Looks Familiar Charts; The Historic Price Pattern-Stock Market Cycle Progression

Pattern and cycles as defined by Merriam Webster:

Pattern: the regular and repeated way in which something happens or is done

Cycle: a set of events or actions that happen again and again in the same order : a repeating series of events or actions

The following charts of select PSEi 30 issues reveals of a “look familiar” traits with the past.

Question is; which chart of the past has resembled its current price actions?

Stated differently, AEV today looks a lot like which chart of the past?

Well, peculiarly, AEV's current price actions reverberate with BW in 1999!

How about SMPH and MPI?

Drumroll pls….

Tada!!! It’s South Seas-Philweb in 2000!

Let us go back to the definition of pattern and cycles. 

Since patterns signify as “repeated way in which something happens or is done”, then this means that such circumstances represent as ex-post observations. Or patterns can only be identified after the fact.

On the other hand, since cycles constitute a “set of events or actions that happen again and again in the same order” therefore it is an ex ante phenomenon. Said differently, cycles are based on anticipatory or expected repetition of events that leads to iterative outcomes

The above charts have been indicative of an unfolding path of patterns progressing as various stages of the stock market cycle.

While a cycle may not be repeated in exactitude, they are manifestations of the extant or incumbent structural and internal dynamics that has powered its present status. It is not just form but substance.

It is easy to deny the above by saying AEV, SMPH and MPI are not the same as BW and SSO. But such an objection would represent a red herring. The issue is PRICE ACTION or PRICE BEHAVIOUR.  The unfolding price actions have been suggestive of a cycle, underpinned by market psychology, that has resembled or reverberated with SSO and BW.

The boom phase of all bubbles will always be rationalized. Even the initial bubble bust episode will be vehemently denied…as today.

That’s because most people, even those garbed with MBAs or PhDs, not only think with their eyes, but they have vested interest in the boom. Thus they will fight with all means, including employment of deception or even manipulation, to maintain the status quo.

As example, why do you think 5 biggest investment banks (Lehman, Goldman, Salomon Bros, Merrill Lynch and Morgan Stanley) in the US vanished during the Great Recession? Were their armies of analysts, economists, statisticians and econometricians, accountants, lawyers and etc… been able to anticipate the event? Or as consensus, were they merely been blind to risks? Or did they deny the risk because it would hurt their business models?

The difference has been that BW and SSO occurred in a span of less than a year. These are specific stock bubbles that happened during the post Asian crisis phase. Or these specific stock market bubbles coincided with the PSE’s bear market.

Ironically, we are witnessing a historic moment unfold…right here, right now.

Since present price actions by essentially most of the top 15 PSEi 30 issues have assimilated BW and SSO price momentum dynamics, then this means that almost the entire PSE have been and will be gripped and plagued by the developing treacherous price fluctuations from embedded imbalances.

Here is what to expect. If momentum picks up, in the same way as BW and SSO, then there should be a TERMINAL blowoff phase. Stock prices (by many firms) will contemporaneously spike by even a larger proportion than today, over the next two-three weeks. And this means 8,127.48 will be taken down. The PSE will have a shindig.

But as BW and SSO patterns reveal, the sharp upside movements of the FINAL vertical stage would redound to or will be followed by an equally sharp downside. The vertical ramp will be erased. Greed will morph into Fear. And fear will strike into very hearts of the market participants.

"Fundamentals" will emerge to rationalize such price action.

Consolidation happens after the bloodbath. Then the next leg down will begin. The incremental downdraft will proceed.

And if history will rhyme, Newton’s law will most likely prevail.

Of course, that’s if the BW and SSO cycles will repeat.

But as you know, we have been told that “this time is different”.

China Aims To Centralize Underground Stock Exchanges

Informal economies are symptomatic of the state of affairs for economies struggling with byzantine legal and bureaucratic entanglements.

But in today’s modern finance based economy, it’s my first time to hear of the proliferation of informal stock exchanges.

From Bloomberg,

China will ban trading of securities and futures on unauthorized exchanges to regulate the market and prevent financial risks, the State Council said.

Some of the trading activities have led to price manipulation and fund embezzlement by the exchange managers, China’s cabinet said in a statement dated yesterday. Such problems may cause regional financial risks and endanger social stability, the statement said.

There are over 300 unregulated bourses across the country, the Financial Times reported today, citing analysts. Turnover on the three authorized commodity futures and a financial futures exchanges in China fell 4 percent to 113.4 trillion yuan ($18 trillion) in the first ten months from a year ago, according to the China Futures Association.

“Regulators are concerned because these exchanges do not pay much attention to risk control, and volatile trading could hurt the participants and have a spillover effect on other companies and related industries,” said Shen Zhaoming, a Shanghai-based analyst at brokerage Changjiang Futures Co. “Local governments all hope for bigger economic influence, and they think establishing such exchange platforms is an efficient way to achieve the goal.”

Apart from the stock and futures exchanges approved by the State Council, no other bourses are allowed to list new shares, offer centralized pricing or make markets, the statement said. Exchanges that trade gold, insurance or credit products must receive approvals from financial authorities under the State Council, it said.

Price manipulation and fund embezzlement (e.g. MF Global Holdings) have also been present in ‘regulated’ exchanges.

Centralization does not sanitize or prevent markets from having miscreants. To the contrary, politicized regulated markets may even spawn them e.g. Philippines’ BW Resources Scandal and the US shadow banking system, where the former is the result of cronyism and the latter has mostly been product of regulatory capture and regulatory arbitrage.

So price manipulation and fund embezzlement would be a flimsy pretext by the Chinese government to exercise control over informal exchanges.

Besides, bailouts, unilateral credit margin maneuvering, quantitative easing, artificially low interest rates, Operation Twist (manipulation of the yield curve), Basel Accord (Financial Repression), ban on shorts and other forms of politicization of the marketplace represent price manipulations which has been the du jour policies being undertaken by global governments at the expense of the average market participants and the taxpayers.

So it is ‘legal’ for governments and their cronies to finagle or to manipulate or to exercise insider trading of the markets. To add, governments are beyond or are exempt from the laws which they implement. Again this implies that 'what may be legal is not moral'. One would call this political inequality.

Finally it is simply amazing how “300 unregulated bourses” exists in China.

Again some possible drivers here,

-regulated exchanges have been too much bureaucratic or extensively politically controlled to force many financial market investors to go underground,

-the major bourses of mainland China Shanghai and Shenzhen have not expanded enough to cover the entire country. However, the current state of technology seem to reduce the odds of such dynamic unless restrained by politics.

-China’s capital markets have been so limited or constrained such that boom bust policies have been compelling many investors to seek ways to stretch on yields by participating in the informal stock exchanges. And a possible symptom of this would be the China’s version of the shadow banking or financing system that has funded the recent property boom (and possibly informal stock exchanges too?).

This should be a great example of how the markets are always way ahead of and manage to circumvent regulators—a perpetual cat and mouse game.

Insider Trading: What is Legal isn’t Necessarily Moral

Cato’s Walter Olson has a splendid article on the recent controversy over alleged insider trading by some politicians

Mr. Olson writes, (italics original)

Washington has been buzzing for the past 48 hours over revelations that some of Capitol Hill’s best-known lawmakers have been making fortunes speculating in the stocks of companies affected by official actions, typically while in possession of market-moving inside information. Rep. John Boehner (R-OH), Senatorial wife Teresa Kerry and others made bundles trading in health companies’ stocks shortly before Congressional or executive-branch action affecting the companies’ fortunes. After closed-door 2008 meetings in which Fed chairman Ben Bernanke briefed Congress on the gravity of the financial collapse, some lawmakers dumped their own stockholdings or even placed bets that the market would fall. Rep. Nancy Pelosi (D-CA) got access to highly desirable IPO (initial public offering) stock placements, some in companies with business before Congress. And so on. Studies have found that lawmakers as a group reap far above-average returns on their investments—suggesting either that these politicians are among the world’s cleverest investors, or else that they are profiting from inside information. All this has been turned into a front-page issue thanks to Throw Them All Out, a book by Hoover fellow Peter Schweizer, whose findings were showcased the other night on 60 Minutes.

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

First of all, I am not certain about the validity of the alleged statistics. Unless the analysts, who uncovered the controversial wealth derived from supposed insider trading, have been privy to the personal accounts of the aforementioned politicians or entirely trust disclosures as being forthright, these figures should be seen with cynicism.

How do we ascertain if under the table deals (concessions, bribery and etc.) are being passed off or camouflaged as investment gains? In short, what distinguishes money laundering from insider trading?

Second, what is legal isn’t necessarily moral.

Are insider trading laws moral?

As Professor Philosopher Tibor Machan writes, (bold emphasis mine, italics original)

It is conventional wisdom to treat this version of insider trading as morally wrong because it supposed to adversely affect others by being unfair. As one critic has put it, “What causes injury or loss to outsiders is not what the insider knew or did, rather it is what they themselves [the outsiders] did not know. It is their own lack of knowledge which exposes them to risk of loss or denies them an opportunity to make a profit.” By the fact that these others do not know what the insider does know, they are harmed since they are not able to make use of opportunities that are in fact available, knowable to us.

But what kind of causation is it that fails to make a difference when it does not exist? If someone’s knowing a good deal has no impact on what another does, it cannot be said that any harm upon another had been caused by that someone. Certainly, had the other known what the insider knew, he or she could have acted differently. By not acting differently, he or she could easily have failed to reap advantages the insider did reap. But nothing here shows that the insider caused any harm, only that he or she had a better set of opportunities. Unless we assume that valuable information known by one person ought, morally—and perhaps legally—be distributed to all interested parties—something that would beg the most important question—there is no moral fault involved in insider trading nor any causation of harm.

In short, insider trading is fundamentally about asymmetric information or "a situation in which one party in a transaction has more or superior information compared to another" (investopedia.com) and its effect on the marketplace.

I might add that even if there have been symmetry of information, people’s interpretation of information have factually been nuanced or different such that diversity of thoughts leads to variable actions, and thus voluntary exchange. In reality, there will never be symmetry of information because of the variable factors people read or construe information.

So how does one establish “fairness” in information?

Again, Professor Machan, (bold added, italics original)

As this applies to insider trading, if I have a prior obligation to share my information with others, that is, a fiduciary duty to clients or associates, then it is not that the information is “from the inside” but that it is owed to others that makes my dealings morally and possibly legally objectionable. It is only in such cases that fairness is obligatory, as a matter of one’s professional relationship to others, one established by the promise made or contract one has entered into prior to the ensuing duty to be fair. It is only then that one cause injury by refusing to do what one has agreed to do, namely, divulge information prior to using it for oneself. Accordingly, Hetherington’s objection to insider trading is without moral force. What he should have objected to is the breaching of fiduciary duty, which may occur on occasion by means of failing to divulge information (possibly gained “from the inside”) that has been—perhaps even contractually— promised to a client.

Furthermore, if I have stolen the information—spied or bribed for or extorted it—again the moral deficiency comes not from its being inside information but from its having been ill gotten.

If there has been no established fiduciary duty then fairness or unfairness becomes another abstraction used by politicians as pretext to enforce control over the marketplace. Insider trading, thus, becomes subjective and arbitrarily determined by politicians and regulators

This leads us back to Mr. Olson’s conclusion (bold emphasis mine)

It is tempting to approach the new revelations the way an ambitious prosecutor might, trying to stitch together a test-case indictment from, say, the penumbra of the mail and wire fraud statutes bulked up with a bit of newly hypothesized fiduciary duty here and a little “honest services” there. But that’s not how criminal law is supposed to work: for the sake of all of our liberties, prohibited behavior needs to be clearly marked out as prohibited in advance, not afterward once we realize it doesn’t pass a smell test. But we are still free to deplore the hypocrisy of a Congress that has long been content to criminalize for the private sector—often with stiff jail sentences—behavior not much different from what lawmakers are happy to engage in themselves.

My conclusions

It is unclear whether politicians benefited from insider trading or from other shady deals which has been passed off as stock market investments, thus the alleged outpeformance.

Insider trading, as argued from a moral standpoint, without clear parameters of the how the inequitable distribution or the lack of knowledge affects other parties accounts for as an arbitrary law. Hence these can be used by politicians to harass some participants in the marketplace for political or personal goals, and thus can be construed as an immoral law.

Given that politicians have become above the law, this accentuates the unfairness or the unilateral nature of the ethically flawed insider trading law or regulations

Finally, politicization of the marketplace, bailouts, inflationism, green energy and other market manipulation which predominate today’s have been skewing gains in favor of political clients at the expense of society, so where has the prosecution on insider trading been?

Clearly, what is legal may not be moral as the insider trading law reveals.

P.S. The Philippines has seen its popular Insider trading Scandal via the BW Resources.

Don’t blame this on free markets but one of state corporatism or crony capitalism

As the PCIJ writes, (bold emphasis mine)

The machinations surrounding the operation of the BW Resources Corp. and its affiliated BW Gaming and Entertainment Co. were probably the height of presidential recklessness. To begin with, Estrada was Dante Tan's secret partner in BW, confirms Espiritu. That was why BW became the recipient of so many government favors: an online bingo license given in record time by the Philippine Amusement and Gaming Corporation (Pagcor), the state-owned gaming company; a P600-million loan from the Philippine National Bank that was approved even if the collateral was worthless land; and a contract from Pagcor that ensured the transfer of Pagcor operations to a building that BW was constructing in downtown Manila.

Moreover, as various officials attested during the impeachment hearing, Estrada intervened on behalf of Tan when he was being investigated by the Securities and Exchange Commission (SEC) for insider trading and stock price manipulation. The President also ordered Jimenez and ethnic Chinese businessmen Wilson Sy and Willy Ocier, whose speculative play in the market was believed to have caused BW prices to fall precipitously in late 1999, to return the money Tan had lost to shore up BW prices.

"That was the version of Dante Tan when I confronted him about it," says Espiritu. "That version was also confirmed by the brokers at the Philippine Stock Exchange." Face to face with an angry president, Sy and Ocier agreed to reimburse Tan's losses, according to prosecution lawyers in the Estrada impeachment trial. The payoff was supposedly made not in cash but in 650 million shares of Belle Corp. worth P1.5 billion. The shares were turned over not to Tan but to Estrada, who then supposedly sold them to SSS and GSIS at a profit of P800 million.

Such politically driven stock market manipulation has been fated to meet with divine justice.

President Estrada has been impeached (yes I know Mr. Estrada ran and placed second in the 2010 presidential elections), where the scandal had been part of the impeachment proceedings, and BW Resources crashed back to earth, where crony Dante Tan, reportedly lost lots of money and has fled country and reportedly is in Canada even if the courts eventually absolved him--which again reveals of the nebulousness of the law.

BW Resources (blue chart) [from my previous post]