Market narratives are social epidemics. When all who aren't resistant have been infected they lapse. It's never about accuracy; it's about saturation--Peter Atwater
In this issue
PSEi 30: 7,000 level Breached, Mission Accomplished? After ACEN and CNVRG, WLCON Next? Are Banks the Next Bubble Sector?
I. PSEi 30: 7,000 level Breached, Mission Accomplished?
II. Since the ACEN and CNVRG Momentum Model Worked, Why Not Boost Retails with WLCON’s Entry?
III. Next Bubble Candidate: The Financials? The Rationalization: Interest Spreads and Re-opening?
IV. BSP Admits: Bank Rescue Measures are Unsustainable!
PSEi 30: 7,000 level Breached, Mission Accomplished? After ACEN and CNVRG, WLCON Next? Are Banks the Next Bubble Sector?
I. PSEi 30: 7,000 level Breached, Mission Accomplished?
With the breach of the 7,000-level, it was mission accomplished for Operation 7,000. Or is it?
Figure 1
How was this accomplished? By a change in approach.
Tuesday, October 5th, led by the parabolic prices of the fantastic four (ICT, ACEN, CNVRG and GLO), instead of a pre-closing dump on the index issues, the index managers pumped it. (Charts from Technistock)
The low-volume breakout sent a succession of bids that sent the index to 7,057.45 the next day (October 6). Intensive bidding spread to the top 10 issues.
Surprisingly, the high-flying leaders succumbed to a two-day selloff, dragging down the index back to 6,906.86.
After a dump on Thursday, Friday's trade opened with a furious rally only to end with a pre-closing selloff. Pump and dump.
Figure 2
Despite the 7,000-level breach, a roundtrip sent the index -.24% down from a week ago.
But the sectoral free-float market cap contributions remain the same; telcos and energy producers have complimented the flagging performance of the holding firms and real estate.
And surprise! The round of vertical-based price setting has expanded to the financials and the retail sectors. More on this later.
Interestingly, the free-float share of the TELCO increased this week despite the 15.9% meltdown of CNVRG shares.
Meanwhile, the momentum of ACEN, Ayala's renewable energy firm, remains seemingly unstoppable, as it closed the week with a fresh high.
Yes, parabolic prices represent free money, especially for the majority ownership of these firms.
II. Since the ACEN and CNVRG Momentum Model Worked, Why Not Boost Retails with WLCON’s Entry?
Since Operation Phisix 7,000 seemed like an arduous task for the big 6, the entry of ACEN and CNVRG in the middle of August provided flanking support.
Parabolic prices of ACEN and CNVRG, which spilled over to its contemporaries, powered the PSEi 30 from 6,400 to 7,000.
From the Inquirer, October 08: Effective Oct. 11, the Philippine Stock Exchange (PSEi) announced that Wilcon would replace Lopez-led First Gen Corp., following a tender offer transaction that reduced the latter’s public float.
Was FGEN replaced because of the reduced float? Perhaps. But like ACEN and CNVRG, WLCON’s inclusion may all have been about momentum. ACEN and CNVRG were enlisted on the elite PSEi 30 last August 16th.
Last August I wrote,
The higher the prices, the bigger the market cap, the greater chances for the inclusion to the PSEi 30 or preserving its membership status.
…
Or, aside from other inconsequential factors, the crux for the choice of ACEN and CNVRG is likely because their share prices are at All-time highs.
That is to say, because of its penchant for the survivalship bias or picking contemporary winners, the PSE seem to be drawn to the allure of bubbles.
PSEi 30: Surging Prices as Criteria to Membership: ACEN and CNVRG in, EMP and DMC out, August 8, 2021
As of October 1st, a week before the announcement, WLCON returned with a phenomenal 66.6% YTD against FGEN’s 16.52%. Its winning streak also caused its full-market cap to swell to almost surpass FGEN. The announcement accelerated this divergence.
Because the ACEN and CNVRG model have worked initially, WLCON appears to be hurriedly incorporated into the elite PSEi 30 to boost the lackadaisical shares of its retail peers, PGOLD and RRHI.
The seeming realization is that if the heavyweights are incapable of boosting the index now, why wait? Use the high-flying newbies instead to pump the benchwarmers.
Transform the stock market into a centrally planned mechanism for targets to get hit.
III. Next Bubble Candidate: The Financials? The Rationalization: Interest Spreads and Re-opening?
Another sector seems to have been part of the fine-tuning program to help in the quest of Operation 7,000.
Even during the selloffs, Financials led by BDO soared in the last two trading days. Market cap weight of the financials increased modestly over the week. (Figure 3 upmost pane)
Figure 3
Aside from reopening, the rationalization will likely be the steepening yield curve, which improves the net interest spreads of banks. (Figure 3, second to the highest window)
The yield curve expansion did bolster the Financial Index in 2015-2017. (Figure 3, second to the lowest window)
But in the current episode where the yield curve climbed from 2019 to the present, the Financial Index behaved indifferently.
Perhaps the market realized that it is not just margins but balance sheet conditions to benefit from it.
Bank lending indeed rose in 2015-2018. (Figure 3, lowest window) But the industry didn’t have too many bad loans to contend with then.
IV. BSP Admits: Bank Rescue Measures are Unsustainable!
Figure 4
In fact, the loan growth in this period compounded the liquidity problems of the banking industry. Rising CPI, which drove rates higher, caused NPLs to climb. Bad loans sapped liquidity in the system. (Figure 4, topmost pane)
The BSP, thus, commenced with a 200 bps Reserve Requirement cuts in 2018 from 20% to 18% in March and June.
Despite all the combined historic measures to rescue the industry, the sanitized NPLs data remain elevated.
In reality, even the BSP admits that such rescue schemes are unsustainable.
From their Financial Stability Report*: (bold mine) Debtors, creditors and the authorities should accept that there is more risk that is inherent in doing business over the immediate horizon, and not just more risks. Without this recognition, segments of the market can be rationed out rather than rebalance credit throughout the market. This can delay recovery or erode opportunities. Further regulatory relief eases some pressure today, but it does not recognize the rise in systematic risk. This misrepresents risks which can lead to rounds of systemic risks if left unmanaged. Out-of-the-box solutions are necessary and that requires a dialogue with all stakeholders.
*Financial Stability Coordinating Council, Financial Stability Report 1H 2021 BSP.org
Folks. That is an illustration of "kicking the can down the road."
What these rescue measures do is camouflage risks. Unfortunately, hiding or transferring risks is not the same as making them disappear.
In truth, once the system becomes dependent on the policy backstops from the BSP, weaning away from it poses a severe challenge. And the current set of distortions will only compound on pre-existing imbalances. Ergo, the FSR's comment, "it does not recognize the rise in systematic risk."
Repeating last a news quote from last week. From the ABS-CBN, September 27: “Loose monetary policy and accommodative macroprudential policy and regulation tend to engender potential bubbles in markets that could lead to macrofinancial risks and instability. Once the accommodations are phased out, more scars could emerge,” Diokno said.”
“Tend to engender potential bubbles in markets that could lead to macrofinancial risks and instability”.
So what have banks been doing with their excess liquidity and all other relief measures?
The answer: They have been anteing up their bets on the capital markets!
Using the excess liquidity provided by the BSP, and under the negative real rates, and rising yield curve environment, bank exposure of financial assets zoomed. (Figure 4, second to the highest window)
And the financial industry, led by banks, has most likely been instrumental in driving the PSEi 30 to the present levels.
Yet, the more they gamble, the greater their risks, the more fragile the industry's balance sheet.
It's not a coincidence that rising rates have led to the increase in the held-to-maturity assets of banks.
From the Financial Stability Coordinating Council’s May Statement**: From a market valuation standpoint, the higher yields also mean that holders of tradable securities face mark-to-market losses. Shifting tradeable assets into held-to-maturity may address valuation risks but it does come at the price of locking-in liquidity
**Financial Stability Coordination Council, STATEMENT ON THE STATE OF FINANCIAL STABILITY 18 May 2021 Meeting of the Financial Stability Coordination Council BSP.org
Have bank losses on fixed income securities been mounting? Have they been using HTMs as cover?
With escalating systemic debt in the face of rising yields, how sustainable are these attempts to cosmetically embellish the financial system by forcing up the PSEi 30?
How will banks ever attain a sound recovery when they are prodded to use their scarce resources to participate in the inflation of asset bubbles, which the BSP chief admits "lead to macro-financial risks and instability?"
Why not allow the markets to function naturally and spontaneously, competitively allocating and pricing capital in search of productive and profitable undertakings while avoiding losses?
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