Phisix 7,270: More Signs of Price Instability, JKSE-Phisix Correlations and the Global Reflation Trade

Global Markets Catches Up with the Phisix; Has the JKSE-Phisix Correlationship Been Broken?

With the ongoing furious race to milestone heights, some may wonder why the Philippine Phisix has hardly participated in the “risk ON” environment that has overwhelmed global equity markets.

For instance, the Indonesian JKSE has broken into fresh record highs the other week. And this week’s .48% gains furthered the JKSE’s distance from the breakout point.

For now, Indonesian President Widodo’s earlier harangue and harassment of equity bears seem to have succeeded. Mr. Widodo has used the stock market as a policy tool to spiff up the administration’s image at the expense of the functioning market [see earlier email -The Indonesian Government Wages War on Stock Market Bears and Interest Rates! Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2016]

Nonetheless, despite a slowing GDP and stagnating property prices*, since the Indonesian central bank (Bank Indonesia) cut policy interest rates for the sixth time in October 2016, such has incited the re-acceleration in loans to the private sector which was similarly reflected on the substantial rebound in the nation’s overall loan portfolio. Such jump in credit growth has likewise been manifested in the sharp escalation of money supply growth, seen via M2.

Taken together, a substantial portion of money injected into the financial system has only been rechanneled into domestic stocks from which have stirred a frenzied pump. And this has prompted for the recent fresh highs.

This exhibits how Indonesia’s stock markets have become another punter’s haven that has been detached from reality—largely bankrolled by easy money and by government’s intrusion in its stock market.

And this is the sort of dynamic that tells us why monumental history is presently unfolding…and not just in the context of record stocks, but of its aftermath.

*The Global Property Guide’s note on Indonesia’s 2016 housing prices (March 23 2017): “In Indonesia, residential prices in the country's 14 largest cities fell by 0.89% during 2016, after falling 0.2% in 2015. House prices fell 0.37% q-o-q during the latest quarter.”

Figure 1: ASEAN Equities Top, JKSE-PSEi Bottom

Back to the Phisix.

Given the present global conditions, the domestic benchmark has not underperformed.

Based on the year to date activities, the domestic bellwether has been almost at par with most the ASEAN’s equity benchmarks. Year to date, Indonesia’s record JKSE has delivered an inferior 5.11% return relative to the Phisix at 6.27% (as of March 24). The difference thus springs from the baseline effect—the Phisix began the year at a relatively lower base compared to JKSE.

This entails that the PSEi has outsprinted the rest of the field at the start of the year where the rest of the world has only been in a catch-up mode.

Yet the PSEi has spent over two months in a consolidation phase. Or it has been sauntering in a very narrow trading range (7,100-7,400) following the 9 day (engineered) meltup which occurred at the close of December through the first week of 2017.

Interestingly, the price trend dynamic of both the JKSE and the Phisix for the past two years or from 2014-2016 has revealed of amazing signs of synchronicity. Both yardsticks have essentially ascended and descended in seeming confluence. (see bottom figure 1). Or there appears to be a tight correlation for the noted benchmarks.

This convergent dynamic appears to have been broken only in the last two months.

JKSE’s record upside breakout came as the PSEi has forged what chart technicians call as a “flag formation”—a continuing pattern.

As a side note on flag formation: while the intermediate trend has been up, the originating trend has been down—so the 64 billion peso question is; continuation of what pattern? The answer lies on the observer’s bias.

Yet has there been a recalibration in the Phisix-JKSE correlationship? Or will there be a restoration of the previous convergence? If the latter on which direction?

More Signs of Price Instability

Here’s more.

Yet the present trading range has signified an outcome of rampant and relentless pumps and dumps.

End session pumps and dumps for the week totaled 55.56 points with 65% share accounting for as pumps and the remainder as dumps. The Phisix was down 1.03% or lower by 75.4 points. This entails the end of the week outcome has been immensely sanitized by price distortions borne out of such unscrupulous engineered price actions.

Figure 2: Stunning Amplification of Price Volatility

Such flagrant contortions can be seen in the escalating magnitude of volatility ensconced in the headline index.

The vast dispersion of gains and losses within sectors for this week has been astounding (lower left window). 

The property, financials and industrials stunningly cratered by 3.5%, 2.48% and 1.73%, respectively. Because their combined market weighting at 49.09% (18.35% financials, 17.31% property, and 13.43% industrials—as of March 24) was slightly lower compared than the gainers at 49.69% (holding 39.37% and services 10.32%), the latter group’s impact severely diminished the enormous losses of the former group. The holdings and the services jumped by .83% and .86% this week. The combined events resulted in the diminished 1.03% decline in the headline index.

It’s even fascinating to see a rare unanimity in the price activities of the property and industrials. All property and all industrial issues tumbled this week! The property sector: Ayala Land (-5.48%) SM Prime (-3.28%), Megaworld (-3.06%) and Robinsons Land (-2.31%). The industrials: food giants Universal Robina (-1.23%) and Jollibee (-2.69%), backed by power firms Aboitiz Power (-3.22%), First GEN (-.45%), EDC (-.66%), Meralco (-4.21%) and Petron (-1.1%).

On the opposite end, eight of the ten or 80% of holding issues were sharply up: AEV (+3.29%), LTG (+2.8%) AGI (+2.68%), AC (+1.81%), GTCAP (+1.56%), JGS (+1.17%), SMC (+.97%) and the largest member, SM (+.6%). Supporting the holding sector, three of the four services also boomed; TEL (+3.84%), GLO (+1.78%) and ICT (+1.67).

In perspective, furious selling occurred in the property and industrials, aside from the financials, but ferocious bidding transpired at mostly the holding sector supported by the services.

It can be deduced that foreign money was responsible for most of the selling pressures in the Phisix given the largest net selling at Php 3.34 billion since end December. In the meantime, the locals shored up the PSEi gainers through a rotation. That is, perhaps locals sold holdings at the broad markets to finance aggressive bids in select PSEi issues. The 16.14% decline in peso volume indicated of a retreat in liquidity which most likely meant that buyers weren’t able to meet the seller’s urgency to exit, hence the expanded price volatility. In addition, the significant deterioration in market internals for both the PSEi and the broader spectrum suggests that selling activities were not limited to the PSEi 30 basket (except again for a few heavyweights).

The question is why the colossal deviances in the weekly activities, particularly for the holding sector, when their major subsidiaries were under severe selling pressure? Has this been designed anew to stage manage the index?

Even more. 12 issues or 40% of PSEi members had price changes of 3% and above (in both directions). 17 issues or 57% had price changes of 2% and above (again bidirectional). 25 issues or 83.33% registered price changes of 1% and above! (lower right window)

And yes such incredible escalating volatility has been happening even as the Phisix has been drifting in a tight zone.

Most haven’t realized that these are signs of a seismic buildup in stressors or a symptom of intensifying price instability. It’s either we’d be seeing a breakout above 7,400 or a plunge to 6,500 in the near horizon. Or we could even see both.

Has the Reflation Trade Climaxed?

And here’s the thing.

Has the euphoric and ebullient US markets lost its footing to mark a significant top? As I suspected, strains from US dollar illiquidity has once again resurfaced to have impelled oil prices to tumble back below $50.[See Has the Fed “Fallen Behind the Curve”? March 11, 2017]

It would be interesting to see what happens next to oil prices?  Will it hold ground or flounder back to $45 or even below? If the latter should happen, then the reflation trade will almost certainly lose its shimmy. The question is how will this affect producers, creditors and fiscal conditions of producing nations

As for the US, will a reprise in the oil price debacle be now compounded by mounting woes in the US retail sector?

If the US stock markets flub, then just how will this affect the global risk ON scenario?

How will such reversal impact domestic stocks?

Interesting, no?

Yellen’s Most Dovish Rate Hike

The US Fed hiked interest rates for the second time in three months last week

But instead of a perceived tightening, the perception of a dovish rate hike prompted for a decline of the USD which combusted global risk assets.

Alhambra’s Joseph Calhoun handily wins the quote of the week: The market was starting to price in four (today’s plus two more) and that had to come out of the market after the meeting. This was the most dovish rate hike in the history of rate hikes. Greenspan’s old conundrum was that long term rates weren’t rising as the Fed hiked. The conundrum today is that even short term rates aren’t rising as the Fed hikes. Two year note yields are right back to where they were after the December rate hike. 

Ms. Yellen actually poured oil into the fire when she said: “Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to two percent inflation”

She also introduced the word “symmetric” in the FOMC statement which meant flexibility in their inflation targeting: “And it's a reminder, 2 percent is not a ceiling on inflation. It's a target. It's where we always want inflation to be heading. And there will be some times when inflation is above 2 percent, just like it's been below 2 percent. We're not shooting for inflation above 2 percent. But it's a reminder that there will be deviations above -- above and below when we're achieving our objective.”

I have recently opined that the likely reason for the rate hikes may hardly be due to the reading of statistical tea leaves like output gaps but rather that the Fed behind the curve. [Has the Fed “Fallen Behind the Curve”?(March 11, 2017)]

From the perspective above, it’s easy to see the likely factors or influences that may have altered the perspective of the majority officials of the US Federal Reserve.

If the FED has indeed been behind the curve, timid rate hikes will only further bolster the underlying risk appetites.

And Ms. Yellen’s observation that this may “potentially require us to raise rates rapidly sometime down the road” may become self-fulling prophecy.

This is what I meant by falling behind the curve.

Instead of impeding further ramps in asset prices, half-hearted rate increases serve only to accelerate a feedback loop.  In 2004-2006, the Fed raised rates by 17 times! Yet prices of property and the S&P escalated further. US housing prices topped a few months before the Fed’s last rate hike.

In sales, this would be equivalent to “selling a price increase”. In anticipation of a price increase, buyers would buy more quantity of items than they would under normal circumstances. By the same token, timid rate hikes, instead, whet the people’s appetite to load up on debt which they use to chase after asset bubbles. That’s what happened during the last credit cycle which ended with the Lehman bankruptcy.

Yet in the previous cycle, the FED raised rates about four years after (or in 2004) it began cutting rates in 2001 in response to the dotcom bust.

In the current cycle, the Fed hiked rates in late 2015, seven years after it began to slash rates in 2007 in response to the Great Recession.

Seen from the context of the S&P, the first time the Fed increased rates the bull market was only 1 and a half years old or at its first leg.

In the current setting, the Fed increased rates in December 2015 when the bullmarket was about 7 years old!

The point here is that modern day central banks are afraid to take the proverbial punch bowl away because of they are in mortal dread of debt deflation. Debt signifies a monster which they have created, which ironically, they have been afraid to confront.

Yet the question is if the aging US bullmarket would still have the stamina to carry through amidst the tremendous amount of malinvestments that have been acquired or accumulated through the years.

As I have been pointing out here, near vertical record US stocks has been founded from increasing questionable quality. It has been practically been pillared on hope backed by rationalizations and by the herding effect predicated on the fear of missing out.

In the 4Q US flow of funds, US stocks were driven secondarily by corporate buybacks and primarily by retail investors who chased after passive funds.

Here’s Mr. Ed Yardeni with the details:  (bold mine)

(1) Supply-side totals. Net issuance of equities last year totaled minus $229.7 billion, with nonfinancial corporate (NFC) issues at -$565.7 billion and financial issues at $269.7 billion. The increase in financials was led by a $283.9 billion increase in equity ETFs, the biggest annual increase on record. The decline in NFC issues reflected the impact of stock buybacks and M&A activity more than offsetting IPOs and secondary issues. 

(2) Demand-side total. To get a closer view of the demand for equities, let’s focus now on the quarterly data at an annual rate rather than at the four-quarter sum. This shows that equity mutual funds have been net sellers for the past five quarters, reducing their holdings by $151.3 billion over this period. Over the same period, equity ETFs purchased $266.4 billion, with their Q4-2016 purchases a record $485.4 billion, at a seasonally adjusted annual rate. Other institutional investors have been selling equities for the past 24 consecutive quarters, i.e., during most of the bull market! Foreign investors have also been net sellers over this same period. 

So smart money sold while retail investors piled in.

The normally bullish Mr. Yardeni concluded: “The bottom line is that the current bull market has been driven largely by corporations buying back their shares, as I have been observing for many years. More recently, we have been seeing individual investors increasingly moving out of equity mutual funds and into equity ETFs.Both kinds of buyers tend to be much less concerned about historically high valuation multiples than more traditional buyers are. We may be witnessing the beginning of an ETF-led melt-up, which may simply reflect individual investors pouring money into passive stock index funds. Lots of them seem to bemore interested in seeking out low-cost funds rather than cheap stocks. In this case, valuation multiples would lead the melt-up, until something happens to scare investors out of those passive funds, which could trigger either a correction or a nasty meltdown. It is obviously a bit late in the game to start only now to be a long-term investor given that stocks aren’t cheap no matter how valuation is sliced and diced.”

And there’s one thing I forgot to mention last week.

The US treasury injected hundreds of billions of funds into the system in anticipation of the expiration of the US debt ceiling last March 15 from the start of the year. Since this has almost been similar to a credit easing, this may have driven the record-breaking “Trump bump trade”. Unfortunately, this is a liquidity illusion. The first reason: the Fed’s hiking cycle would mean trimming of excess reserves in the system. The next reason is that when the debt ceiling will be lifted, the US treasury will likely sell huge amounts of debt into the system which means it would entail draining a lot of liquidity in the system.

 

And just how will a drain in liquidity impact the already pressured US retail industry led by the restaurant and the department stores? Retail sales grew at the weakest pace in 6 months last February.

Even worst, credit instruments to shopping malls seem as Wall Street’s next biggest shorts!

From Bloomberg (March 13, 2017):

Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall.

It's no secret many mall complexes have been struggling for years as Americans do more of their shopping online. Now they're catching the eye of hedge-fund types who think some may soon buckle under their debts, much as many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy's and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing.

Wow, if US shopping malls become the epicenter of a crisis, this will likely spread across the globe the world! Guess what would happen to Philippine malls???

As a final thought, it wasn’t just the FED that hiked rates. Countries which had their currencies pegged to the USD like Hong Kong, UAE and Kuwait raised interest rates. China’s PBOC raised rates on repos (open market operations) and medium lending facility 10 hours after the FED hiked. While the BOJ kept policy unchanged, rumors floated of a “stealth tapering” where the BoJ would miss hitting its annual LSAP targets.

With global stocks on a tear as liquidity is being withdrawn, just how sustainable can this environment be?

As a final note, the Geert Wilders, the far-right contender lost the Netherland’s national elections last week.