The PSE Jinx Indicator? The PSE Awakens From Hibernation to Declare Boom’s Back!

The PSE Jinx Indicator? The PSE Awakens From Hibernation to Declare Boom’s Back!

-PSE Wakes Up from Hibernation to Declare: Boom’s Back!

-It’s Not G-R-O-W-T-H, But Bank Credit Conditions That Drives the PSEi!

-PSE’s Double Standard, A Structurally Vulnerable Vertical Price Trend

-The PSE Jinx Indicator?

The PSE Jinx Indicator? The PSE Awakens From Hibernation to Declare Boom’s Back!

This week I observed of the intensifying convictions that Philippine stocks have once again become a one way trade

Current price actions essentially represent the deepening and intensifying convictions of the one way street for Philippine stocks by the participants.

And such outlook has now moved beyond just price actions.

The mainstream has embraced present actions an indication of accomplishment. More importantly, this has now been construed as an entrenched dynamic.

PSE Wakes Up from Hibernation to Declare: Boom’s Back!

Last Thursday, when the PSEi almost hit 8,000, which highlighted a massive pump and dump, officials of the Philippine Stock Exchange came out of its 10 month hibernation to make an elated announcement…

The PSE index (PSEi) surged to its highest intraday level for the year at 7,980.75, up by 182.22 points or 2.34 percent from yesterday's close. 

"Many markets appear to have recovered from the initial impact of the Brexit but the Philippine market generated an additional impetus from the historic transition to the Duterte Administration. We are hopeful that we will have a strong second half supported by solid economic fundamentals and expectations of further growth under the new administration, said PSE President and CEO Hans B. Sicat. 

In the past, the PSE vociferously celebrated record highs. As of Friday’s close, the PSEi remains off 3.65% from the April 10, 2015 watermark. Ironically, the surfacing of the reanimated PSE disclosure.

Notice too that the PSE dogmatically worshipped each “record high” which it attributes to G-R-O-W-T-H or to economic conditions.

The PSEi makes it appear that economic fundamentals reflect on such price levels.

Yet any serious thinker would realize that present price levels have signified symptoms of massive mispricings. As of Thursday’s PER, the average TTM PER of the PSEi has soared to 19.65 whereas the market cap weighted average PER of the same index has spiked to an dumbfounding 25.66!!!!!!!!!!! Yes folks, the market cap weighted PER have now almost reached the 1996 levels.

The series of vertical pump has only been pushing prices further and further away from reality.

And on the path to 8,127.48 in 2015, for the month of April, the PSEi issued 4 press releases to glorify the string of record highs

Here are the last two announcements:

April 6: Closing above the 8,000 level is significant as it reinforces the favorable view that investors have on our market. We are optimistic that the positive local developments and upbeat outlook on listed firms will provide more upside potential for the index," said PSE President and CEO Hans B. Sicat. Year-to-date, the PSEi has established 25 record finishes and has posted a gain of 11.4 percent.

April 7: Interest rates are expected to remain low with the benign inflation data released today which augurs well for the equities market. We hope to more see favorable developments in the coming months to help sustain the gains and attract more participation from investors," PSE President and CEO Hans B. Sicat noted. The PSEi has now had 26 record finishes since the start of the year. Year-to-date, the index has gained 12.0 percent.

Yet even after reaching the peak in April 10, the PSEi venerated the boom as the handiwork of the former president

April 14: The Philippine Stock Exchange (PSE) commended the leadership of President Benigno S. Aquino III for helping increase investor confidence in the economy and contribute to the rise of the PSEi to the 8,000 level…In his welcome remarks during the event, PSE Chairman Jose T. Pardo said, "At the 8,000 point level, the index is giving returns just this year of already more than 10 percent. It is interesting to note that the unprecedented ascent to 8,000 comes with other remarkable market indicators." …This can only mean one thing, confidence in the economy under your leadership, Mr. President", Mr. Pardo stated.

The PSE issued a total of 17 press releases in 2015 (4 in April, 2 in March, 4 in February and 7 in January) to eulogize on the stock market bubble!

And PSE officials had apparently been more enthusiastic at the top in April 2015 rather than during the post senatorial elections in May of 2013

Then the PSEi issued only a single statement in the month of May where the PSEi hit its milestone height of 7,392.2 in May 15

May 3, 2013: The Philippine Stock Exchange main index or the PSEi surged to a new all-time high on Friday driven by the positive sentiment generated by the Standard & Poor's Ratings Services (S&P) upgrade of the Philippines' sovereign rating to investment grade status. The PSEi closed at 7,215.35 points, up 121.93 points or 1.72 percent.  This breaches the previous all-time high at 7,120.48 points set on April 22. Intraday, the PSEi also hit a new high at 7,230.40 points surpassing the previous record intra-day level of 7,120.48 points posted on April 22. "S&P's latest upgrade of the Philippines to investment grade status has given investors renewed confidence in our market. We are confident that this milestone will encourage more people to invest in the Philippines, and participate in the excitement on the new opportunities that have been opened up arising from this development," PSE President and Chief Executive Officer Mr. Hans B. Sicat said.

So after more than a week the PSEi stumbled to a bear market.

Yet in four months going to the milestone high of May 15 2013, the PSE praised record highs 14 times (2 in April, 2 in March and 9 in February).

Recall that the PSE made 17 statements in 2015 as against 15 in 2013 to consecrate the inflationary stock market boom! This means that PSE officials had become more engaged and more passionate about the April 2015 boom.

Yet as one would realize, rationalizations such as “will provide more upside potential for the index”, “favorable developments in the coming months to help sustain the gains” and “will encourage more people to invest in the Philippines” turned out to be a malarkey, or exaggerated statements, or even establishment propaganda. Why? Because the PSEi crashed thenceforth!

In an interview at CNN in 2012 Starbucks CEO Howard Schultz rightly said,

I really believe that you cannot use the stock market as a proxy for the economy.

Yet for all their repeated mistakes, PSE officials seem dense to the fact that price levels alone do not establish the state of economic conditions.

As proof, the Phisix had a full bear market in 2008-2009 even when the country had only a close brush with recession.

Reality has never ever mattered. Feel good political statement does.

It’s Not G-R-O-W-T-H, But Bank Credit Conditions That Drives the PSEi!

What would seem as a more appropriate link would be the correlations between bank credit growth with the PSEi. The BSP’s bank credit growth seems to precede the actions of the PSEi. Or, bank credit ebbs and flows eventually appear to get reflected on PSEi fluctuations.

As it happens, the present boom seems to have been financed by bank credit expansion in response to the BSP’s silent stimulus initiated in 4Q 2015 to 1Q 2016.

Nonetheless, when the PSEi vaulted back during the first crash in August 2015, for the FIRST time the Philippine Stock Exchange rushed to defend a fading boom.

August 27: The Philippine Stock Exchange's (PSE) benchmark index PSEi continued its recovery after closing at 7,022.09 up 154.17 points or 2.24 percent in today's trading.  This marks the third straight day that the index closed higher following the sharp drop of the market on Monday, when the PSEi followed the global decline of market prices. "The rebound of the market is a welcome relief amidst the uncertainties in the global markets.  The second quarter growth numbers highlight the resilience of the economy despite challenges abroad and we hope that investors continue to look at the Philippines as a viable investment," PSE Chairman Jose T. Pardo said. 

In hindsight, the Phisix crashed anew to a low of 6,084 in January 21, 2016. So just what happened to “resilience”? Resilience should have actually meant the absence of crashes.

The fact that TWO major crashes occurred during the last three years reveals that like 1994-1997, Philippine stocks have been nurturing imbalances for it to be vulnerable to such risks.

And a seeming déjà vu can be seen in the context of bank lending rates today (2012-2016) which have resonated with the pre-Asian crisis (1994-1997) levels. Bank lending rates have been at the lowest level for their respective credit cycles!

Moreover, the August crash, which was blamed on “global decline of market prices”, also proved that internal dynamics was vulnerable enough for external events to influence them.

So present “resilience” means the brazen use of market manipulation to prove their point.

Last week I asked about the funding dynamics of the recent vertical pumping: Who financed this? And how was such stunning meltup been financed? Have these been through bank credit?

The BSP’s data on bank credit may have lent credence or has validated on my suspicion. Banking loans to the financial intermediary skyrocketed to 21.05% in May (lower window)!

So even while banking loans have sharply risen for the general industry, manufacturing loans have hardly accelerated (upper window). So where’s the boom for the largest sector of the economy?

PSE’s Double Standard, A Structurally Vulnerable Vertical Price Trend

Importantly, while the PSE has been quick to revere the ‘PSEi high EQUALs economic G-R-O-W-T-H’ meme, the same officials seem to have forgotten to release the 4Q 2015, full year 2015 and 1Q 2016 aggregate financial results of the PSE universe in their PSE monthly.

Neither has their monthly January to April 2016 reports nor their press releases contained such valuable information. Why? Because the numbers have failed to concur or validate on their proposed and desired outcomes?

I have noted here how the aggregate numbers of PSE listed firms have been deteriorating since 2Q, 1H and 3Q 2015.

And just what has the PSE been cheerleading about?

The path to 7,800 from 6,100 can be seen from and contrasted with the two episodes of February 2014-February 2015 (1.08 years) and January 2016 to July 1, 2016 (5.5 months or .46 year). The similar price level dynamic reveals of the average monthly return of 2.3% and 5.21% respectively. This demonstrates of the present truncation of time involved to hit the same level with that of 2014-15. And consequently, such showcases on the tenacity of the scale and pace of the current rally.

To wit, the current rally (5.21% per month) has reached almost the same intensity as with the November 2012-May 2013 level which had an average monthly return of 6.1%!

So the sheer vehemence of the rally exposes the trend as increasingly vulnerable to a sharp reversal, whether this would be influenced by external factors or not. If 2.3% a month would be sensitive to a reversal, what more of a higher rate at a shorter time? 2013’s 6.1% a month already proved this point (even if this was blamed on the emerging market selloff).

And it is interesting to note of the Newton’s Third law of motion (equal and opposite reaction) that has afflicted the run up to the April 2015 record.

6,100 signified as part of the base (5,800-6,200) which served as a springboard for the 2014-2015 ramp. Yet April 2015’s record top essentially almost gave back everything that has been built beyond the base.

In short, the current vertical trend itself is structurally unsustainable.

At best, it would need to take some of the froth off through a lengthy process of consolidation. From here, fundamentals should grow more than enough to offset the recent price pumps.

At the norm, it would suffer the same Newton’s Third Law of motion dynamic as its 2013 and 2015 predecessors.

At worst, the PSE would suffer from a crash that would be more than the Newton’s law.

From a risk reward tradeoff perspective, in three potential outcomes, the best would be close to zero returns, the other two would constitute varying degree of losses.

Let me add that given the massive use of manipulation to fix the index, aside from the BSP’s silent stimulus, it is not inconceivable that the 8,127.48 would be met. But like in 1994-1997 and in 2007, previous highs were temporarily breached before a final breakdown emerged. Ultimately, record stocks will not be about price levels but about a question of sustainability between relationship of prices and fundamentals behind these securities.

PSE’s Principal Agent Problem

Of course, PSE’s romancing of the stock market bubble represents another noteworthy example of principal agent problem. I know that officials of the PSE recognize that present price levels have borne the yoke of excessive valuations. But still, they justify the pumping and pushing in the name of G-R-O-W-T-H.

And as shown above they keep doing this even when they have repeatedly been proven wrong.

And they continue to do this perhaps because this should benefit the PSE over the short term (anyway in the long run, as JMKeynes said, we are all dead), which they may be hoping for more IPOs and increases in fees from also a hoped for increase in trading volume; it gives the PSE officials latitude for their personal career advancement, as well as, to generate political capital through enhanced connections with officials from both the government and from publicly listed firms—beneficiaries of the BSP’s invisible redistribution, and most importantly, because the PSE’s institutional audiences have shared their interests (media, supply and buy side industries).

Of course, another critical factor has been retail participants and spectators have so very short memories. Because they seem to have amnesia, PSE official’s repeated mistakes has been easily be forgotten. So the continued promotion of recklessness.

For as long as stocks recover, the mainstream institutions will continue to prance along with such hopium based riskless world, where they will tell the public that positions on risk assets such as stocks, can only go up!

Of course, since there is no free lunch, there will be a price to be paid for by the hapless and gullible consumers of mainstream agenda, most of whom do not understand the incentives driving these people’s actions.

All these worshipping of stock market bubbles will eventually end in tears, in a not so distance time (perhaps at the latter half this year?)

The PSE Jinx Indicator?

Yet there is a nice message from the PSE’s (as well as the establishment’s) all-out embrace or swooning over the vertical or Viagra stimulated ramp at the PSE.

The PSE’s message works almost like a magazine cover indicator, a contrary indicator contrived by Legg Mason’s late technical analyst Paul Montgomery. The magazine indicator points to media’s highlight of trends at its inflection points. Applied to markets, such contrarian gauge essentially represents the crowded trade.

Like the PSE, such indicator shows of a deeply held popular conviction, sharp price movements and expectations of continuing trend as signs of a critical turning point.

Yet all these are interrelated.

Expectations (based on beliefs) influence prices through actions. If a marginal segment of market participants believe that prices will rise, and bid accordingly, more than seller’s beliefs that prices will fall, then this will set in motion a gamut of ascending prices.

And price actions influence expectations (via reinforcement or falsification). If the resultant price increases confirm on the marginal segment’s initial expectations, then higher prices will tend to not only reinforce such beliefs, but likely draw in more believers via increased participation of marginal buyers more than marginal sellers. Under such condition, price increases will then be sustained.

Such feedback loop mechanism (Reflexivity theory) creates a crowd following function that would be forged and nurtured as a trend.

And when trend becomes deeply embedded where everyone’s beliefs have converged, the dearth of sellers translates to a shortage of liquidity. However, the shortage of liquidity creates an environment where the same market participants will want to unwind their positions. Doing so would mean justification for such actions. And when such actions, based on new expectations, are undertaken such would set into motion a series of price declines. And price declines will then be reinforced by expectations, (and rationalizations) that subsequently, influence actions that runs on the opposite direction. Thus boom becomes bust.

So when the PSE issued a statement last week to sanctify the recent highs, it basically reflected on a popular sentiment which, in fact, has signified symptoms of the crowded trade.

The deepening of conviction predicated on G-R-O-W-T-H has been founded on rising prices. And the vicious vertical price actions have only worked to entrench such faith, although such avowal has actually been pillared by misconception (higher stock prices equals G-R-O-W-T-H). Nevertheless, since such trend has been seen as firmly established, the popular expectations would be for its continuity.

From such premise, we can see that it has been no coincidence that the PSE has opted to issue more press releases in April 2015 when the PSEi was on the way to 8,127.48 more than disclosures in February and March of the same year and compared to the record high of 7,392 in the month of May in the year 2013.

PSE officials have amplified their emotional investments in the consecration of the one way street inflationary stock market boom!

It has been no fluke that the PSE went to boldly defend the waning boom to the public against the August 2015 crash.

It has been no accident that the PSE decided to hibernate or take a respite after being proven devastatingly wrong in 2015.

It has been no chance that the confidence of PSE officials has been reignited for them to issue last week’s exaltation of the revitalized vertical stock market boom

And it has been no happenstance too that the last two public disclosures (August 2015 and last week) by the PSE on the inflationary stock market boom has been more about its lionizing, which ironically, has been bereft of record levels

Therefore, it has been hardly fortuitous for me to discern that PSE officials have been increasingly desperate in search of a boom.

If so, then such desperation should imply of a nearing inflection point.

This implies that latest pronouncements by Philippine Stock Exchange to uphold the boom have now become a Jinx Indicator.