Vertical Upside Price Actions is Baccckkk! New Year Week and End 2016 Week’s Blitzkrieg!

Note: this post was distributed January 8, 2017 published belatedly only January 15th.

…fake news is what people want. News is a form of entertainment. People pay for it. Naturally, they want entertainment that makes them feel smart, heroic, and honorable. That is, they want lies! They don’t want to feel uncomfortable, inadequate, or stupid. So the last thing they want is any serious thought or real insight. The truth is too difficult to get ahold of and too bitter to swallow. They want news that goes down smooth… and makes them feel taller and slimmer—Bill Bonner

In this issue

Vertical Upside Price Actions is Baccckkk! New Year Week and End 2016 Week’s Blitzkrieg!  

-Mounting Financial Instability: New Year’s First Week and 2016’s Closing Week’s Blitzkrieg!  

-Filtering Signals From Noise: The Historical Context of the PSEi’s Newton’s Law

-Why Should This Time Be Different???

-The Real Economic Effects of Stock Market Price Fixing, The Simmering Friction Between Politicsand Economics

Vertical Upside Price Actions is Baccckkk! New Year Week and End 2016 Week’s Blitzkrieg!  

Wow. There they go again!

A week ago I noted of the unseen records for the year 2016. These unrecognized landmarks can be seen in various facets: monetary policies, parts of the economy and the financial markets. Philippine politics has even entered a game-changing era.

And part of the unnoticed milestones has been signs of mounting instability in the domestic stock market [2016: The Year of UNSEEN Records; USD Php Beats the PSEi for the Second Straight Year!]

Mounting Financial Instability: New Year’s First Week and 2016’s Closing Week’s Blitzkrieg!  

Well, apparently that streak of intensifying price instability continues. And this further reinforces how breakthrough history is in the making!

 

The banking system’s fiery credit expansion, which soared by 18.02% November, and which has mostly likely been sustained in December, had to look for something to push. Or newly issued money had to be spent, the question is where?

So aside from the deliberate or engineered pumps to shore up the headline index, the combined easy money from the BSP’s 2016 silent stimulus (from both over Php 200 billion bond buying in 1Q and from the interest corridor last June) had spilled over or propelled local stocks for a stunningly violent response!

The PSEi opened 2017 with a BANG!

The first weekly return for 2017 was a shocking 5.96%!!! This almost equals the 2009 New Year week where the same index returned 5.98% or a minuscule difference of .02%. Along with 2009, this marks the largest New Year week return in 11 years (lower left window)! See another record (of sorts)!

In 2009, the Phisix returned by a whopping 63%.

The message of this week’s pump was to reassert the beleaguered bull’s dominion. It’s a sign of hardened conviction, albeit a desperate one, whose actions are designed to restore what has been perceived as lost glory/status/privilege or even entitlement (paraded in the name of G-R-O-W-T-H). [more below]

But to disabuse from misinterpreting the likely outcome of 2009 with today, understand that 2009 was vastly different. A comparison should start with the base year from where these runs sprung, specifically 2008 and 2016.

The PSEi ended 2008 at 1,872.85. In the same year, the local bellwether tanked by 48.29%! Official PER at the close of 2008 was at 9.42.

In 2016, the Phisix closed marginally down by 1.6%. The end of the year price level of the PSEi was at 6,840.64. This accounted for 3.65x the price level of 2008.

Likewise, official BSP published PER (based on October 2016 where the Phisix closed at 7,404.81) was at 19.21. That’s more than double the 2008 level!

Incidentally, (as a side note), the PSEi’s was not alone in the insanity that had gripped the stock market. The stock market benchmark of another ASEAN member, Laos, through its  Laos Security Exchange Composite(LSXC) which had been on a bear market astoundingly BLASTED AWAY with an incredulous 20% run on New Year’s week!!! (lower right window) Yes, another historic activity in motion!

And back to the PSE, it’s not just New Year’s week. The PSEi closed the year 2016 with a ferocious three-daylow volume pump that generated 4.22%. Such a big weekly upturn fundamentally alleviated the end of the year deficit of the PSEi to just 1.6%.

So to add the returns of the past two weeks, the PSEi accrued another startling 10.18%—the biggest two-week return since August (+16.12%) and September-October (10.04%) of 2007!!!  The cumulative return for the past two weeks even beat last year’s frenetic activities or even 2013’s. Just awesome!

Recall that 2007’s vertical run turned out to be the top of that cycle.

And yes, if such two-week ramp would be somewhat duplicated, then 8,100 would be attained again at the close of January.

Furthermore, over the past 7 trading sessions, the PSEi racked up 10.43%. This slightly beats the 7-day run during the lows of January 21, which earned 10.14%. It’s only June 2013’s 4-day and 2007’s 5-day buying blitz which both delivered 12.74% that eclipsed last week’s price actions (see upper window).

As one would note, the upside volatility of the last two weeks has SURPASSED that of early 2016s!

Filtering Signals From Noise: The Historical Context of the PSEi’s Newton’s Law

In looking at the substance (overall severity of price actions) and not the form (price levels) or infiltering of noises from signals, one would realize that vertical ups and downs have hardly been signs of stability or a source of optimism.

While it may be true that such momentum may extend for awhile, these are UNSUSTAINABLE.

The simple reason is that markets are subject to a clearing process, and excesses will have to be eradicated overtime.

And this process has been apparent in Newton’s Law—For every action, there is an equal and opposite reaction—or what can be referred to in finance as “reversion to the mean”.

History has been providing repeated examples, which apparently little would heed.

 

The cumulative charts above have incorporated the PSEi’s 3 different secular cycles that spanned almost 5 decades (1965-2013). The reason I omitted 2013 to the present is that such chart has already been presented above.

And throughout nearly 5 decades, ALL MAJOR episodes of VERTICAL-VIAGRA pumps had been erased!

Unless this time is DIFFERENT, which has always been the entrenched and dominant thematic conversation for the mainstream, the strong likelihood is that HISTORY will RHYME anew.

And notice that in ALL three cycles, MAGNIFIED volatility in price actions have ALWAYS occurred at the TOP of the cycle.

And these are exactly the symptoms we have been witnessing today.

And notice too that the Phisix performance from 2009-2012 was hardly about vertical actions. In fact, vertical actions had been limited during 2002-2012 with 2007-2009 as the only major event. That’s in contrast to its secular forebears.

However, 2013 changed the equation.

Such is the context of Newton’s Law for 5 decades.

As a side note, for traders, the issue here is more than just about the timing but about the risk reward or probability payoff. But of course luck can play a role, that if one gets providential with timing right.

Why Should This Time Be Different???

So what exactly should make contemporary times representative of this time IS different??? Or why should this time be different?

The mid-1990s had also the lowest bank lending rates (1994-97) that spurred a credit bubble (upper left pane).  And that such massive credit expansion from low rates filtered into property and stocks.

Today’s rates have even been LOWER than in the 1990s and leverage has been significantly HIGHER (This is regardless of the much touted bank capital adequacy ratios which will be tested soon).

And hasn’t it been that stocks and properties, which are both interest sensitive assets, have been the main beneficiaries of record low rates today???

Have excessive valuations via PERs not been the same?? Since 2013 to date, PER levels have been adrift at the highest level that was once seen in 1995-97. (lowest window)

Nota Bene: PERs rose in 1Q of 2002 to 21-22 not because of price multiple expansion but because of earnings decline. The Phisix collapsed 70.4% from the peak of 1997 to the trough of 2002. So while the headline index was in the process bottoming in 2002, eps had yet to follow.

What’s more, the BSP’s Official PERs—which had originated from the PSE—have been cosmetically embellished. The PSE deliberately censored or omitted 2015 annualized eps performance applied to the corresponding stock prices, particularly in the 2Q 2016 (when 2015 eps should have been reported). 1Q 2016 data appeared to have been used in place of 2015 eps to sanitize the stratospheric PERs.

Despite the whitewashing, ironically, one can still see such deviances/discrepancies. As of Friday (January 6), the PSE still publishes the PERs based on 2015 eps. Guess what would be the PERs based on last Friday’s prices (Phisix 7,250) relative to 2015 eps?? Answer: 26.34 average, 26.103 (market weighted). What more in last July when the PSEi hit 8,102??? This only shows that PERs have equaled if not passed 1997 highs (27-28 PER).

Understand too that present-day inflated PERs have been bolstered by massive credit expansion in reaction to the BSP’s silent stimulus.

In short, while the technicalities of the past two secular cycles have been different, the essence of economic and asset growth—credit expansion remains the key driver.

This time will NOT be different.

The Real Economic Effects of Stock Market Price Fixing, The Simmering Friction Between Politicsand Economics

 

Here’s what has truly changed today: the massive use of pumps and dumps, particularly price fixing at the close.

For instance, Friday’s huge price fixing pump lifted the PSEi from +.14% pre-close to +.54% at the close, for a staggering +.4% or 2.85x gains for the day.

On the other hand, Thursday’s massive dump erased .82% or from +3.36% pre-close to +2.54% close.

And as I have noted earlier, the PSE opened the trading week with a fabulous price fixing pump which buoyed the index from the red (-.24%) to close up (+.3%) [2017 Welcomed with a Massive DUMP-PUMP and Marking the Close! January 3, 2017]

This week’s combined pump and dump accounted for 132.1 points or striking 1.9% of last week’s closing prices. Since the massive pumps (+65.24 points) had been little shy of the week’s fervid dumps (-67.16 points), the result has been a small net -1.92.

Nonetheless, the astounding price distortions.

As I have been repeatedly saying, those price fixing actions have only been impairing the pricing system. [See The Best Stock Market in Southeast Asia is a Brazen Systematic Price Destroyer! December 18, 2016]

A simple price quantity demand and supply chart tell us what happens with such manipulations.

Changes in Prices (vertical Y axis) affect not only Quantity (horizontal X axis) but demand ‘D’ and supply ‘S’ schedules that underpin ‘Q’ quantity (left chart)

The equilibrium ‘E’ point highlights the balance of demand and supply where there would be no excesses (shortages or surpluses).

Hence the role of prices, which function as information to buyers and sellers, is to balance or to coordinate demand and supply towards the equilibrium.

Therefore, today’s price fixing process somewhat acts as a price control mechanism. 

When prices are pegged above the ‘F’ equilibrium levels (price floors) the result would be an increase in quantity supplied or surpluses (supply exceeds demand).

Such actions have already reflected in the real economy. And the mispricing of stocks, partly due to manipulation, has been contributing to such progressing maladjustments.

Stocks or equity securities are titles to capital goods or factors of production.

Also, the goal of the stock market is not only to channel savings into investments but to reward and punish owners of capital goods for its use, as basically channeled through profit and loss.

Theoretically, higher stock prices function as remunerations to the efficient users of capital goods.

Unfortunately, when stock prices are manipulated higher to project artificial efficiency, it emits false signals. As noted above, such increases supply relative to demand, or generate surpluses.

This comes in the form of disproportionate amount of investments from existing players and from the entrance of new participants. This may be interpreted as yield chasing in the context of capital deployment in the real economy.

The perceived boom from high stock prices induces existing players to expand market share while the new participants hope to capitalize and partake of the bonanza by capturing a share of the market pie. Eventually, the latter will be enticed to list at the PSE.

For existing players, elevated stock prices allow owners alternative means to access more capital throughadditional share offerings.

Since stocks also serve as collateral, higher share prices translate to expanded access to capital through credit.

Since stocks can serve as form of currency or has moneyness traits, higher share prices signify as an increase in leverage in favor of equity’s controlling interest to negotiate and conclude deals for corporate expansion. Or corporate shares can be used to acquire firms.

Stocks are even used as a key measure for public wealth profiles, particularly for the majority owners.

Such transmission of mispricing of stocks can see today by through the race to build supply, mostly through property and retail firms.

The largest property, property related and retail firms along with their parents, as well as banks that provide funding for them, constitute the 10 largest market capitalization of 30 Phisix constituents. Three of the four IPOs in 2016 have been from the same categories, namely Golden Haven, Cemex and Shakeys.

Yet existing and new players fail to realize that an increase in competition will alone tend to pare down profits of industry participants. Industry saturation or overcapacity (which should account for as misallocation of resources) should add to such risks.

As a side note, three Sy owned companies has now dominated the top 5 largest market cap of the PSEi as of Friday.

Hence, the unintended effects of the systematic manipulation of stock prices have not only been to foster and nurture imbalances within the stock market, mainly through overvaluations, but have also been transmitted to the real economy through the frenzied race to build supply, which has only been compounding.

This shows WHY there has been a strong incentive for the elites to promote or support skybound stock prices through “whatever it takes”. Perhaps some of their firms could have been part of the regular price fixingpump.

And as Philippine stocks have become key signals for investment conditions (or euphemism for BSP’s Mr. Tetangco’s ‘trickle down’ invisible redistribution), which is how mainstream communications have been directed (the mantra: G-R-O-W-T-H equals HIGHER share prices—regardless of valuations), this also gives us a good reason WHY the BSP has engaged in a Php 200 billion PLUS monetization of government debt in the 1Q of 2016.

A full-fledged bear market will not only jeopardize and take the steam out of the cosmetic political GDP, most importantly, it would expose on the heightened fragility of credit financed malinvestments in the economy. A real bear market, will likewise imperil government financing as falling tax revenues will diminish the government’s ability to spend.  Moreover, finances of government pension funds, which has significant exposures in the stock market, will faceincreasing strains.

This explains too WHY the Phisix has been incurring increasingly violent price gyrations. Vested interest groups have been increasingly desperate and dead set in pushing stock markets higher in the interest of retaining easy access to capital and preserving the status quo even as economics, in contravention, seem to draw attention to escalating excesses.

In short, the ongoing violent price gyrations have signified symptoms of the combusting frictions between politics and economics.

Guess which would eventually win.