The gullible masses who cannot see beyond the immediate range of their physical eyes are enraptured by the marvelous accomplishments of their rulers. They fail to see that they themselves foot the bill and must consequently renounce many satisfactions which they would have enjoyed if the government had spent less for unprofitable projects. They have not the imagination to think of the possibilities that the government has not allowed to come into existence—Ludwig von Mises
In this issue
As GDP Slipped and EPS Languished, GDP WEEK Fanfare All But Vanished! Banking on the Sy Group to Pump the PSEi
-GDP Week PUMP Took a Bye
-The Phisix’s Managed Decline
-The Product of Manipulations: Heightened Volatility and Decaying Breadth
-SY Group of Companies as Key Person of the Phisix!
-The Fragility from the Sole Dependence on the SY Group to PUMP the PSEi
-Grand Infrastructure Plans: Rhetoric versus Reality
As GDP Slipped and EPS Languished, GDP WEEK Fanfare All But Vanished! Banking on the Sy Group to Pump the PSEi
GDP Week PUMP Took a Bye
The hype from the GDP week apparently fell through.
The absence of the GDP week pump caused the Phisix to close a modest .61% lower this week, the second week of decline.
And the following reasons may have contributed to the week’s actions.
One. Earnings performance of composite members of the PSEi 30 had been far worse than in 2015. (see email PSEi 30 1Q 2017 EPS Suffered Massive Underperformance! More Signs of Construction Weakness May 17)
Two. Insiders whispered to their private sector networks not to expect transcendence in 1Q GDP.
Three. Related to the second, 1Q GDP went against the consensus (median estimate was 6.6% - Bloomberg)
Four. The Phisix has reached an overheated state.
Fifth. Contagion from speculations on Trump’s impeachment.
Yet such dismal earnings announcements aside from the weak GDP outcome, which represents adverse critical factors, would have prompted for a much bigger loss. But it didn’t.
So the following must have influenced last week’s actions
One. Negative developments were ascribed to as statistical anomalies. Thus the focus of the mainstream had been to shift the gullible public’s attention to the next reporting season. Developments then would normalize.
Two. But who cares about negative outlooks? The Phisix can only go up!
Three. This week’s decline was stage managed or another product of intense manipulations.
Phisix’s Managed Decline
End session spikes or “marking the close” represents a unique trait for the Phisix.
While there have been many countries that have adapted similar trading platform as the PSE, this is the only bourse where “mark on close orders” significantly changes the outcome of the key benchmark—a practice executed with astonishing regularity and brazenness—apparently with full blessings of authorities.
Said distinctly, the Phisix represents the only bellwether in the world where composite issues experience enormous (mostly) PUMPS and (rarely) DUMPS. But don’t worry, capital markets are supposed to work this way – so says the establishment! PERIOD.
Forget about the price fixing actions which masquerade as a price discovery process. The fundamental economic function of markets as a coordinating mechanism to balance demand and supply won’t be hampered by such actions. So at the end of the day, there can only be beneficial and constructive outcomes!
Last week’s incidents.
GDP day coincided with the conniption endured by US equity markets supposedly due to the prospects of Trump’s impeachment, such prompted the Phisix to fall by1.21% prior to the transition to the runoff. When the market intervention phase was lifted, the Phisix was down by only .88%. That’s .33% shaved from regular session losses. And such point shaving activities had been due to the huge pumps on SM (+.8%) and JGS (+1.8%)!
China’ national team seemed to be at work at the PSEi in the next day (Friday)
You see China’s national team has been very busy lately. With their stock market under pressure, China’s national team have made their presence known. Like their Philippine counterparts, vertical pumping or “the afternoon delight” goes on operation about an hour or an hour and a half before the closing bell.
Such similarity of operations can be seen in the Phisix last Friday (upper left). The difference has been that China’s national team doesn’t have the same “cheaper” privilege as the domestic counterpart of price fixing based on closing bell transitions.
The Product of Manipulations: Heightened Volatility and Decaying Breadth
So we move now from the cause to the effect.
The lowest window shows how the week’s Phisix (-.61%) outcome was derived.
Six firms or 20% of the PSEi 30 had experienced 4% in price changes! Such illustrates of the seismic shifts in tectonic plates as emblazoned in prices!
The frequency of magnified price volatility has signified as offsprings to the rampant price fixing actions which the establishment fails to see!
Such hardly accounted for a normal correction phase. ALI’s cratered 4.1%. But this was countered by a violent pump in SMPH, which rocketed 1.88%, and by SM’s modest .65%. Since SM was pumped .8% Thursday (GDP day), this means that over 100% of the week’s gains were due to mark on close orders! See what price discovery means???
And along with Ayala Land, PLDT’s 8.26% crash had been pivotal enough to turn this week’s headline index lower.
Huge weekly gains in ICTSI (+2.42%) and MBT (+2.42%) effectively countered JFC (-4.25%) dive.
In short, the determinacy of the index’s outcomes increasingly depends on a narrowing number of big performing issues. Again, such accounts for as another product of end sessions price pumping!
SY Group of Companies as Key Person of the Phisix!
And yes this week’s pump in both SM and SMPH has sent these issues to near records highs again!
And as pointed out previously, present developments mark the reign of the Sy Group of companies. [See Incredible Coordinated PUMPING: SM Group Powers the Phisix to 7,850!!! May 7, 2017]
Or the ramp to the current levels has been principally due to the price actions of the trio firms owned by the Sy Group!
The upper chart exhibits the market share of the SY owned companies: SM, SMPH and BDO since April 2015.
The beauty of the chart is that it shows the RELATIVE price performance of the trio against the OTHER PSEi 30 issues or the contest to grab the share of the PSEi pie.
It demonstrates HOW the triumvirate ascended through the ranks over the past two years to virtually CAPTURE three of the top 5 spots as biggest market firms of the PSEi!
Such feat means that the SY group now represents the benchmark’s most dominant force!
So while the SM group has commandeered the ascendancy of the PSEi, its present strength represents its own WEAKNESS. Ergo, the vulnerability of the Phisix now has centered on the capacity of the Sy group of companies to keep inflating their share prices.
Of course, that’s in the condition of the persistence of the present dynamics—a limited participation of the broader PSEi.
I started tabulating the market cap ranks at the close of the week on April 10, 2015 (the first 8,127.48). Then the largest market cap was SM with 9.95% share. BDO at 5.44% ranked seventh while SMPH was ninth at 4.98%. Their total share of market cap: 20.37% or one fifth of the PSEi.
Today, the ranks and market share weights as of Friday May 19 were as follows: first SM 11.13%, second SMPH 8.14% and fifth BDO 6.45%. Their current total share of market cap: 25.72% or a QUARTER of the PSEi!
In short, in three years the magnificent trio’s share of market cap soared by 5.35% to corner a quarter of the PSEi’s share!
The current standings of the SY owned companies were not solely from fervid vertical pumps on them. The price crashes of URC and TEL, which were previously ranked higher than SMPH and BDO, saw their market share positions precipitously drop.
Yet the lagging share prices of URC and TEL epitomizes on the predicament of the Phisix to jump past 8,100. Or, URC and TEL have been part of the symptoms of limited participation.
Since the recent 7,400 breakout, there had been several attempts to bolster some of these laggards. So unless the broader Phisix will see coordinated price levitation, much of the onus of raising the Phisix to new record levels will fall squarely on the shoulders of the SY group.
The Fragility from the Sole Dependence on the SY Group to PUMP the PSEi
The SY group of companies have transitioned to take stewardship of the Phisix because they have been one of the main beneficiaries of the price fixing process
The relative fundamental UNDERPERFORMANCE of SMIC vis-Ã -vis competitor Ayala Corp represents one basic paradox
SM has seized leadership even when their earnings growth has been DWARFED by Ayala Corp! It can’t be about short-term. AC has trounced SM repeatedly for the past 4 years (including 1Q 2017). AC racked up an average annual PER growth of 24.28% against SM’s 5.5% over the same period! That’s a remarkable 341% gap, a constellation away, in favor of AC! The odd part has been that AC has only ranked sixth with only a 5.81% market share. So what justifies SM’s leadership position?
Are markets supposed to reward the inferior more than the superior in performance? And are such aberrations supposed to signify “functional” market behavior??? Or have these been symptoms of the gaming of the system?
Here’s more.
Apparently aside from the GDP, the markets just shunted aside the sluggish eps 1Q performance of the Phisix.
Don’t forget that GDP is supposed to account for the big picture that incorporates eps. So an eps shortfall should reflect on the GDP.
It’s something which I took note last weekend (see Wow! Mall Vacancies Surfaces in Mainstream Media! Cement Industry’s 1Q woes! 1Q PSEi’s EPS Growth in Dire Straits! May 14, 2017)
When eps growth turned negative in the 1Q of 2015, GDP slumped to 5.2%. It’s just amazing to see the how micro (eps) substantially diverge from many very highly optimistic government data. It’s likely that government data has been thoroughly politicized.
Yet will history repeat?
I would suggest that GDP since 2015 has been vastly overstated.
Moreover, in 2015 the lackadaisical eps and GDP story had mainly been about crashing domestic liquidity growth from declining credit growth. Today, though credit growth continues to rampage, which has been closing in at RECORD levels from likewise an UNPRECEDENTED monetary policy easing (stimulus) measure, domestic liquidity appears to be plateauing!
Seen through a different prism, the moribund eps and GDP story in 2015 was partly a response to BSP’s tightening measure. It’s the opposite condition today.
The government’s RECORD monetary (record low policy rates, $500 billion of BSP’s QE) and proposed UNPARALLED fiscal (infrastructure) stimulus* has engendered the present GDP and eps doldrums!
Or the eps and GDP fumbled even as the government stimulus has operated in FULL THROTTLE!
A further downturn in economic activities would most likely force the hand of the BSP to spike inflation even more!
The BSP would ease via lowering of policy rates, slashing reserve requirements and QE (government’s treasury debt monetization)!
Regardless, Philippine stocks are so much dearly priced. Market cap to GDP (2016) as of Friday was at an astonishing 90.4% which remains at the proximity to 1996 pinnacle at 97.35! (lower window)
Moreover, the Phisix’s 1Q PER ‘annualized’ would average 17.96 or 18. But when computed based on a market cap, PER would swell to a stunning 21.65 (upper window)! Reason? The top 5-15 has represented the area of concentration for price multiple expansion activities!
Yes, even more signs of manipulations of the PSEi.
Near record SM and SMPH have now generated PERs almost equal to JFC!
The higher the PERs, the greater the risks of negative returns!
In sum: Pls allow me to repeat: It won’t be the price level that will ultimately matter. For example, BW-SSO crashed back to the roots where these bubbles began its vertical ascent. The Asian crisis expunged all the gains acquired from 1992-1996.
Instead, it is the sustainability of price actions that determines eventual returns grounded from real world economics
Grand Infrastructure Plans: Rhetoric versus Reality
*The proposed Php 8.2 trillion worth of “golden age of infrastructure” would be financed by debt (80:20 domestic/foreign). And such deficits would emerge in the face of a “tax reform”. The ensuing mismatch between revenue and spending which could be expected to burst open would most likely require a heavy hand from the BSP!
Some numbers: total government debt as of March was at Php 6.190 TRILLION. Add Php 8.3 TRILLION, debt would inflate to Php 14.49 TRILLION! That would bring debt to gdp (2016) at 100%! And that’s just from infrastructure, which EXCLUDES expenditure expansions in other areas of government bureaucracy, welfare, and military/defense!
While I am FOR tax reform, TAX reform confronted by massive expansion of government’s expenditures will just NOT work! Such proposals are infeasible!
If the massive public work program becomes a reality, such will not only CROWD OUT resources but most importantly, finances. The explosion of fiscal deficit would send the peso into a tailspin as interest rate surge! Expect the BSP to go deeper into debt monetization!
By itself, infrastructure does NOT cause wealth or prosperity. Rather, infrastructure represents an effect or a byproduct of economic progress from economic freedom (promotion of voluntary exchange and competition, respectof property rights and the enforcement of contracts and governance through sound money)
As the late Peter Bauer wrote in the 1969 Scottish Journal of Political Economy essay from his Dissent on Development(Revised Edition)**
Nor is it true that a substantial infrastructure is a precondition of development…. The suggestion that ready-made infrastructure is necessary for development ignores the fact that the infrastructure develops in the course of economic progress, not ahead of it. The suggestion is yet another example of an unhistorical and unrealistic attitude to the process of development.
The public has been constantly beguiled with grand infrastructure projects since the new administration was sworn into office eleven months ago. Like almost every political aspect following the elections, short-termism or promises of elixirs dominate the establishment’s sentiment.
Ironically, reality has bespoken of a different environment. The cement industry suffered about 4% sales decline in 4Q 2016. This decline was carried over to the 1Q of 2017 as an even deeper or worst slump! Sales of the biggest three cement manufacturers (which has a combined market share of about 70-80%) crashed by over 10%! Though part of the retreat in sales may be due to channel stuffing (inventory dump in 2016), these are symptoms of a sharp slowdown in demand. Or demand (from construction or real estate) has been vastly overstated
Add to this decline the gross revenues of major contractors.
Curiously, despite the crash in cement sales, construction GDP has exhibited downside actions. But still, construction GDP registered stunning growth numbers: 11% NGDP, 8.2% RGDP! High double digits as the micro suffer? Just what has the PSA been smokin’?
As further proof of the construction industry’s woes, even the banking system’s construction loan portfolio continues to shrink. Though of course part of these stems from the diminishing returns from the base effects
Drastic changes in political developments may impact political plans.
The incumbent administration has repeatedly touted China as its foremost financial patron for its infrastructure spree.
Fascinatingly, when Mr. Duterte floated the idea of developing an oil project in a section of the South China Sea Mr. Xiwarned that they’d go to war with the Philippines! And if the leadership abides by the suggestion to take China’s threat to an arbitration tribunal, such would further rile up the Chinese leadership.
So would the Chinese government continue to finance the administration’s pet projects and boondoggles? If not then where will other potential sources come from outside Japan?
The administration just drove the stake deeper in its relationship with the West.
It has rejected aid from Europe which allegedly has strings attached. The leadership also railed at the US state department, again, predicting that the US will collapse in 50 to 100 years!
The rhetoric of grand infrastructure plans can’t seem to match with the actions of counterparties required to support this and of current real economic developments.
Perhaps somehow somewhere it would.
Still, real (not political adulterated) economics say that these are not going to work.
Costs are NOT benefits!
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