Manic Phase: Price and Distribution

As I have been saying here we are at the moment witnessing the unfolding of a historic event!

And NO I am talking about headline numbers. Instead, current developments represent a classic episode of a climaxing mania.

Signs have been all over.

First, this can be seen via the vertical price actions and the distribution of gains.

From the January 21 trough, as of Friday, the PSEi has returned 32% in 5.75 months. The only nearest parabolic climb was in 2007 where the PSEi returned a bigger 34.3% in August to October 2007. Yet such magnitude of gains was accomplished in even shorter time frame of 1.75 months! Though 2007’s returns would be steeper in scale than today, the distribution of gains has been different.

Today’s run has been driven by ferocious price inflation on a limited number of issues. While the present the bidding rampage have filtered through a majority of the 30 issues, the substantial asymmetry in the dispersion of gains has served as a critical obstacle as to why 2007 returns and April 10’s 8,127.48 has not (yet) been attained.

The paradox has been that both runs eventually ended with a collapse.

Yet with a few issues essentially issues carrying the yoke of the forcible ascension, anytime the same issues lose momentum they are likely vulnerable to an equally sharp downside move!

And historical evidence from the 1970s to date shows with a perfect slate that vertical ramps end up with at least Newton’s third law of motion—for every action there is an equal and opposite reaction—as an outcome!

Will this time be different?!

Second, actions as measured by the PSEi’s price charts have only been exhibiting a tremendously treacherous climb. The unfolding vertical panic buying binges demonstrates of the psychological convergence or of the crystallization of crowd psychology which has evolved to see stocks as signifying an ENTITLEMENT!

Since stocks can only RISE, it has become a mechanism for free lunches! And because bubbles are essentially a belief in attaining SOMETHING OUT OF NOTHING, then treating stocks as a “right” reinforces the stock market’s bubble framework!

Understand that price actions, overvaluations, leveraging and sentiments are only symptoms of something out of nothing dynamic.

The Unfolding Historic Moment: A Terminal Manic Phase: Price-Valuation Imbalances

Third, price actions feeds on valuation ratios. This means that current activities depict more than just about price actions.

Prices of securities are supposed to reflect on the embedded future stream of discounted cash flows. While there had been larger accounts of vertical moves, such as in March to July of 1987 at 197.37% in 24 days, in October 1993 to January 1994 at 73.71% in 59 days and in January to March 1998 at 52.2% in 54 days, the backdrop that undergirded moves of the specific eons served as important factors to such events.

In the said three events, the PSEi had mostly been undervalued in response to prior crashes (1987 and 1998) or stagnation (pre-1993). Ironically, despite the relative cheapness, all three episodes saw such respective nosebleed gains from fabulous violent pumping eventually negated! Newton’s law ruled! The obverse side of every mania is a crash.

Unlike the earlier variants, the present January to July meltup has been pillared on ultra high valuations. The BSP-PSE data reveal that at the close of January 2016 when the PSEi fell to a low of 6,084, end month PER then remained at an elevated 18.85!

So this means that the current meltup has only widened the divergence between prices and fundamentals through price multiple expansions.

Worst, even 1Q 2016 eps performance revealed of -2.25% contraction of eps growth. This happened in spite of the BSP’s backdoor or silent stimulus! So prices and fundamentals have only been going on an opposite direction!

As of Friday the average TTM PER of PSEi was at a staggering 26.55! Whereas the market cap weighted PER has vaulted to 27.4! Present PERs have reached levels of January to March 1997, specifically, 28.21, 27.35 and 27.57!

So unless fundamentals will miraculously skyrocket to reflect on the 5+ month MELTUP, or unless risk has been entirely abolished or unless stock markets have totally been broken or have been rendered permanently dysfunctional—perhaps similar to the $13 trillion negative yielding global bonds markets (though this should be ephemeral)—then current levels of PER has been an indication of history in the making. By history, I mean that they most likely portentous of a major inflection point!

The stock market’s price-fundamental ballooning mismatches alone has been a manifestation of the worsening of embedded structural financial and economic deficiencies that require markets to clear (by weeding out the excesses) in order bring economic coordination back to balance.

The Unfolding Historic Moment: A Terminal Manic Phase: Market Internals Shows of Explosive Greed!

Fourth again stocks are more than just about price actions and valuations, mass psychology are expressed in terms of sentiment indicators also provides clues of imbalances.

Intensifying extremes in sentiment has been indicative of a one way trade.

Warren Buffett’s famous axiom “Be fearful when everybody is greedy and greedy when is fearful” can clearly be seen in the demeanor of present trading activities.

Remember the PSEi has yet to reach 8,127.48 or remains 1.2% off the April 2015 watermark.

Nonetheless, trade churning as indicated by the average daily traded issues (left) and the average daily trades (right) have more than just been at record highs, but importantly, the outstanding chasm between present levels and that of the run to April 10 2015’s 8.127.48 reveal of astonishing symptoms of overconfidence, wanton recklessness and amplified sense of derring-do.

Or stock market participants have become extensively or outlandishly aggressive in churning trading positions to cover a record number of issues. In a word, GREED rules!

The egregious deficiencies in peso traded volume of the present MELTUP relative to the previous records have signified an even more exceptional development!

Although this week’s average daily volume at Php 9.8 billion represented a 37% increase from last week, such volume has been comparable only to the run to April 2015’s record, and significantly BELOW May 2013 equivalent!

Understand that the purchasing power of the peso has a significant function relative to stocks in determining peso volume traded.

For instance, the nominal purchasing power of a peso to a unit of PSEi in 2013 was substantially LESS in than in April 2015 at 8,127.48 and also less than the present at 8,030. In particular, since the PSEi today has been 8.5% higher than the acme of 2013, this means that to trade a similar unit of volume today requires 8.5% MORE pesos! So bigger volume should be expected given the elevated levels of prices!

This should be most pronounced when applied to PSEi issues that hit new records

Or let me use a specific stock as example. SMPH’s record in May 2013 was at Php 21.25. As of Friday, it was at Php 30 or 40% higher relative to 2013. So to trade SMPH at present levels would require 40% MORE pesos than in 2013! Or a Php 1,000 trade position in 2013 can buy 47 shares as against only 33 shares today!

Again ceteris paribus, given the embedded price inflation in securities, present levels of stocks should trade at HIGHER volumes than in 2013. Apparently this has not been happening. Instead, at higher stock market prices, peso volume has even shrunk!

And seen in actual unit volumes, volume have shriveled even more!

In short, as the price of a product increases, quantity demanded falls, or the law of demand at work!

Given that a small number of the domestic population have direct or indirect positions in the stock market, the higher the prices of stocks, lesser the number of people who can participate.

So sustained price inflation alone will serve as a deterrent to participation or will prove present elevated price levels as tenuous.

Oh by the way this applies to other risk assets such as real estate too.

So despite near record high, current weakness in peso volume only depicts of aggressiveness by either a smaller number of participants, as reflected by reduced volume, or an increased number of participants but with reduced buying capacity!

Yet from an ethical perspective, this means that the beneficiaries of the current price rip in stocks have been the owners of immensely inflated securities and the buy and sell side industry. The gullible investing public are presently being drawn to such vertical pumping process has only been absorbing undue risks in order to transfer wealth and income to these entities!

Proof? JGS’ $250 million share sale purportedly for “estate purposes”. Pump the stocks. Sell inventories to the public predicated on H-O-P-E of an eternal credit fueled headline G-R-O-W-T-H!

And when the bubble pops again, it is these vulnerable public who will pay the price by holding the proverbial empty bag.

So if there is any indication the low volume pump is by itself a cause of concern.

That’s unless these vested interest groups will be able to generate new recruits with substantial deposits from the domestic investing public, from yield hunting foreigners and or from a torrent of free money from the BSP (as well as the FED, BOJ, ECB, BOE and others) channeled through the banking system.

The Unfolding Historic Moment: A Terminal Manic Phase: Weak Peso

Sixth, security price inflation has essentially accounted for as manifestations of government financial repression actions via central bank’s easy money policies designed to transfer or shift growth to the present which had been borrowed from the future.

In academic lingo, de facto easy money policies are known or called as the trickle down from the “wealth effect”. Such dogma emanates from the perspective that borrowed growth would entail of multiplier effects which should offset the costs of borrowing from the future.

Yet because such superficially premised top down doctrine ignores on the distortions on the individual’s balance sheets, the price channel and consequently, economic coordination through resource allocation, such policies only creates a negative feedback negative mechanism.

While such policies initially ignites a temporary boom via economic wide measures, profits, earnings, jobs, wages and fuels capital expansion, they come at price. The longer term consequence of which has always been to increase systemic leverage (thereby magnify financial instability risks), heighten pressure on prices (which alternatively means reduced purchasing power and an eventual squeeze on profits), and careens economic order towards speculative capital intensive based industries or projects (malinvestments). In other words, when the party is over, hangover haunts the celebrants.

And one of the offshoots of bubbles has the eventual weakening of a currency (with the exception of the USD, due to its foreign reserve status).

Exchange rate ratios are principally dependent on the relationship between the quantity of, and the demand for a currency. So when the government uses credit expansion to augment present growth levels, relatively larger money supply from bank credit expansion will cause a currency to eventually weaken.

Last week I asked how internal contradictions between the peso and the stocks would be resolved. The markets have given a temporary answer in favor of the bulls. As domestic stocks experienced a meltup, the peso rallied.

Nevertheless the promise of “helicopter money” means that developed economy governments will likely inundate global economies with liquidity. With Japan as likely the first developed nation to experiment on Bernanke’s “helicopter money”, the yen crashed by a shocking 4.32%! But such crash has implied of the triggering of the yen carry or borrowing or shorting of the yen to finance arbitrages on assets of other ex-USD currencies.

And because of the revitalized global cross currency carry arbitrages, Asian currencies rallied strongly, along with a meltup in stocks, for the week. The Philippine peso surged .69%. The official USD php rate was last quoted at 46.8 from the other week’s 47.125.

And perhaps as further signs of the yen carry on the PSE, a material surge in foreign inflows occurred last week. Foreign buying surged to Php 7.42 billion, the largest since end of May. The level of foreign trade surged to 49.6% of overall trade.

Remember for Japan, after ZIRP, QE, NIRP and now comes helicopter money. Like a late stage cancer patient, every new applied medication provides a shot of adrenalin of hope. But eventually reality based on entropic economic forces will dominate.