In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability—John Kenneth Galbraith
In this issue
The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects
I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging?
II. The History of BBM's Pre-SONA PSEi 30 Pumps
III. Explaining the Index Pump: Concentrated Gains and Rotational Activities
IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume
V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry
VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth
VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder
VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency
IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?
X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion
The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects
As the
Philippine President is about to deliver his third SONA, the PSEi 30 has surged
for a fourth straight week to 6,800. What makes these gains artificial?
I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging?
The Philippine PSEi 30 closed the week ending July 19th just shy of the 6,800 level.
Philstar.com, July 20: The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares. The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares… a stronger peso and optimistic economic prospects buoyed local market sentiment… also anticipating the second quarter corporate earnings results.
In addition to the above, 'strong net foreign buying' contributed to this outperformance.
Previously, a more prominent explanation had been expectations of rate cuts by the Fed and potential monetary easing by the BSP.
Financial market news coverage has been mechanically influenced by current events—specifically, the 'availability bias' described in post hoc narratives: because of this event, therefore that. As a result, recent events receive disproportionate attribution and focus.
However, there seems to be a crucial event missing from this coverage: the political leadership is slated to deliver the annual State of the Nation Address (SONA) on July 22nd, Monday.
With a 2.16% advance this week, the PSEi 30 has enjoyed its fourth consecutive weekly winning streak. This weekly gain has propelled the Philippine benchmark to be the second-best performer among its regional peers, following Mongolia’s MSE. (Figure 1, topmost image)
Remarkably, the PSEi outperformed amidst a prevailing downturn in the Asian market, where 12 out of the 19 national benchmarks closed lower by an average of 0.53%.
Furthermore, the increased risk appetite for Philippine assets was also reflected in the Philippine peso, which was the only Asian currency to advance this week amidst a strong USD. (Figure 1, middle graph)
The US dollar index $DXY grew by 0.27% WoW, but eight of the nine regional currencies, excluding Japan, closed lower.
The USD-Philippine peso $USDPHP retraced by 0.08%, from last July 12’s quote of Php 58.38 to Php 58.335.
While the yield of the Philippine 10-year bond dived a week earlier, paving the way for its outperformance in the region, it remained unchanged this week as most of the regional peers experienced declines. (Figure 1, lowest diagram)
In contrast, Emerging Asia’s 5-year credit default swap (CDS) exhibited a 520-basis points spike in Philippine CDS (ADB data), indicating that while it comes from a low base, a sustained regional risk-off sentiment could reverse any recent gains. China’s CDS soared by 930 bps. (Figure 2, topmost and middle charts)
How do the causalities cited by the local media fit into this context?
The strengthening dollar, falling bond yields, declining stocks, and rising CDS are likely symptoms of de-risking and deleveraging in the face of slowing economies and potential rate cuts.
Are Philippine stocks and the peso suggesting immunity to this emerging phenomenon?
II. The History of BBM's Pre-SONA PSEi 30 Pumps
Here is the most important thing the echo chamber has critically missed:
Since the inauguration of the incumbent President in 2022, the PSEi 30 has enjoyed a series of pre-State of the Nation Address (SONA) pumps.
The incumbent's previous SONAs were on July 25, 2022, and July 24, 2023.
From the 6,065.23 trough on June 23, 2022, the PSEi 30 soared to a peak of 6,863.86 on August 19 of the same year, delivering a 13.17% return. (Figure 2, lowest graph)
The PSEi 30 then surrendered all of those gains and more but found a second post-election honeymoon in October, alongside the UK’s Bank of England (BoE) rescue of its emerging pension crisis, which saw global stocks bottom and reverse to the upside.
The second SONA pump began on July 7, 2023. It emerged from an interim low of 6,379.03 to reach an interim high of 6,679.13 on July 26, 2023, resulting in a 4.7% return.
In both instances, the PSEi 30 surrendered all its fleeting gains in no time.
The third SONA pump came at the temporary bottom of 6,158.48 on June 21, 2024, following the Ayungin Shoal incident. Through July 19th or at 6,791.69, the PSEi 30 has returned by 10.3%.
How will this time be different compared to its recent predecessors?
Nota Bene: The SONA pumping cycle doesn’t necessarily end on its actual date, as factors such as momentum and domestic and local liquidity flows may determine its lifespan.
III. Explaining the Index Pump: Concentrated Gains and Rotational Activities
Why is it an index pump?
Figure 3
This week's 2.16% gain represents the largest week-before-SONA returns. (Figure 3, topmost chart). The difference between the present and previous environments doesn't provide a relevant comparison or suitable probabilities for making a forecast. For instance, the political-economic landscape of 2009 and 2010 was influenced by the climax of the Great Financial Crisis.
This week’s gains were once again concentrated on the (free float) market cap heavyweights.
While it may be true that 20 of the 30 member issues were up this week, the outsized gains of the top 10 issues, which carried an astounding 72% share of the PSEi 30 (as of July 19th), delivered the gist of this week’s 2.16%. (Figure 3, middle graph)
On average (equal-weighted price change), the weekly return was only .92%.
The substantial difference between the average and the change in the headline index was principally due to the free float weights.
And this week’s activities resonated with the last four-week performance.
Fundamentally, while the PSEi 30 was up 10.3% from June 21st to July 19th, the accrued gains were largely derived from the top 5.
Again, while 22 of the 30 member issues rose during this period, the average gain was 5.48% indicating the spread caused by distortions of the free float market cap relative to the equal-weighted price change. (Figure 3, lowest visual)
Moreover, the top 5 issues, which expanded by an average of 15.4%, accounted for most of the 5.5% four-week average growth.
In addition, the 51.17% pie of the top 5 heavyweights have drifted close to their recent milestone levels, with the index pumps rotating among the heavyweights. (Figure 4, topmost graph)
That is, shifting or rotational pumps from ICTSI to the financial 3 to the other market cap heavies—which presently includes the real estate members! (Figure 4, middle and lowest windows)
IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume
Figure 5
Aside from the incredible pre-closing pumps and dumps contributing to the headline returns, the 2024 version of SONA pumps has emerged against the backdrop of a DETERIORATING mainboard volume! (Figure 5, topmost graph)
As an aside, we omitted posting recent charts of pre-closing massive pumps and dumps to conserve space.
At least there was some volume surge in previous SONA pumps, which is certainly lacking today. And incredibly, little is known about how cross-trades have padded such low-volume pumps.
However, it has not just been the PSEi 30 market cap weightings; the lean trading volume has also been concentrated among the heavyweights.
For instance, the Sy Group's share of the main board volume has been rising in support of the pumps to its shares. (Figure 5, middle pane)
Additionally, the volume share of the top 20 traded issues accounted for 83.6% over the 4-week period, slightly higher than the 83.1% year-to-date. This means that less than 20% of the volume has been dispersed among the other 264 listed companies. Duh!
The PSE noted that there are 284 listed firms as of the second quarter.
V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry
More to this point:
Although the overwhelmingly dominant share of the top 10 brokers decreased from 59.16% YTD to 57% in the four-week SONA pump, the number of total active participating brokers fell to its lowest level (since I began plotting it). (Figure 5, lowest image)
This means that while transactional volume has spread to a wider scope of brokers, which is good news, the plunge in the active share of participants implies that current conditions have squeezed the marginal brokers, which is bad news.
The PSE also noted that there are a total of 122 active brokers in their Second Quarter Report.
Could this be confirmation of our prediction that a large segment of marginal brokers will become extinct soon?
And the above data reveals the extent of concentration of trading volumes and trading participants to an elite cabal, who are likely managing the PSEi 30 levels.
VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth
Figure 6
Naturally, the insufficiency in volume and market depth translates to the underperformance of market breadth.
While this week's market internals showed advancing issues marginally higher by 53 against declining issues, from the June 21st low to the present (SONA pump 2024), decliners remained ahead of advancers 1,924 to 1,888, a spread of 36 in favor of decliners.
This means that the headline performance has starkly diverged from the PSE universe. Incredible.
Another likely indicator of general market sentiment is the participation level of traded issues.
Unlike in the prior SONAs where the number of traded issues saw slight increases, we have been witnessing the opposite in the present conditions—a contraction!
The decreasing rate of average daily traded issues accentuates the ongoing liquidity squeeze at the PSE.
Other measures, such as the average daily number of trades and the average daily volume per trade, exhibit the same worsening liquidity drought.
VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder
Yet, for prudent investors, here are some critical points to ponder:
-How can this be a bullish sign when the 10% increase in the Index has been accompanied by a drought in volume supported by stagnant participation and decaying breadth?
-Why would the increasing concentration of the index, trading, and market activities not signify an INCREASING risk to financial stability?
-How could the ARTIFICIAL embellishment of the index signify a bullish sign?
Lastly, why and how would these orchestrated campaigns to impose price distortions not magnify increasing imbalances and malinvestments in the PSE, the local capital markets, and the economy?
VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency
What is the source of financing for the SONA pump?
In essence, savings or credit are the sources
of investments (real or financial).
Under the classical gold standard, credit represents the savings of another individual, intermediated by depository institutions.
Under the current fiat money, the US dollar standard, credit can account for "money from thin air."
How has the PSE's low volume signified a sign of increased savings? Or has institutional money been tapping credit for the SONA pump?
Or has the PSEi 30 been reliant on foreign savings and leverage (carry trades)?
PSE data provides some clues:
True, aggregate foreign money flows surged to PHP 2.8 billion this week, the largest since May 17, 2024.
However, the degree of flow has failed to boost the PSEi 30 during the SONA pump in 2023 and may represent a temporary dynamic today.
As it stands, in the world of global financialization, foreign money flows may account for fund flows by affiliates or subsidiaries of PSE-listed firms registered abroad and offshore firms of allies and colleagues, rather than from money managers in search of higher returns.
These fund flows may be used to artificially inflate statistics to show increased interest by foreigners "to paint the tape."
In any case, while foreign flows cushioned the ongoing decline in trading volume this week, these inflows accounted for a mere PHP 93.6 million from the June 21st trough.
The spike in this week's flows reveals that foreign flows have largely been absent in the previous three weeks, and it is likely that the 2024 SONA pump has been engineered by domestic financial institutions.
Our guess: Could this partly be the handiwork of the Maharlika Sovereign Wealth Fund and other government financial institutions?
More importantly, despite foreign flows, trading volume remains in the doldrums, exposing only the deficiency in savings.
Yes, the Philippine Statistics Authority declared an increase in gross savings in 2023. However, the broader picture tells us a different story: a marginal rebound following a collapse.
Yet, questionably, this savings data is determined by GDP!
IX. 2024 SONA Pump:
Engineered by Domestic Financial Institutions?
There are clues pointing to this possibility.
The SONA pumps may involve Other Financial Corporations (OFCs).
For instance, according to BSP data covering Q3 2023: "Based on preliminary results of the Other Financial Corporations Survey, the domestic claims of the other financial corporations grew by 2.4 percent in Q3 2023… the other financial corporations’ claims on the other sectors, particularly the private sector, grew as the sector extended more loans to households and increased its holdings of equity shares in other nonfinancial corporations" (bold added)
Claims on the private sector surged at the end of Q2 2023 going into Q3 2023. (Figure 7, topmost graph)
Did flows from the OFCs account for the SONA 2023 pump?
What about in 2022?
While the Q3 2022 data was silent on claims on the private sector, the reversal from outflows in Q2 2022 could have been indirectly responsible for the June to August 2022 SONA pump, which delivered a 13% gain.
X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion
Furthermore, signs of accelerating liquidity growth could extrapolate to money diffusion into the PSEi 30, channeled through orchestrated or engineered asset pumps.
May's fourth largest public spending, possibly representing an early-stage distribution of liquidity from the pre-Election "Marcos-nomics stimulus," may also have been used by banks and non-bank financial institutions for the 2024 SONA pump.
This has a precedent.
An uptrend in the growth of cash in circulation financed the previous national (Presidential) elections, which percolated into the pumps of SONA 2022 and the 2022 post-election stock market honeymoon.
Another factor was the spillover from the historic PHP 2.3 trillion liquidity injections in 2020-2021 by the BSP to rescue the banking system—which was sold to the public as benefiting the economy.
An uptick in the growth of cash in circulation from April to October 2023 also supported the 2023 SONA and the Q4 2023 rally in the PSEi 30.
How does this apply to the present?
May 2024's cash in circulation growth of 6.1% represents the highest level since December 2022, which fund flows have likely spurred this SONA 2024 pump. (Figure 7, middle image)
It is unsurprising that a substantial part of liquidity growth has been partly funded by bank credit expansion.
Universal Commercial Bank lending growth, which may have been used to finance pre-election spending in 2021-2022, has been manifested in the pumps of SONA 2022 and the post-election honeymoon. And its reduced growth may have depressed the returns of the SONA 2023 pump. (Figure 7, lowest chart)
Finally, the accelerating UC bank lending growth from Q4 2023 to the present has been instrumental in financing the 2024 SONA pump.
As previously explained, though disinflation could prevail in the interim due to the slowing real economy, supported by the rise in non-performing loans (NPLs), which may constrain the uptrend in bank lending, sustained increases in deficit spending should put a floor on inflation.
A resurgence of inflation, which should cap interest rate cuts, will further expose imbalances and malinvestments resulting from all these orchestrated attempts to create an artificial economic and financial boom through credit expansion, price manipulation, and statistical artifices.
Although the political leadership did not explicitly mention the stock market to boost his political capital during the previous SONAs, the message—implying "strong earnings growth ", "optimistic economic prospects", a "stronger peso," and so on—represents the commonplace conveyance by institutional mouthpieces in explaining the recent spike in the PSEi 30.
However, when everything goes off the rails, it has to be either the US Federal Reserve or something foreign, but hardly ever local affairs (attribution bias).
QED.
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