But if prices then do not rise more than expected, no extra profits will be made. Although prices continue to rise at the former rate, this will no longer have the miraculous effect on sales and employment it had before. The artificial gains will disappear, there will again be losses, and some firms will find that prices will not even cover costs. To maintain the effect inflation had earlier when its full extent was not anticipated, it will have to be stronger than before. If at first an annual rate of price increase of five percent had been sufficient, once five percent comes to be expected something like seven percent or more will be necessary to have the same stimulating effect which a five percent rise had before. And since, if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which, in spite of rising prices, many firms will be making losses, and there may be substantial unemployment. Depression with rising prices is a typical consequence of a mere braking of the increase in the rate of inflation once the economy has become geared to a certain rate of inflation. Friedrich A. Hayek Can We Still Avoid Inflation?
In this issue:
Phisix Powered to 7,700 on Vertical Pumping! USD Peso Fights Back! Nears 50
-What Happened to the USD Peso Correlation? Will the USD Peso Retake the Php 50 Anew?
-Vertical Prices Are Designed to Conceal the Corrosive Pillars and the Mounting -Fragility of Domestic stocks
-Susceptibility to Manipulation: The Limited Base of the Philippine Stock Market
-Alan Greenspan’s View of the Real Economic Effects of Stock Market Imbalances
-Tail Piece: Quote Of The Day: It’ll Be The First War In History Where A Nation Accidently Defeated Itself.
Phisix Powered to 7,700 on Vertical Pumping! USD Peso Fights Back! Nears 50
Another week, another series of wild vertical price pumps.
In this holiday-truncated week, at least, most of such synchronized bidding sprees on select market cap sensitive issues were centered on a single session.
Three weeks back the Phisix broke free from its tight trading range of 7,100- 7,400. The previous high from that breakthrough run at 7,629 was again taken out with this week’s 1.09% jump. The Phisix closed at 7,661.
Figure 1: One day Pump and the Mark the Close Icing
Unlike the run from 7,400, which required big price spikes from two trading sessions, the path to 7,700 came with a big move from a single trading day (see upper left chart from figure 1). Nevertheless, to preserve this, a huge ‘marking the close’ sealed the gains for the week!
So Friday’s decline merely pruned a moiety of the buffer built from the frenzied single day pump.
If you haven’t noticed, vertical pumps haven't been as regular or frequent since late December to early January. Instead, these have emerged sporadically. And more importantly, the synchronized bidding events appear to have been “timed”.
And again, for this week the gist of the advances was concentrated on the top 15 (as shown in the lower window)
Even more important has been the ongoing substantial rotational moves among the top 10.
Said differently, when weakness in some of the top 10 issues emerge, the others would considerably be pumped to offset these.
On the other hand, when the previous big issues pick up steam, the others which took their place would see their gains moderate or encounter a profit taking
The overall outcome, hence, would either be an immensely mitigated decline or of a big upside move in the headline index!
For instance, the largest share of market cap, SM, declined for two straight weeks.
In the said period, ALI, SMPH & or BDO or a combination of the two would neutralize SM’s loss. The four issues alone constitute 32% of the PSEi. And because JGS increased in three straight weeks, I omitted it from the ‘rotation’ scheme (for now).
Though this week’s push to 7,700 was pretty much broad based given 19 advancing issues of the 30 members, SM’s 2.39% surge contributed substantially to the week’s final result
Ironically, barely has there been any significant major news or information has emerged to justify a demand shock to prompt for selective bidding binges in the big named PSEi 30 issues.
The reappearance of foreign buying worth of Php 2.08 billion accounted for the only notable activity.
And even more bizarre, despite the reported foreign buying, which should have spurred another rally in the peso, the opposite occurred—the peso was dumped! The USD peso materially bounced by .38% to Php 49.95. It was the second week of recoil following the SM incited USD dump.
After the Thai baht, the peso was the second weakest currency in Asia for the week.
What Happened to the USD Peso Correlation? Will the USD Peso Retake the Php 50 Anew?
Figure 2 USD Peso Correlation: This Time is Different?
Last week’s leap to the 7,700 level marks the third in the history of the Philippine Stock Exchange.
While on all three occasions, including the present, saw a temporary drop in the USD peso, eventually the USD rebounded (see orange rectangles).
And as seen from 2015-2016, an inverse relationship encompassed the Phisix and the USD peso. When the USD rose, the Phisix fell and vice versa. The critical turning points marked by the red arrows clearly demonstrate such correlation in motion.(see figure 2)
In 2017 this relationship changed. The USD peso and the Phisix conjointly ascended. In short, from divergence, the USD peso and the Phisix have converged.
Have current events manifested a pivotal change in price relationships between the two?
Or have all these been a result of the massive tampering of the Phisix?
And here’s more. In three occasions the Phisix broke 7,700, the USD peso was at 45.31 (February 4, 2015), 46.11 (June 7, 2016) and finally at 49.65 (April 25, 2017).
So while the Phisix drudged over the past two years to break the April 10, 2015 high of 8,127.48 (or really a jumping rope of 7,400), the USD peso continues to scale upwards.
Futures indicate that the USD peso may recover next week the entire loss brought about by alleged foreign buying at the PSE, during the two-day 7,400 breakout run three weeks ago. Unless there will be a significant reversal this Monday, another non-working holiday, the USD peso may trade at Php 50.1 or higher when the trading session opens on Tuesday.
The peso rallied furiously when the SM-2GO deal was passed off as foreign buying. Coincidentally, the deal supported a rare return of foreign buying at the PSE board.
Hence, the SM group assimilated the BSP’s role in containing the USD’s rise, as explained last week. [SeeUSD Peso Below 50: Should SM Big Bosses Replace The BSP’s Monetary Board? Dutertenomics: The Golden Age of Free Money for Big Government, SM as BSP Chief? The Auto Industry’s Ecosystem April 23, 2017]
Perhaps such foreign buying mountebank has been deciphered and seen through or exposed by the currency markets. And it’s why the peso have weakened once again.
Vertical Prices Are Designed to Conceal the Corrosive Pillars and the Mounting Fragility of Domestic stocks
And it’s not just the peso.
The current Phisix run-up appears to have been plagued by self-contradictions or established from infirm foundations
While the PSEi has breached the 7,400 for the third time, peso volume has been considerably thinning. It’s no different from last week’s ramp.
Steepness hides the emaciating volume in support of the run.
Figure 3: Breakouts on Diminishing Volume Equals Diminishing Returns
Please allow me to measure in terms of speed and volume, last week’s price rampage
The latest low of the PSEi in December was at 6,563. I took note of the equivalent nearest proximate lows of 6,500 and highs of 7,700s of its predecessors.
The run from 6,500 to 7,700 required 10 months and 2 days in 2015. Comparably, in 2016, it required 4 months and 4 days, which was almost as fast as 2017’s 4 months and 2 days!
For the week where the Phisix snared 7,700, the week’s (average) daily volume in 2015 was at Php 12.8 billion, in 2016 Php 8.32 billion and 2017’s Php 6.42 billion (Figure 3: lower window)! Diminishing returns!
How about the sprint from 7,400*-7,700? In the context of speed, 2015 and 2017 had an equal 15 days! The 2016 chapter was longer at 19 days.
Based on average daily peso volume, 2015 had Php 12.7 billion, 2016 was at Php 10.7 billion and 2017’s ramp came with only Php 8.84 billion! Diminishing returns, again!
*based from the day prior to the breakout
In 2015, the vertical phase came only at the climax, specifically from March to April.
In 2016, the entire 6 months run was close to vertical
To date, 2017 would slightly surpass its 2016 forebear in speed. But volume has significantly been in corrosion.
This is not to say that 8,100 will not be reached or surpassed. Instead, this is to say that whatever height the current cycle will hit, it will crumble like its ancestors.
The FORCING UP prices of shares of listed firms making up the PSEi 30, attempts not only to fire up the herding effect through momentum or the “greater fool” dynamic but more importantly, to fix prices upwards for symbolical and most likely for political purposes
Furthermore, to conceal the growing fragility of activities at the Philippine Stock Exchange, manipulators have only resorted to the desperate measure of vertical pumping of prices
Susceptibility to Manipulation: The Limited Base of the Philippine Stock Market
It may be partially true that part of current activities may reflect on global RISK ON trend, but the peso and bonds have hardly been buying it.
With the real economy prices on a rampage, why should bonds and the peso conform to the activities at the PSE?
Moreover, what are the consequences of a resurgent inflation to disposable income, consumption, working capital or operating costs, capital expenditures, earnings, profits and most especially to the current race to build supply???
What would forcing upwards prices do except to expand price multiples??? Would it not make the MOST EXPENSIVE stocks in Asia even more EXPENSIVE???!!!!!!
Alternatively, would vertical prices not increase risks of financial instability? By the measure of volatility, financial instability has already been making its presence felt!
Just look at how steep the fluctuations have been to affect the most liquid issues at the PSE? How can these be perceived as “normal”?
Or has the 7,400 breakout been timed for the administration’s travel and the ASEAN summit?
Again, considering the very low participation rate by the local retailers, panic buying can’t adequately describe current price movements. The only way where retail participants can become party to this is for them to acquire buy-side products (UITFs, investment linked policies, mutual funds, ETFs and etc…).
And to convince and sell products to the gullible public, buy-side institutions depend on higher equity benchmarks
Additionally, exorbitantly priced inventories are required for the same institutions to unload these to their retail clients.
Think of it. What’s the incentive (risk-reward balance) for them to indiscriminately buy assets at galactic valuations given that they’ve been equipped with all sorts of sophisticated econometric models to assess several risk dimensions???
Have their models gone kaput? Or have their models been programmed to just come up with—Buy The Dip! But The Breakout! Buy at Highs!—Buy! Buy! Buy! Buy! Buy! Buy!
This shows that outside the small retail sector, public and private banks and nonbank financial institutions and their foreign contemporaries have essentially pillared the Philippine stock market.
Just take a glimpse of the financial and insurance industry. The industry remains relatively small even from the government’s data
There are 7,337 establishments, according to the Philippine Statistics Authority. These are broken down into monetary intermediation 698, Activities of holding companies 218, Trusts, funds and other financial vehicles 177, Other financial service activities, except insurance and pension fund activities 5,366 (pawnshops), insurance 124, pension funding 5, activities auxiliary to financial services except insurance and pension 354, activities auxiliary to insurance and pension and fund management activities 395.
Of course, aggregate numbers don’t tell us of the individual financial capacity or deposit base of these firms. It would be likely that only an elite number of these existing firms have significant volumes.
With very limited participation, PSE trading has been more about public and private financial institutions shuffling papers with each other and with their foreign counterparts.
So how can there be no temptations or efforts to game the system??? Especially considering authorities have either been asleep at the wheel or have been captured by the industry????
Alan Greenspan’s View of the Real Economic Effects of Stock Market Imbalances
Incentives drive people’s actions
And economic incentives are partly behind the gaming of the system
As I recently pointed out [see Vertical Upside Price Actions is Baccckkk! New Year Week and End 2016 Week’s Blitzkrieg! January 15, 2017]
Stocks or equity securities are titles to capital goods or factors of production.
Also, the goal of the stock market is not only to channel savings into investments but to reward and punish owners of capital goods for its use, as basically channeled through profit and loss.
Theoretically, higher stock prices function as remunerations to the efficient users of capital goods.
Unfortunately, when stock prices are manipulated higher to project artificial efficiency, it emits false signals. As noted above, such increases supply relative to demand, or generate surpluses.
This comes in the form of disproportionate amount of investments from existing players and from the entrance of new participants. This may be interpreted as yield chasing in the context of capital deployment in the real economy.
The perceived boom from high stock prices induces existing players to expand market share while the new participants hope to capitalize and partake of the bonanza by capturing a share of the market pie. Eventually, the latter will be enticed to list at the PSE…
Such transmission of mispricing of stocks can see today by through the race to build supply, mostly through property and retail firms.
Former Fed Reserve chair, Fed Greenspan seems to share my views. Paul Volcker senior fellow for international economics at the politically influential think tank the Council of Foreign Relations (CFR), and Alan Greenspan biographer, Sebastian Mallaby writes of the views of the former chief of the US Fed on how the stock markets influence the economy*
Stock prices drive corporate investments in fixed assets, Greenspan observed. In turn, those investments drive many of the booms and busts in a capitalist economy.
First, real estate prices as incentive to the construction industry
To put Greenspan’s insight at its simplest, consider the construction industry. If the market value of an office block rises above the cost of building it, entrepreneurs will erect new office space blocks to sell at a profit. As they procure steel and concrete and employ cranes and workers, the entrepreneur’s spending will set off a broader boom in the economy. But if the market value of office blocks falls below the cost of building new ones, the dynamic goes into reverse. Entrepreneurs will no longer have the incentive to put up new office blocks, because they will sell them at a loss, Their spending on raw materials, machinery and workers will halt. The loss of powerful source of demand may trigger a recession
Next, Mr. Greenspans’ views of the transmission effects of the stock market boom bust cycle in the real economy… (bold added)
The same principle, Greenspan went on, applies equally to companies. If the market value of a company—that is, the value of its shares as determined by investors on the stock exchange—rises above the cost of the company’s capital stock, entrepreneurs have an incentive to expand the company or create a new one. Just as the construction entrepreneur will erect an office block ofr $10 million if it can be sold for $15 million, so a manufacturing entrepreneur will build a new industrial enterprise for $100 million if he can expect to sell shares in it for $150 million. But if the company’s market value falls below the cost of its distribution warehouses and production lines, entrepreneurs cease to have incentive to invest in new capital assets. In the upswing, high share prices spur business investment, fueling a broader boom. In the downswing, low share prices destroy that incentive, triggering a slowdown.
It’s basic economics at work. The law of supply tells us that “the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls.” On the other hand, the law of demand dictates “that the quantity of a good demanded falls as the price rises, and vice versa”
How to treat and use the theory is where we differ.
Given Mr. Greenspan’s position as the head of the US Federal Reserve, perhaps his “Greenspan Put” emerged to implicitly support the stock market (1987 crash and dotcom bust) for the said reasons. Mr. Greenspan failed to see how those interventions set off or fostered imbalances elsewhere. Even more, as a former disciple of Ayn Rand, apparently power impelled for Mr. Greenspan’s apostasy of the free markets.
As an analyst, consultant, trader and investor, my role is to understand the fundamental function of prices. And this I freely share with you.
Prices embody information about the state of balance of demand and supply. Tinker with them, disruptions and dislocations from an accretion of imbalances and malinvestments will ensue.
It’s not about statistics. Rather it’s about the economic coordination process.
Tail Piece: Quote Of The Day: It’ll Be The First War In History Where A Nation Accidently Defeated Itself.
Great quote from Lew Rockwell’s Jack Perry
I’m sorry, I must have missed the part where North Korea had done something to us that warrants another war. Oh, they’re building nuclear weapons and ballistic missiles, right. Excuse me, but has anyone noticed their ballistic missiles have a rather chronic habit of blowing up on the launch pad or shortly afterwards? North Korea is more at risk of nuking themselves with their own missiles by accident than them successfully dropping one anywhere else but on Pyongyang. It’ll be the first war in history where a nation accidently defeated itself.
