Of all the mass delusions running rampant in the culture, none is more spectacularly delusional than the conviction that we can all get fabulously rich from speculation while producing nothing. The key characteristic of speculation is that it produces nothing: it doesn't generate any new goods or services, boost productivity or increase the functionality of real-world essentials. Like all mass delusions, the greater the disconnect from reality, the greater the appeal. Mass delusions gain their escape velocity by leaving any ties to real-world limitations behind, and by igniting the most powerful booster to human euphoric confidence known, greed—Charles Hugh Smith
In this issue
Pumping Bubbles for Operation PSEi 30 7,000: The Fantastic Four, Telcos and Renewables; China’s Looming Evergrande Moment!
I. Undermining the Rising Wedges Through Pre-Closing Pumps
II. Operation 7,000: Relying on The Fantastic Four, Telcos and Renewables Bubbles to Boost the Index
III. Share of Free-Float Market Cap of Telcos and Renewables Rockets as the Big 6 Tumbles!
IV. China’s Looming Evergrande Moment
Pumping Bubbles for Operation PSEi 30 7,000: The Fantastic Four, Telcos and Renewables; China’s Looming Evergrande Moment!
I. Undermining the Rising Wedges Through Pre-Closing Pumps
There are consequences for every action taken. And the ramifications vary across time and are spread into different dimensions.
In the local stock market, the rampant rigging of prices affects valuations, distribution scale of index issues, price chart patterns and ultimately helps shape economic allocations.
This desire to put up a cosmetic façade of the economy through asset bubbles has accelerated the pace and scale of the institutionalized quasi-price controls.
Figure 1
As posited last August, there seem to be some patterns emerging from institutionalized pumps and dumps, where big dumps are signals for large pumps. This week, after another intensive pre-closing dump, a massive pump followed.
The index is increasingly detached from reality.
Although the index climbed by 9.33% to 6,855.44 in August, the BSP’s PER exhibited a slump in August to 20.62 from 22.7 in July, suggesting an incredible spike in earnings. Yet, it is unclear how the PSE arrived at this remarkable number.
However, using the published 1H eps from their respective 17Qs, the annualized average 2021 PER of the PSEi 30 has soared to 28.13! But this is lower from last week’s record 28.37, which topped the previous milepost in January 1997 of 28.21.
Nonetheless, the raw numbers of PSEi 30 firms demonstrate how gaming the index only creates price levels with little relevance to fundamentals.
Strikingly, the PSEi 30 continues to rise even as the mainstream continues to downgrade the GDP. Authorities reduced substantially its GDP target to 4-5% from 6-7% in mid-August.
And even more incredible, the index simply adores record COVID cases, confirming our view last August 23.
This year, ironically, rising infections have actually been positive for the PSEi 30!
By extension, from a chart perspective, the pace of low volume frantic bids only generated bearish rising wedges, the third since the rally off the lows in March.
The March 2020 trendline had been broken twice (in the end of July and mid-August) through record pre-closing dumps. This trendline signifies a product of the BSP’s rescue to stave off deflationary impulses through redistribution of the public’s savings and resources to the elite-owned banking industry and their clients.
Again, in reaction to this, an acceleration of low volume index pumping followed, forging the third series of rising wedges.
Differently put, to fight off an offshoot of their creation, such implicit price-fixing measures have intensified.
But they’re in a pickle. Gains from rising wedges patterns were all given back in the last two episodes. So the desperation by index managers to undermine this pattern through pre-closing pumps.
II. Operation 7,000: Relying on The Fantastic Four, Telcos and Renewables Bubbles to Boost the Index
And the management of the index has now been transformed.
The top 6-10 issues carried the rallies of March 2020 to February 2021.
But a surge in retail accounts joined the bidding mania in November, pushing the volume up to multi-year highs. The outgrowth in volume diffused into increased speculative punts in the broader market. Many third-tier issues outperformed.
But because the volume hit a climax, the rally faded. That is, because of the inadequate growth of bank savings, the PSE's trading transactions growth stalled. The rising wedge, thus, took its toll on the index.
This prompted another fierce rescue of the index from May to June, with gains centered on the top 6-10 market cap issues (mostly the top 6).
Perhaps realizing that the old model didn’t work out well and that the retail mania had quickly run out of steam, the managers introduced a new model for their Operation: 7,000.
The listing of high momentum stocks of AC Energy (ACEN) and Converge Information and Communications Technology Solutions, Inc. (CNVRG) provided fuel to the bubbles on value sectors, which seems to play a crucial role in hitting their target.
PSEi 30: Surging Prices as Criteria to Membership: ACEN and CNVRG in, EMP and DMC out August 8, 2021
Figure 2
Three issues hit a milestone on September 16 1.28% pump: ACEN, CNVRG, and GLO. ICT also hit a fresh high on September 13. (Figure 2, upmost pane)
ICT appears to be surfing the global shipping and logistics boom. (Figure 2, middle pane)
Even at 6,900, four issues carved new milestones. Amazing. The Fantastic Four!
See discussions:
An Escalating or Climaxing Telecom Bubble?! Globe and Converge Prices Go Vertical! August 29, 2021
Mania Shifts to Energy Producers! Reading through the Spike of Aboitiz Power’s Share Prices! September 5
And while natural gas prices have been surging in Europe, the PSEi 30’s energy issues, manifesting a play mostly on renewable energy, has barely any relevance to it.
Share prices of global renewable, alternative and clean energy surged to records into the early 2021, as shown by the chart of the iShares Global Clean Energy ETF (ICLN), but has now tumbled into a bear market.
Meanwhile, global telecoms rebounded from its March 2020 nadir. Since peaking in April 2021, the rally has stalled, as exhibited by the Dow Jones World Telecoms index. Share prices of global telcos are even down from their pre-pandemic levels! (Figure 3, upmost pane)
Even the external perspective provides little fundamental support to the mania in the telco and renewable sectors.
III. Share of Free-Float Market Cap of Telcos and Renewables Rockets as the Big 6 Tumbles!
Figure 3
Despite this week’s .83% decline, the free-float market cap weights of the telco sector and the renewable energy plays stormed to historic highs coming at the expense of the market leaders or the big 6. (Figure 3 middle and lower panes)
The same issues have corralled the week’s trading volume. Telcos and renewables have captured 24.85% and 10.85% share of the main board volume of Php 39.683 billion, respectively.
The Fantastic FOUR (ICT, CNVRG, GLO, ACEN) racked up a 19.26% share of mainboard output.
The combined volume of Telcos, renewable energy, ICT, including AP’s parent AEV, accounted for a stunning 40.64% share!
In contrast, the share of mainboard trading volume of the big six (SM, SMPH, BDO, AC, ALI and JGS) shriveled to 15.5%! (Figure 4, middle pane)
Because of the mania brewing in these value sectors, the share of the free-float market cap of growth sectors (real estate and holding sectors) has been monkey-hammered. (Figure 4, upmost window)
Figure 4
Why?
From the Inquirer, September 17: Seven out of every 10 Filipino consumers are struggling with debt, making the Philippines the “most stressed” nation when it comes to managing household finances compared with the rest of the Asia-Pacific (Apac) especially during this prolonged COVID-19 pandemic. This is based on a research commissioned by Amsterdam-based fintech Backbase and conducted by Forrester Consulting, which looked at the state of banking and financial wellness in nine markets across the region. Drawing insights from 900 retail banking consumers across the region, 100 of which were from the Philippines, the study revealed the top challenges faced by consumers, including debt and inability to meet savings goals. …The 70-percent share of Filipino consumers struggling with debt was the highest among nine surveyed markets in Apac, where the average ratio of debt-weary consumers stood at 49 percent…Talking about the main challenges Filipinos face when it comes to their finances, Backbase Apac regional vice president Iman Ghodosi said that 67 percent of banking customers in the Philippines expressed feeling “overwhelmed” by debt, while 60 percent said debt was constraining their ability to pay bills, leading to more debt. Furthermore, 63 percent of Filipinos said debt was making it difficult for them to build savings. Household debt in the Philippines is at a near-record of over P2 trillion, or the equivalent of about a 10th of the country’s prepandemic economic output.
Please notice that although about a third of the population have bank accounts, only less than a tenth have borrowed from formal institutions. Most of the borrowings are from the informal sector. (BSP Financial Inclusion 3Q 2020) As repeatedly said here, the middle to the upper income/wealth echelons constitute the bulk of consumer borrowings. It is not clear whether the data covered above includes gearing from informal sources.
Nevertheless, real demand comes from real production and services. Money, functioning as a medium, only facilitates this exchange. And since the BSP's zero-bound policies have entrenched the debt dependency of consumers (aside from producers), not only has the curtailment of production and services impeded demand but likewise, it has exerted tremendous pressures on debt servicing.
And so, with current economic pressures weighing on consumers, the index managers are instead banking on miraculous fables to support bubbles generated from excess liquidity in the financial system.
Will the index succeed in breaking away from the symmetrical triangle through index management and blowing bubbles?
From our perspective, the index surge from 2009 to 2013 was emblematic of a genuine bull market, supported by natural market forces at work and bolstered by a surge in volume.
The current environment is plagued not only by uncertainties at home but also on the international sphere.
IV. China’s Looming Evergrande Moment
A default of one of the largest property developers in China, with the largest leverage, the Evergrande, appears to be imminent.
While it is a possibility that the Chinese government may bail out Evergrande and the other fumbling developers, there should be a periphery to core transmission from the affected sectors (property and banks) to the nation’s economy, moving towards the world.
While it is not written in the stone that a disorderly event occurs, even a slo-mo stagnation should be enough to impact adversely the global economy.
Figure 5
There are initial signs of a spillover.
From the perceptive Doug Noland of the Credit Bubble Bulletin, September 17: Copper sank 4.6% this week. Iron Ore collapsed 16.0%, with Nickel down 5% and Lead 6%. Global resource stocks were under significant selling pressure. Commodity currencies were sold. It appears markets began discounting a Chinese housing downturn, with negative economic ramifications for China and the world. Silver fell 5.7%, Platinum 1.9%, and Gold 1.9%. As for precious metals weakness, perhaps traders are moving to get ahead of further dollar strength, a rally that would gain momentum in the event of abrupt renminbi weakness.
But there’s more.
Shares of China’s property developers have been sold down (Hang Seng Property Index).
Industrial production of crude steel dropped to the levels of the Great Financial Crisis (GFC).
Outstanding loans to the real estate sector appear on route to deflationary territory.
Money Supply M1 growth has likewise been in a sharp decline.
And finally, China’s USD denominated junk bond yields climbed to the highest level since March 2020.
The property sector accounts for about 28% of China’s GDP, while real estate represents 40% of household assets. A downturn in the sector will likely spur social upheaval.
China is essentially closing its economy.
She has cracked down on big tech, education/online tutoring, crypto/bitcoin, video online gaming, and Macau’s casinos while promoting "common prosperity" socialism– signs of the government’s battening down the hatches.
At the same time, the Chinese government is stepping up its militant geopolitical activities, such as increasing incursion in the South China Seas, tests of Taiwan’s airspace, and Japan’s sea lanes at the East Asian Sea.
Shifting the potential outrage of the public from an economic downturn to the international adversaries appear to be the diversionary thrust of the Chinese government.
Good luck to those who believe that the Philippines will decouple from global events.
Yours in liberty,
The Prudent Investor Newsletters
