Bulls
of 1929 like their 1990s counterparts had their eyes glued on improving profits
and stock valuations. Not a thought was given to the fact that the rising tide
of money deluging the stock market came from financial leverage and not from
savings—Dr. Kurt Richebächer
In this issue
PSEi 30: Has BBM’s SONA
Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry
Trade
I. PSEi 30: Has BBM’s SONA
Cycle Climaxed?
II. The Health of the Pre-SONA
Pump: July’s Index Spike on Sluggish Volume
III. The Impact of the "National
Team:" Rising Concentration Risks in the Financial Spectrum
IV. The Impact of the "National
Team:" Rising Concentration Risks in the Economy
V. How Media Shapes the
Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical
Risks from South China Sea
VI. How the Unwinding
Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s
post SONA Dump
PSEi 30: Has BBM’s SONA
Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry
Trade
Has BBM’s SONA Cycle Peaked? While the
headline index has shown resilience in July, market internals reveal structural
weaknesses. The unraveling of the Yen-Yuan carry-trade increases global
contagion risks.
I. PSEi 30: Has BBM’s SONA
Cycle Climaxed?
The following post is a follow-up on my July 21st,
“The 2024 Pre-SONA
Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects”
Since its interim peak on July 19th, the PSEi
30 has dropped 2.97%—as of the week ending August 2nd—supported by this week’s
decrease of 1.79%, marking its second consecutive decline.
The major Philippine benchmark fell in 5 of
the last 9 trading days.
Interestingly, this week’s larger decrease
came as the Philippine government is expected to announce the Q2 GDP—which has
been widely projected to outperform—and June’s labor force survey.
The authorities are also set to release
July's CPI print, which the
BSP expects to show a bounce from last month.
And it's also earnings season, where the
consensus expects Q2 earnings to exceed expectations.
Meanwhile, the establishment and media have
been peddling the idea
of the “ghost” month affecting the stock market’s performance, earnings,
and the economy.
II. The Health of the Pre-SONA
Pump: July’s Index Spike on Sluggish Volume
First, let's examine the performance of the
Philippine Stock Exchange last July*.
*Nota Bene:
-The base reference matters. In my
perspective, the 2013 starting point represents the real peak of the PSEi 30
based on volume and market internals.
*Annual returns of the PSEi 30 partially
represent an apples-to-oranges comparison due to marginal changes in its
membership.
*The data indicated reflects nominal returns
and not CPI-adjusted or real returns.
Figure 1
Thanks to the pre-SONA pump, the PSEi 30
jumped 3.23%—representing its second-best monthly performance in 2024 and the
biggest July returns since 2018. (Figure 1, topmost image)
It was also the largest of the BBM's pre-SONA
pumps over the last three years.
On a year-to-date basis, the PSEi 30's meager
2.62% returns signified its best showing since 2019, which highlights the
ongoing bear market. (Figure 1, middle
graph)
Despite this, diminishing returns continue to
be a scourge on the PSEi 30.
But how about the volume?
Though July's gross turnover was up 11.3%
from a year ago, in peso terms, its depressed level, which was almost equal to
2021, reinforced the downtrend since 2015. (Figure 1, lowest chart)
Figure 2
Gross volume includes the published
special block sales and the undeclared substantial share of cross-trades.
In the first 7 months of 2024, gross volume
fell by 8.4% year-over-year (YoY) to Php 865.5 billion, marking a third
consecutive annual decline. (Figure 2, highest window)
This means that the paltry improvement last
July has not been significant enough to cover this year's volume deficit.
The 7-month main board volume likewise
dropped 3.69% to Php 702.7 billion, which signified levels below 2018. (Figure
2, middle visual)
Resonating with the gross volume levels in
peso, it has been a downhill for the main board volume since peaking likely in
2013.
Amazing.
The more than a decade-long depression
in the PSE's gross and main board volume represents the decadent conditions of
capital or savings.
It must be emphasized that these
volumes have been inflated by foreign trade, pumps by the "national
team," and intra-day dealer trades.
In the first 7 months of 2024, the share of
foreign participation has risen from 45.44% in 2023 to 48.8% this year. (Figure
2, lowest diagram)
Foreign investors remained marginal sellers,
posting Php 27 billion in outflows, their fifth consecutive year of net
selling.
III. The Impact of the "National
Team:" Rising Concentration Risks in the Financial Spectrum
As for the "national team," the
Other Financial Corporations (OFC) could be part of this cabal engaged by
authorities to prop up the index.
Clue?
The BSP on the OFC’s activities in Q1 2024: The
BSP on the OFC’s activities in Q1 2024: “The QoQ growth in the other financial
corporations’ domestic claims was attributable to the increase in its claims on
the other sectors, the central government, and the depository corporations. The
other financial corporations’ claims on the other sectors grew as its
investments in equity shares issued by other nonfinancial corporations and
loans extended to households increased. Likewise, the sector’s claims on the
central government rose as its holdings of government-issued debt
securities expanded. Moreover, the sector’s claims on the depository
corporations rose amid the increase in its deposits with the banks and holdings
of bank-issued equity shares. (bold added) [BSP 2024]
Figure 3The growth of OFC’s claims on the private
sector slipped from 9.5% in Q4 2023 to 8.5% in Q1 2024, which was also
reflected in the claims on depository institutions, whose growth rate decreased
from 20% to 13.9%.
Nevertheless, both claims surged to record
highs in nominal peso levels, reflecting the returns of the PSEi 30 amounting
to 7% and the Financial Index to 17% in Q1 2024. (Figure 3, upper and middle charts)
OFCs have not just been funding the
government; they have also been propping up the PSE!
To emphasize, the percentage share of the
free float capitalization of the top three banks reached an unprecedented 22.7%
of the PSEi 30 last May! (Figure 3, lowest image)
Though it has slipped, it has remained within
a stone's throw of 21.85% as of the week of August 2nd.
The same banking heavyweights command a
whopping 89% of the overall Financial Index pie, which is stunningly higher
than the 79% share in the week of July 16, 2023.
This outgrowth partially reflects the
decrease in the number of members from 9 to 7, due to the exclusion of Rizal
Commercial Bank and Union Bank.
The only non-bank member of the index is the
Philippine Stock Exchange [PSE:PSE].
Figure 4
The Financial Index has not only starkly
outperformed, alongside ICT, electrifying the gains of the PSEi 30, but it has
also been absorbing a greater share of the depressed volume of the PSE. (Figure
4, topmost graph)
That is, the uptrend in the Financial Index
has climbed along with its estimated volume share of the PSEi 30, comprising
18.15% last June. (Figure 4, middle image)
As such, the concentration of gains in the
index has also resonated in the context of gross volume.
To wit, the rising concentration risk
comes amidst a declining trend in profit growth of the banking system, where a
bulk of it represents accounting profits. For instance, mark-to-market
losses are concealed via record Held-to-Maturity (HTM) assets, and BSP relief
measures that understate NPLs, etc.
IV. The Impact of the "National
Team:" Rising Concentration Risks in the Economy
And it is not just banks.
While year-to-date (YTD) gains of the PSEi 30
members have been evenly distributed (as of August 2), the returns of the top
five issues have defined the index's performance rather than the overall
breadth. (Figure 4, lowest pane)
For instance, the traded volume of the top 20
most active issues increased by 40% this July compared to a year ago and was up
by 2.17% YTD 2024 from the previous year.
In the same vein, the volume of the Sy Group
soared 46.6% last July from the same month in 2023 and was up 7.3% YTD 2024
compared to a year ago.
This indicates that the heavy index pumping
last July by the Philippine version of the “National Team” amplified the
percentage share of the top 20 issues and the Sy Group in the context of
volume.
Meanwhile, the average share of the top 10
brokers increased from 56.98% in July 2023 to 57.6% last month.
Aside from the sluggish volume, the PSEi 30’s
SONA gains have barely been reflected in the PSE’s constellation.
The advance-decline spread last July 2024 was
-150 compared to -166 in the same month a year ago. Again, the PSEi was up
3.23%.
Figure 5This divergence reverberated in the YTD
performance: although negative breadth has become less negative—or price
declines have been less intense—a positive sign, they are still declining. Again, the PSEi was up 2.62% YTD. (Figure 5, topmost
diagram)
Lethargic volume (a symptom of capital
consumption), rising risks from the concentration of activities in trading
volume (reflecting maladjustment in balance sheet exposure), select stock
prices (inflation of mini-price bubbles), broker exposure (increased balance
sheet leveraging?), as well as low levels of retail trades (low savings), and
rising dependence on foreign trade (increasing reliance on global capital
flows) translate to magnified risks of significant downside volatility or
simply—a meltdown.
A stock market meltdown leads to a
decrease in collateral values that underpin bank lending, which magnifies
balance sheet mismatches, increases illiquidity, and heightens the risk of
insolvency within the industry and among its borrowers. It also weakens the
balance sheets of investment, pension, and insurance funds (such as the
government’s SSS and GSIS), potentially leading to increased capital deficits
and further heightening the risk of illiquidity and insolvencies.
The BSP would likely bail some of
these out at the expense of the peso.
During the stock market meltdown in March
2020, the
Finance Chief called on the SSS and GSIS to boost or "rescue" the
stock market. The BSP followed this up with record cuts in official rates,
historic liquidity injections, and the implementation of various relief
measures. The rest is history.
The BSP implemented ex-Fed chairman Ben
Bernanke advise,
History proves,
however, that a smart central bank can protect the economy and the financial
sector from the nastier side effects of a stock market collapse (Bernanke,
2009)
The Philippine version of the national team
likely exists for these reasons.
V. How Media Shapes the
Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical
Risks from South China Sea
Incredibly, the establishment and media
continue to entertain and mislead the public with the alleged influence of the
so-called "Ghost Month" on stocks or the economy.
Because "Ghost Month" is a
superstition rooted
in Chinese tradition (religion), the media and establishment's embrace of it assumes
that the markets and the economy are driven by Chinese culture, even when the
Philippines is predominantly
a Catholic population. (Figure 5 middle window)
For example, some BSP
literatures cite the "Ghost Month" to rationalize the unexplainable.
The BSP should address
accusations of their having 'ghost employees' instead.
The repetitive references to the so-called "Ghost
Month" also assume that foreign participation in the financial markets and
the economy is influenced by Chinese tradition.
Or, are investors or market participants in
the PSE and the economy predominantly of Chinese descent or a practitioner of Chinese traditions?
Some PSE facts regarding the alleged misfortunes
of the Ghost Month:
Since the PSEi uptrend from 2003 through
2023, August has closed lower in 14 of the 21 years, or 67% of the time, with
an average change of -0.72%. Yet, August 2021 delivered a majestic 9.33%
return, the highest since 2000. August 2022 also produced a 4.24% return, the
highest since 2008. (Figure 5, lowest graph)
So, what happened to the "Ghosts" of
2021 and 2022? Did the PSEi call upon the movie comedians known as the
"Ghostbusters" to foil the rut? Or, have these rallies been a product
of the BSP's easy money campaign?
Ironically, the same media and establishment
experts have been unanimously silent about the June 17th Ayungin Shoal
incident, which involved a standoff between the Philippine and Chinese Coast
Guard.
The incident could have triggered World War
III—had the US agreed with the Philippines' interpretation, activating the 1951
Mutual Defense Treaty. Unfortunately, the US implicitly gave a cold
shoulder to the Philippines, forcing
the latter to negotiate and deal with Chinese authorities over the South China
Sea. Naturally, the
US is opposed to this.
The same echo chamber has been observed
ignoring the ongoing shift to a war economy through its embrace of war
socialism.
Superstitions are given precedence
over facts that matter, translating to the brazen hoodwinking of the public
that fomenting war is good for the economy while Ghosts will scare the wits out
of investments.
Won't a war lead to a partial transformation
of the living population into ghosts?
Yet, who would invest in a country on
the brink of war? Who would like to see their investment ownership evaporate
when enemy drones start wreaking havoc on crucial social, economic, and
political edifices, exacting a heavy toll on life and disrupting the division
of labor?
But don't worry, stocks and real estate will
boom!
Sorry, but that’s an absolutely stunning
imbecilic logic.
VI. How the Unwinding
Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s
post SONA Dump
The scarcity of local volume
translates to amplified vulnerability to volatile foreign sentiment, mercurial
fund positioning, and flows.
Proof?
The massive +4.7% rally by the Japanese yen $USDJPY
stole this week’s thunder.
It smashed what the consensus called the
“unstoppable” force, a speculative mania.
To amplify its policy, the Bank of Japan
(BOJ) reportedly timed
its $36 billion intervention in July to coincide with softening signs in
the US economy.
Furthermore, the Chinese yuan $CNY also rebounded
by 1.1% week-over-week (WoW). The US dollar index fell by 1.1%.
The unraveling of the yen and yuan carry
trades unleashed a wave of de-risking and deleveraging that rippled across the
globe.
Figure 6
Asian currencies posted substantial
gains.
(Figure 6, topmost graph)
The Philippine peso rallied by 0.46%, with
the $USDPHP closing at 58.08 and looking poised to fall below the 58 levels and
retest the 57.5 area this coming week.
The Philippines led the rally in ASEAN bonds.
(Figure 6, middle window) The sharp fall in the 10-year Philippine bond yields
strengthens the view that the BSP is about to cut rates.
Furthermore, as signs of mounting strains in
the economy emerge, the "belly" of the Philippine treasury curve has
also inverted—meaning yields of 2-to-7 year notes have dropped below
the 1-year note and partly below the 6-month T-bills. (Figure 6, lowest chart)
Philippine treasuries appear to be defying
the BSP’s projected increase in inflation.
Figure 7The unwinding of the carry trades sent the Japanese
stocks crashing. The yen’s massive rally
coincided with the Nikkei 225’s 5.81% nosedive last Friday, to register its
2nd largest one-day decline after the Black Monday crash of October 1987. The Nikkei was down 4.6% WoW. (Figure 7,
topmost and middle charts)
Asian stock markets closed mostly lower.
Eleven of the nineteen bellwethers posted deficits, with an average decline of
0.47%. Aside from Japan, the most significant weekly declines were led by
Taiwan and the Philippines.(Figure 7, lowest graph)
All of this indicates the magnified
contagion risks associated with asset booms driven by financial leverage.
Figure 8
Risks in the ‘periphery’ have reached the ‘core.’
The race to a series of record highs by the
S&P 500 $SPX has echoed the PSEi 30’s muted rally in 2024. With the SPX
down, the PSEi 30's SONA pump has started to wobble. (Figure 8, highest image)
Foreign outflows of Php 1.6 billion this week
have partly resulted in the PSEi 30’s 1.79% decline.
In the backdrop of lethargic volume,
concentrated activities, and a rising share of foreign participation, a continuation
of global de-risking and deleveraging translates to more liquidations here and
abroad, which could expose many skeletons in the closet of the Philippine
financial system.
The SONA pumps of 2022 and 2023 not
only surrendered all their gains; more importantly, the PSEi 30 closed lower
than its base at the start of the pumps. (Figure 8, middle graph)
If history rhymes, the PSEi 30 could fall below
its June 21st low of 6,158 during this SONA cycle (post-SONA dump).
Further, when the Philippine peso rallied in 2018 (USD PHP trended lower), it
marked the onset of the PSE’s bear market. Will history repeat? (Figure 8,
lowest chart)
Importantly, weren't we repeatedly
told that easy money would fuel the embers for the rocketing of asset gains?
___
References
Prudent Investor, The
2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and
Effects, July, 21, 2024
Bangko Sentral ng Pilipinas, Q1
2024 Domestic Claims of Other Financial Corporations Rise by 2.8 Percent QoQ
and 12.9 Percent YoY, July 31, 2024
Ben S. Bernanke, A
Crash Course for Central Bankers, ForeignPolicy.com, November 20, 2009