Is This Time Different for the Phisix? What ‘Surprise’ Will Be Announced in the President Duterte’s 3rd SONA?

Is This Time Different for the Phisix? What ‘Surprise’ Will Be Announced in the President Duterte’s 3rd SONA?

What Surprise Will Be Announced in the President Duterte’s 3rd SONA? Expect A Forthcoming Seismic Change In The Political Environment

Domestic political events have been unfolding rather speedily.

The war on drugs has now spread to envelop the acceleration of the war on religion, the intensifying ‘purification’ of local government officials and the ramrodding of a legislative draft to usher a constitutional change.

The ongoing ‘purge’ of local officials has included several assassinations of the highest (mayors and vice mayors) to the lowest ranked (councilor, barangay official and etc.), the neutralization of police powers of select local officials and the reduction of police security services of a leading critic of the administration.  

Anchored mainly on political ideology, these events, to my analysis, could have all been entwined. But I won’t elaborate further.

And it has been a curiosity to see political morbidity spiral heading towards the third State of the Nation’s Address SONA on July 23. A “surprise” awaits the public during President Duterte’s 2018 SONA says a public official.  Have these events been tied to such surprise announcement/s?

Though these may be unrelated to the SONA, the direction of the current series of events indicates a forthcoming seismic change in the political environment.

Interesting times, ain’t it?

The Only Phsix Chart that Matters: Phisix in the Face of Rising Rates

Last week, I exhibited the only CPI chart that mattered.

Figure 1

This week I offer another the only Phisix chart that matters.

From 2006 to 2016, the Phisix rallied on the backdrop of falling yields of the benchmark 10-year peso or Local Currency Unit (LCU) bonds.

As yields of the 10-year peso bonds hit 2011 levels, the Phisix hit its recent apogee in January 2018.

That is to say, an era of easy money has propelled Philippine stocks to reach its present highs.  

And the previous bear market episodes of 2013, 2015 and 2016 were overrun by the dynamo of too much money chasing too few assets.

Of course, serial manipulation of the PSEi emerged in late 2014 which had been responsible for the considerable portion of the advances of the headline index.

Yet, the last time benchmark yields spiked was in 2006 which was followed by a stock market crash in 2007-2008. A selloff in both domestic bonds and the peso accompanied the Great Recession stock market crash (-56%) of 2007-8. But the bear market of 2007-2008 represented a counter cycle within a secular cycle.

And the eon of easy money can be seen in the explosion of systemic leverage (bank and government credit) which has nearly tripled in 11 years. (lower pane)

Nevertheless, yields of the 10-year benchmark have been in decline from the 1990s. However, systemic leverage took off only in 2011 or two to three years after the BSP embraced global central banks proactivist stance into easing money conditions to support the domestic economy.

Is This Time Different for the Phisix?

“This time is different” for the Philippine Stock Exchange for several reasons.

One, domestic politics have been radically transfiguring the economic landscape. The transition to the reconfigured government led political economy will translate to substantial dislocations which would not only aggravate previous imbalances but accelerate its exposure.

Conventional analysis, pillared fundamentally on statistics, will barely comprehend the underlying structural shift in the political economy.

That said, not only will the economy shift, the earnings profile of listed firms should see a significant departure from its past.

Two, it is the twilight days for free money economics. Buttressed by the transition towards a government-driven economic structure, competition for access to resources and finances with the private sector have only been intensifying. Previously, the bubble sectors in the private economy were the sole competitors. Today, the National Government has tipped the scale of competition in its favor and has taken the role of the critical mass in the economy.

As evidence, debt monetization or direct financing of the NG liabilities by the BSP have become a principal instrument in financing the NG’s deficit spending in 2016 and 2018. The inflationary impact from the overissuance of money has fated the peso to further attenuation and reinforces the price instability in the domestic ecosystem

Forcibly sustaining easy money policies on a resource-constrained economy should lead to a stagflationary environment.  

And rising rates from stagflation magnifies the fragility of a debt-dependent economy (see lower pane)

Even the chart of the 10-year yields benchmark reveals of a 2012-level resistance breakout from its rounded bottom formation. If the pattern would hold, the benchmark yield can be expected to spike to 9% in the fullness of time!

 

Figure 2

Three, the Phisix reached a bear market in 2018 in spite of an UNPRECEDENTED monetary and fiscal stimulus as evidenced by RECORD low rates (upmost pane) and LANDMARK high in systemic loans, UNPARALLELED QE (mid window) and ALL-TIME high fiscal deficits (lowest pane).

If the economy fumbles what tools would be left for the National Government and the BSP to use for stabilization goals?

Fourth, yes the Phisix has soared to a new record in 2018. But this milestone has been a function of three factors.

One, MONUMENTAL end-session pumping or UNMATCHED price manipulation.

34% of this week’s 2.96% gains came from end session pumping.

Two, the incredible transcendental accretion of market cap share by fundamentally two groups, the Sys and the Ayalas.

With this week’s 2.96% rally, the cumulative market cap weightings of the top 5 issues hit a NEW RECORD of 45.31%. Including BPI, the Sy-Ayala group of companies control a staggering 51.23% of market cap share of the PSYEi. Six firms determine the fate of the PSYEi! Remarkable!

Wouldn’t these be paradoxical, a MONUMENTAL capture of the headline index as it struggles to emancipate itself from a bear market?

The vastly skewed weighting towards six issues, with a particular mention on the SM group, highlights the growing concentration risks within the PSYEi benchmark itself.

Figure 3

And three, the record breakout in the headline index came in the face of unequaled divergence in the context of an incredible deterioration in market internals and an astonishing decline in the average output.

When April 10, 2015’s high of 8,127.48 was taken out on September 14, 2017, what followed was a shocking broad market selloff as indicated by the negative advance-decline spread. (middle window)

And another stunning contradictory development: as the PhiSYx ascended to new heights, the average peso output (average daily volume divided by average daily trades) plumbed to new lows! 

Put this way, the broad markets did not participate or even diverged from the performance of the headline index.

Or this serves as circumstantial proof that the headline index had been manipulated upwards which came at the expense of the broader market.

Finally, if the salad days of easy money could be over and out here, it may be the same overseas.

The US Federal Reserve has spearheaded the raising of policy rates and the withdrawal of the previous excesses from its balance sheet expansion. Other major central banks have either followed or have expressed willingness to follow the Fed’s path.

Additionally, increasing accounts of protectionism or “trade war” should extrapolate to reduced global trade, diminished cross-border flows in investments and speculative arbitrages.  

And with shunted or reduced access to external liquidity flows, the PSE’s sensitivity to domestic liquidity gets amplified.

Domestic stocks and its underlying economics, thus, become vulnerable to the risks of inflation, currency, interest rates and political uncertainties.

As such, a stagflationary environment could induce liquidations and capital flight which would pressure interest rates higher, and bring to the surface credit risks and the malinvestments in the terms of excess capacity.

This time is different when compared to recent history.

However, this time won’t be different when compared to the previous cycles.