In this issue
Phisix 7,400: Repeated Regressions Are Signs of Going Nowhere as Risks Mounts!
7,400 Again: What Happened to the Church of Philippine Stock Market Bubble???!!!
Phisix 7,400: What “Back to the Future” Means
August 2015 Conditions Reemerge: China’s Yuan Under Severe Stress as Flash Crashes Reappears
Bubbles Addle the Common Sense
The Dyed In the Wool “Denial” Phase
Phisix 7,400 as Part of the Secular Stock Market Cycle
Phisix 7,400: Repeated Regressions Are Signs of Going Nowhere as Risks Mounts!
7,400 Again: What Happened to the Church of Philippine Stock Market Bubble???!!!
7,400 again!
What’s so special with the Phisix or the PSEi at 7,400???!!!
The PSEi hit a FRESH record on May 15, 2013 at 7,392.2. Rounded off, 7,400 has transformed into a psychological threshold number.
At Friday’s close (October 14 close) of 7,389.3, the PSEi remained stuck at the same standing for THREE years and FIVE months!
In short, the PSEi has operated or traded within the spectrum of 7,400 in THREE years and FIVE months.
Just what happened to all the hoopla, pizzazz and oomph, as well as, the populist mainstream meme that record Phisix equals G-R-O-W-T-H????
Just what had happened to the ingrained or inveterate perception that only stock market (and real estate) prices mattered at all to prosperity???
Given the regress to 7,400, what happened to prosperity???
Just what happened to all the serial bloviating, the bawling, the shouting at the top of one’s lungs of buoyant statistics, the deliberate torturing of statistical data (by both the government and by the private sector), rampant manipulation or price fixing of the stock market, the vertical price climb and the BSP’s sustained interventions to subsidize the establishment (cronies and the government) through trickle- down policies which led to such intense asset chasing price inflation????
Just what had happened to all the heckling, the scorn, the recrimination, the censure, the censorship and the ostracization heaped upon all those who have questioned on the sanctity of asset bubbles???
While this serves as NO victory lap of mine, as the BSP can always power the market higher bydestroying the peso (ala present day Argentina, Venezuela and Zimbabwe in 2008), this brings to the fore, the delusions, the deceptions, the complicity, the fraud, the chicanery and the legerdemain that accompany all asset bubbles.
Bubbles have morphed into religion like devotion to see any criticism or cynicism as sacrilege!
Phisix 7,400: What “Back to the Future” Means
In perspective, indeed peak to peak, the peso PSEi delivered a nominal annualized 3.06% (May 2013-July 2016). But this would account for less than 1% in real returns in the context of government CPI.
Yet if one bought the PSEi index (via ETF such as EPHE) on May 15, 2013, and remains LONG to the position until Friday (October 14), then one suffers not only nominal losses but real (inflation or currency) adjusted losses.
Though the losses would be still marginal, present movements or momentum presages hardly better days ahead.
Take it from the popular ways to view stocks, mainly price actions (trends) and patterns.
First, as I have noted above, 7,400 has been hit SEVEN times during the last THREE years and FIVE months.
This tells us that the PSEi has bobbed and weaved at the critical boundary of 7,400. So despite the fustian pronouncements of newly attained paradise and the insuperability of its supposed reinforced conditions, the Phisix has gone virtually NOWHERE in the last 3 years and 5 months!!!
As a side note, I’m referring here to the headline index. Though some PSEi issues have outperformed (FOR NOW), many have done poorly to have materially weighed on the index.
Second, whether seen in the peso-denominated PSEi or the PSE ETF dollar dominated chart (EPHE), from a chartist perspective, these charts should reckon to be a coming NIGHTMARE!
Considering too that based on peak to peak, where PSEi prices had been at 1) May 15, 2013: 7,392.2, 2) April 10, 2015: 8, 127.48 and 3) July 21, 2016: 8,102.3, they would account for either a GIGANTIC double top or a COLOSSAL head and shoulders depending on how one would frame it.
I am no fan of charts but again charts are the most common “law of least effort” way the public reads or interprets the stock markets.
Of course, one can simply ignore those charts to declaim “this time is different”, if charts formations or signals don’t fit one’s biases. And such “this time is different” constitutes mainstream consensus opinion. So the public has been presented with truncated and festooned literature.
Three, last week’s breakdown by the PSEi from the 7,550-7,800 trading range resonates with PSEi activities during post-April 2015 highs.
In the post-April 2015, the first leg of the downdraft saw the PSEi in consolidation first for about a month (7,700-7,900) before the breakdown. When the 7,700 support broke in May 2015, the headline index went rangebound (7,320-7,700) for the next two months before significantly breaking below 7,000. The break below 7,000 or in particular, the closing low of 6,791.01 on August 24, 2015 (which was attributed to the Chinese yuan’s depreciation) marked the second leg of the breakdown.
In 2015, the weakness on the PSEi reverberated with the peso.
In the current chapter, the first leg of consolidation (7,550-7,800) occurred in the third week of September through the first week of October. Last week seems to have accounted for the first leg of the 2016 downdraft.
If history should rhyme, then the Phisix should consolidate first before any major move (a most likely second leg of big declines).
Presently, the breakdown of the Phisix has been preceded by the recent turmoil in the peso.
And eerily, conditions during the first crash in the Phisix in August 2015 seems similar present to conditions. Spike in prices of the USD offshore yuan (USD CNH) in August 2015 and January 2016 has coincided with the crash in the Phisix.
Last week, the yuan suffered its biggest drop weekly drop since January where the USD yuan hit 6 yearhighs!
The Phisix soared in January to July 2016 even when the peso came under pressure. It was only in August, where the seemingly lost correlation began to reassert its correlation.
Like the USD php, the upsurge in USD CNH had been ignored by the meltup in Phisix, although present activities suggest of the reawakening of such correlation.
Will the previously held inverse correlations between the USD CNH and the Phisix be reinforced?
August 2015 Conditions Reemerge: China’s Yuan Under Severe Stress as Flash Crashes Reappears
As a side note, I have noted here in mid-September that the surge in HIBOR (Hong Kong Interbank Offered Rate) has largely been attributed to the Chinese central bank or the PBOC’s supposed attempt to squeeze offshore yuan shorts. Add to this was the policy paradox to inject enormous amounts of liquidity into the Chinese financial system, by the PBOC, supposedly to calm both the HIBOR and USD yuan.
I doubted the mainstream premise where I wrote, [Philippine Peso Tumbles 1.4% the Largest Weekly Loss Since 2014; Why the Weak Peso Signifies a Long Term Trend (September 18)]
Yet the alternative explanation may not be about the PBOC fighting off currency speculators, but about resurgent signs of liquidity strains from “dollar shorts” in China’s banking system.
Pressures in the HIBOR did thaw. However, pressures on the SHIBOR (Shanghai Interbank Offered Rate) partly eased but has remained substantially elevated particularly, the overnight Shibor at 2.153% (October 14).
The point is that whatever intentions and actions resorted to by the PBOC have hardly seemed to have worked, since the USD yuan has soared to a 6 year high.
Given Chinese government’s chronic addiction to credit, where 12 months social financing (see lower window above; courtesy of Ed Yardeni’s China Briefing p 30) has soared to USD $2.5 TRILLION (!!!) in just ONE YEAR, this has only fueled runaway property bubbles (ABC Online October 13).
Even the PBOC chief economist strikingly admitted last September that the China has been experiencing a massive property bubble. From Bloomberg (September 12): "Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector," Ma Jun, chief economist of the People’s Bank of China’s research bureau, said in aninterview with China Business News. A third of the financial-system leverage added over the past decade has come from the surge of housing prices, Ma said.
Those titanic record amounts of credit creation would naturally cause the yuan to fall.
Although one may posit that PBOC may have allowed the yuan fall, the yuan’s conditions seem to have even reflected on the British pound (GBP). The GBP experienced a flash crash last October 7 (InvestopediaOctober 7). Apparently, the flash crash wasn’t an anomaly because the British pound fell by another 2% this week. Against a basket of currency, the British pound has fallen to 168 year lows (Irish Times October 12)!
And as I have noted here, rising accounts or frequency of amplified volatility has metastasized into a global financial trend. [Phisix 7,100: 2Q GDP Hype, One Day Crashes Have Hardly Been Isolated Events August 31, 2015]
ONE day panics have not usually signified an isolated incident.
One day panics are usually followed by another crash, or a string of crashes or by an eventual weakening or a combination thereof.
A Bloomberg article enumerates some of the recent crashes (October 7): May 6, 2010: U.S. Stocks, Oct. 15, 2014: U.S. Treasuries, Aug. 24, 2015: U.S. Stocks, Aug. 25, 2015: New Zealand Dollar and May 31, 2016: China Index Futures.
The roster excludes crashes by the Swiss stock market (January 2015) as consequence to the unpegging of the euro-swiss franc (BBC January 2015), as well as the stock market crash in Thailand (December 2014).
The point here is that the growing frequency of financial market tremors seems likely to prognosticate the imminence of a major global financial market earthquake…sooner than later.
Bubbles Addle the Common Sense
Back to the Phisix.
Another major significance here is that as the Phisix has held its ground for the past 3 years and 5 months, risks from various facets has been escalating.
And risks will not be just about internal developments but importantly includes external sources too.
One of the severe fallacies or myths propounded by the consensus has been that the Philippines have become IMMUNE to external events.
Bubbles create, foster and nurture not only chronic misperceptions but destroy absolutely, the common sense.
The Dyed In the Wool “Denial” Phase
Although I did not include mentioning this in the chart, the fabulous 6 months Phisix meltup from January 21at 6,084.28 July 21 at 8,102.3 will have far-reaching ramifications.
And part of the present developments has already signified such process in motion.
The 33.2% vertical runup represents deeply held convictions, which impassionately denies on the 2015 to 2016 crash.
The 6 months meltup in 2016 virtually accomplished what its predecessor did in 14 months (February 2015-April 2016) or less than half of its precursor’s time. While this may not be a record, it is one of the biggest vertical spikes in the PSE’s history
Backed by the BSP silent stimulus, the vehemence of the rally tried to imprint on the public that the 2015-16 crash was nothing more than a deviation or an anomaly.
Such dyed in the wool convictions can be seen on how desperate PSE officials have become in defending the artificial boom by selectively broadcasting gains while omitting risks. They seem to believe that by censorship, e.g. eps performance, or by juggling with or by sanitizing unfavorable data, e.g. dilution of record PERs, suppressed information on serial mispricing will redound to a get out of jail free pass.
They hardly seem to understand that this represents intuitive responses seen in typical dying bullmarkets.
Moreover, the “record” frequency and brazenness of price fixing at the PSE have most likely been part of the manipulations/swindles/frauds that compounds on evidences of sauve qui peut or “save yourself if you can” which occurs in the mania phase and then in the panic phase(Kindleberger and Aliber Manias, Panics and Crashes, fifth edition p 20, 48). In the US, the recentWells Fargo scandal should be a notable example of festering fraud and swindles coming into the surface. I expect the same here in the Philippine financial community.
And by price action itself, it has almost been a perfect slate for ALL major vertical price movements during the past 51 years (1965 to 2016) to be neutralized or die its own death. As you probably now know, I called this as the Newton’s (Third) Law—For every action, there is an equal and opposite reaction—applied to financial market pricing
PLDT among the PSEi’s top 15 has completed a full Newton’s Law cycle, thereby affirming the cycle. Many others appear to be in the advanced process, e.g. GTCAP, JGS and URC
Phisix 7,400 as Part of the Secular Stock Market Cycle
Additionally, stock markets operate on cycles.
Since 1965, the PSE has had 3 secular cycles: 1965-1985, 1986-2002 and 2003 to the present. The span of the fully completed secular cycles had been 20 and 16 years, respectively.
The bull phase of the cycle 1965-1979 constituted 14 years. For the second secular cycle, it was from 1986-1997 or 11 years. The present cycle (2003 to 2016) has accounted for 13 years. So unless this time is different, then present cycle represents as the late stage of the contemporaneous bull market in the present secular cycle.
Furthermore, today’s topping process have accounted for a 3-year cycle which appears to jibe with 1994-1997 episode.
Being the most expensive bourse in Asia provides the fundamental basis for a mean reversion process.
Vertical Runs, Newton’s Law and the Unpleasant Skew
Finally, the recent vertical run-up has translated into landmark activities albeit unseen in the headline index.
The unseen records covering Philippine assets: The USD php presently has been drifting at the 2008 levels.Nominal housing prices are at record levels. Officially published PERs at the PSE website have zoomed past 1997 highs, although when broadcasted via the BSP this has been watered down. Record frenzied rate of price fixing activities at the PSE.
Here’s more. Market internals has exhibited awesome boom-bust activities or pronounced volatility: daily traded issues and daily trade or trade turnovers have similarly catapulted to euphoric levels in July. But not only has euphoria seem to have faded, of late, it has now revealed signs of significant deterioration. In short, sentiment has swiftly turned from elation to doubt.
All these tells us one thing, even if the PSEi remains adrift at the 7,400 spectrum, in the face of extreme overvaluations or mispricing, risks have been mounting from manifold endogenous and exogenous sources.
In short, buying overpriced stocks subjects one to the probability of GREATER losses (fat tail risks/risk of total ruin) amidst morsels of likely gains.
Three years and 5 months at 7,400 only reinforce of the probabilistic distribution called the “unpleasant skew” (John Hussman, August 24, 2015) “ a succession of small but persistent marginal new highs, followed by a vertical collapse in which weeks or months of gains are wiped out in a handful of sessions”
