There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present—John Kenneth Galbraith, A Short History Of Financial Euphoria
In this issue
Ten Signs of a Frothing Speculative Mania in the Philippine Stock Exchange!
I. Vertical Prices, Concentration, and Record Breadth
II. Extreme Overconfidence, Manic Speculations
III. Excessively Overbought, Detachment with Fundamentals
IV. BSP and Global Central Bank Liquidity Injections and the K-Recovery
V. Conclusion: Equal and Opposite Reactions: From Melt-ups to Breakdowns
Ten Signs of a Frothing Speculative Mania in the Philippine Stock Exchange!
Sir John Marks Templeton, philanthropist and the founder of the Templeton growth funds, once described the stock market cycle as, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria…The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Neither skepticism nor pessimism has been reached to establish the typical birth of a bull market. Yet, people have been made to believe that political solutions via “vaccines and reopenings” are sufficient and necessary ingredients for the rekindling of a sustainable bull market.
Has the BSP overridden or conquered the stock market cycle?
Or, are we witnessing a bear trap writ large?
Figure 1
I. Vertical Prices, Concentration, and Record Breadth
First, the price actions of many issues or even indices have risen vertically.
Since the March lows, there have been two episodes where key sectoral indices have returned by about 20% in four weeks. Or, the first sowed the seeds of the second melt-up.
Second, the distribution of sharp price increases of the composite members of the headline index has become asymmetric.
In the first installment, except for the financials, all the sectoral indices spiked by at least 20%.
In the current series, the share weight of gains has become concentrated on the property and the holding sectors. In the meantime, the price momentum of one of the previous leaders, the service sector, appears to be fading.
The recent upside thrust amidst the narrowing participation or widening skewness of performance could be signs of incipient exhaustion or seminal indications of a distribution pattern in the works.
Third, bullishness may have reached an interim peak. For the first time since late 2015, market breadth has exhibited a bias in favor of the bulls, with the number of advancers outclassing decliners. However, following the recent all-time highs, the pace of bullishness may have reached extreme levels.
While the current behavior of the market internals partly resembles the low of 2009 in the prism of the PSYEi, which became a foundation for the 10-year bull market, there is a stark divergence between the fundamentals then and the present period.
Figure 2
II. Extreme Overconfidence, Manic Speculations
Fourth, the average daily trade, which represents the number of transactions in a day, hit another milepost high last week, the second for the year. The first event occurred when the headline index reached a low in March and rallied ferociously from it. Unless incited an onrush of new accounts, this may represent the rapid churning of trades by active participants.
Fifth, the average daily traded issues, which represent the number of issues traded daily, reached the second-highest level last week. Etched a few days apart from when the headline index carved the milepost 9,058.62 level in January of 2018 was the latest pinnacle of the average daily trade.
Record trade turnover, and the second to the all-time in average daily trades, as well as the highest spread in market breadth in favor of the bulls, exude extreme overconfidence, and manic speculations. Furthermore, the serial massive mark-the-close pumps on the headline index appear to continually exhibit the brazen gaming of market prices by some participants.
Sixth, the peso daily main board volume hit a multi-year high last week.
Unlike today, the corresponding robust increases in the board volume transactions and healthy market internals characterized the foundations of the genuine bull-market of 2009-2013.
Last week’s vertical price actions, which represent a continuum from March, however, accompanied by a burst in volume resonant of 2015 and 2017 episodes, may eventually, frazzle like its forebears.
Figure 3
III. Excessively Overbought, Detachment with Fundamentals
Seventh, the headline index has reached extremely overbought levels, as measured by the MACD and the RSI, which are at epic heights. Lopsided buying or selling conditions have previously led to amplified volatility in the opposite direction.
And though the index has managed to fill the gaps from the March meltdown, it is about to test two major long-term resistance trend lines from 2009.
However, over the interim, the recent golden cross, or specifically, the crossover of the 50-day moving averages, which rose above the 200-day moving averages, provides temporal support to the index.
Eight, fundamentals should still matter over time.
Like developments overseas, the local stock market appears to be veering away from reality.
From the Businessworld (November 11): THE Development Budget Coordination Committee (DBCC) may revise macroeconomic projections once again, after latest data showed the economy is recovering slower than expected. “The DBCC will be meeting immediately to reassess the latest numbers to see if there is a need to adjust the full-year projections,” Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua said in a media briefing Tuesday. Gross domestic product (GDP) slumped by 11.5% in the third quarter, after a 16.9% contraction in the second quarter pushed the country into its first recession in nearly three decades. In its July 28 meeting, the DBCC projected GDP will shrink by 4.5-6.6% this year, before growing by 6.5-7.5% in 2021 and 2022.
With a second consecutive quarterly 11.5% slump in the 3Q GDP, the National Government may likely revise its macro targets downward for the year. Again. And again.
The point is not that they have been wrong, yes they have been consistently and flagrantly wrong, but rather, their rapidly shifting projections do not even seem to be even driven by data or by context.
The most important lesson, aside from the moving goalpost, has been that the NG subjected the population to a repressive social “health” policy when they were either clueless of its economic implications or had an unstated different agenda in mind.
The Failure of the Centrally Planned ECQ Health Policy, Statistical Charades, and 1Q Real Estate Divergences July 12, 2020
The mainstream’s targets had also been wide-off their mark.
Figure 4
The GDP is a statistic of the National Government’s formulation. With public spending down, as measured in their fiscal accounts, authorities should have known this was coming.
After hitting a record high in the 2Q, public spending as a share of GDP dropped to 14.79% as growth decelerated substantially to 8.15% current or 5.84% real, hence amplifying the drag on the GDP, which registered the second steepest contraction since 1981! Yet, public debt soared by 18.5% over the same period [explanation in the coming outlook].
To be clear, this author does not believe that any value added to the economy from public spending.
As noted earlier:
So, 3Q’s aggregate public and infrastructure spending, aside from revenues, suggest a GDP still in deep contraction, though partially improved relative to the 2Q….
Dismal 3Q Fiscal Performance Point to Another Substantial GDP Decline! November 1, 2020
But all insisted that GDP as a number, the Philippine economy remains invulnerable to any downturn. Neither a credit bubble nor a big government bubble would tarnish its macroeconomic trend.
And one can guess that the PSA’s data may even be an upside to their estimates.
Despite being told that the economy is supposed to recover meaningfully from such regulatory easing, mobility indicators from Apple and Google tell of a different story…
And so while loosening has been the well-received story that has populated media, the economy has been operating substantially below capacity.
And here’s the thing, in the face of immense income, revenue, job losses, real per capita household consumption GDP shrank 10.5% in the 3Q.
3Q Financial Statement disclosures of composite members of the PSE appears to bolster the case of deteriorating conditions of consumers.
The aggregate revenues for listed retail firms, composed of Jollibee, Shakeys, Maxs, Puregold, Robinsons Retail, Metro Retail, Philippine Seven, All Home, SSI Group and Wilcon Builders, had only been up by 10.43% in the 3Q on a quarter-on-quarter basis.
Though a slight improvement from the 2Q contraction of 23.2%, compared to the 1Q, retail revenues still dropped by 15.13%!
Please note that the growth of international revenues, which was up 11.6% in the 3Q, embellished Jollibee’s revenues. On the other hand, domestic sales plummeted 46.82% in the same period. Excluding JFC’s international sales, the revised aggregate retail numbers would translate to a smaller 9.36% growth (QoQ) in the 3Q and a bigger decline of 16.98% compared to the 1Q.
And that’s just the retail sector. Despite the power push on share prices of key property issues, 3Q activities have been turning out to be a disappointment. Once the PSE publishes the FS of all the members of the property index, we shall deal with this.
In any case, panic bidding has engulfed the PSE even as uncertainty and underperformance have loomed larger than the mainstream has expected.
IV. BSP and Global Central Bank Liquidity Injections and the K-Recovery
Ninth, the BSP’s QE, infused mostly to the banks from March, had not only been instrumental in keeping the PSE afloat but likewise energized a frenzied bid in the PSE following additional rounds of liquidity infusions in October.
The BSP’s net claims on the national government surged by 45.7% in September to lift Year to date balance to Php 439.82 billion.
Yet, the blarneys of successful vaccine trials and the prospects of returning to the Pre-Covid era have rationalized the speculative orgy.
Figure 5
Concerted liquidity injections by global central banks, including the BSP, have been disguising insolvency risks by pushing financial assets to extreme record levels. The hope is that increased consumption by those benefiting from these will trickle down to the general economy through the ‘wealth effect’ mechanism. With last week’s melt-up, the MSCI World (MSWORLD) and Emerging Market ETFs (EEM) are knocking at historic highs.
If, by betting on financial assets, money can be generated for free, why take more risk in the general economy by investing?
And even if we grant the possibility of its effectivity, how can the wealth effect trickle down when governments, by increased interventions through asset purchases, have been socializing or taking over implicitly the financial markets?
Finally, related to the above, the vertical surge in global stocks may be producing a K-recovery. A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession, according to Investopedia. For instance, the net worth of American billionaires zoomed in 2020, even as the economy has struggled. That's mostly from record highs in the US stock markets fueled by the US Fed’s liquidity expansion.
Here, the distribution of ownership of listed securities at the Philippine capital markets, as well as the distribution of trading participants should give us a clue of the main beneficiaries of the central bank liquidity pumps.
In the US, it is called Wall Street versus Main Street. The ramifications of which would become apparent as people become more divided politically.
V. Conclusion: Equal and Opposite Reactions: From Melt-ups to Breakdowns
In the finale, while additional BSP actions may extend the lifespan of overbought PSEi levels and embolden speculations that should magnify its divergence from economic conditions, such would only aggravate the risk environment that should intensify the buildup of destabilizing economic, financial, and political forces over time.
Furthermore, as local financial markets have become increasingly dependent on the BSP, any withdrawal of support should expose its vulnerability to disorderly adjustments.
In any event, the supply shocks from the ravages of the recent typhoons should escalate the fragility from the deepening imbalances embedded in the political economy.
That is, following Newton’s law that for every action there is an equal and opposite reaction, increasing accounts of market melt-ups, which underscores mounting economic and financial misallocations, should be arrayed with the prospects of harrowing breakdowns.
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