If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you. And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion—David Einhorn, Greenlight Capital
The Philippine Stock Exchange, Inc. (PSE) celebrated the last trading day of 2017 with a bell ringing ceremony at the Ayala and Tektite Trading Floors.
The PSE also marked the first time that the PSE index (PSEi) closed at a record high on the last trading day of the year. On Friday, the PSEi rose by 23.33 points or 0.3 percent to 8,558.42. This was the 14th time that the main index closed at an all-time high this year. For 2017, the PSEi gained 25.1 percent.
Once more, nothing is what it seems.
Here are factors which are likely to be kept from the public.
1. Epic Price Fixing
The quality of the touted feat matters.
Does forcing the market higher at the closing bell, or pumping up the index then dumping it at the close been representative of a healthybullmarket?
Or has this been representative of a Sodom and Gomorrah manipulated market?
If stock markets were established to balance demand and supply of capital and savings, then what would be the repercussions of the systematic falsification or distortion of its pricing system? Would such not lead to a build-up of economic imbalances?
2. Concentrated Gains
The Phisix is supposed to represent the health of the spectrum of 30 largest listed firms from diverse industries of the economy. But just how accurate has this impression been?
The devil is always in the details.
In 2017, the PSEi 30 did return a magnificent 25.1%, but that number represents the market cap weighted return. (top chart)
The average return for the PSEi 30 was at 20.52%, which exhibits a significant discrepancy relative to the market cap return.
The concentration of gains towards largest market capitalized firms has been instrumental to such substantial difference in returns
Since the top 5 issues contributed over 60% share of 2017’s 25% returns; correspondingly, their market cap share of the PSEi 30 pie ballooned from 2016’s 38.49% share to 2017’s 43.86%! That’s a whopping 13.95% increase!
That’s right. With over TWO-FIFTH share of the PSEi pie, only FIVE companies essentially determines the fate of the Phisix!
3. Sy Group Owns the Phisix
It does not stop here.
Even among the top 5, the share contribution had been distinctly unbalanced.
The Sy Group’s market cap share of the PSEi 30 zoomed to a staggering 29.29% from 25.21% in 2016 for a remarkable 16.18% year-on-year growth! (middle pane)
Importantly, of the top 5, the Sy group’s market cap share has grown at the expense of the two Ayala companies.
The Sy group has accounted for 66.7% share as against the Ayala’s at 33.3% from last year’s 65.5% and 34.5%. Ironically, the Sy Group has been bestowed with more fortune even as their closest rival, the Ayalas, continue to trounce them in the context of earnings (lower pane)
From the above, it could be deduced that the Sy group virtually controls the movements of the Phisix.
So first, record Phisix is a function of the price actions of the top 5. Second, the Sy Group has assumed the helm or informal command of the Phisix
Yet, underneath the cheerleading on record Phisix, the accelerating capture of the dominance in the PSEi 30’s market share pie translates to the amplification of concentration risks.
4. Relentless Price Multiple Expansion
More facts which unlikely will be disclosed.
The PSE plays around with statistics. While it usually cites returns based on the market cap weight, earnings are paraded as a function of the aggregate or the average.
The reason is simple. The sterilization of excesses justifies the buy calls at outrageous price levels. Hence, the substantial froth built into current prices have essentially been reduced by fixating on the aggregate and by suppressing market weighted earnings.
Based on the 9-month 2017 annualized eps, while the average PER was at 19.5%, market cap-weighted PER soared to a 1996 level high of 24.5!
Yet, changing reference points alters the outcome.
Based on the Trailing Twelve Months (TTM) earnings (2016), the average PER at the close of 2017 was at 21.5%, whereas the market cap-weighted PER was at the 1996 high of 27.45!!!
1997 Déjà vu?
Recall that PSEi 30’s aggregate net income grew by ONLY 5% through three quarters of 2017. Let’s say that a 4Q 2017 magic occurs that would double net income growth for 2017.
What do the current returns mean? Well, a 10% eps growth implies that 2017’s 25% returns have not only fully PRICED IN 2017 earnings, but also factored in earnings for one and a half years!
But that’s if the PSEi 30s returns will deliver the same degree of income growth, but what if it falls short?
Valuations have been at nosebleed levels primarily because of frantic bidding of domestic stocks irrespective of the actual bottom line performance
In short, the relentless price multiple expansion reveals how domestic stocks have been priced for perfection and have become more detached with reality.
And yet the public have been hardwired to believe that prices can only go up!!!
But don’t worry, the PSEi’s forward earnings will be used to justify higher prices. Whether expectations will be met or not is immaterial. All that matters is that prices should rise!
And of course, individual valuations of PSEi 30 components vary. Since price multiple expansions have been charting the waters for the headline index, the concentrated returns resonates with the distribution of the most expensive issues (highest window)
5. Striking Diversity: Bearish Breadth and Faltering Volume
The rising tide lifts all boats typically characterizes healthy bullmarkets
Convergent actions tend to be representative of a broad-based enhanced risk appetite, possibly from upbeat expectations of income and or economic growth
But that’s not how things have unfolded during the last semester of 2017.
Ever since the PSEi 30 broke out of the April 2015 high at 8,127 in mid-September, ironically market breadth, or the spread between advancers and decliners, has substantially soured. Declining issues have become the dominant force thereby revealing broad market deterioration. (middle window)
That is to say, as the Phisix raced to record, prices of most listed issues fell. Divergence ruled.
In fact, the 1.5% Phisix runup during the vacation truncated last trading week of 2017 registered only a measly margin of 22 -in favor ofadvancers from a differential of 325-303.
Such patent disparity suggests of either a rotation or a growing lack of interests in the broad-based market.
A rotation means that the broad market had been sold to finance the trend-following trades within the PSEi 30. On the other hand, mounting losses on broad markets may have dissuaded many to pursue additional positions. It could even be a combination of both.
Trading volume further reinforces such divergence.
Peso volume actually shriveled as the Phisix scurried to record highs! (lower window)
The average peso volume has been cascading even before the Phisix broke to a new record in September. Special block sales of EDC and Meralco accounted for the volume spikes of mid-September and mid-July
The PSE even implicitly confirmed this on their latest disclosure: “Daily average value turnover rose by 3.2 percent year to date at Php 8.06 billion”.
Huh? A 25% return on a 3.2% increase in turnover? Given that more pesos are required to buy the same securities at higher prices, shouldn’t higher price levels be, at least, accompanied by bigger volumes? The PSE didn’t explain why this has been so.
And there’s more to this.
Special block sales are included in the account of daily turnovers. Special block sales soared by 77% in 2017 (Php 271 billion versus Php 153.24 billion). Thus, special block sales had entirely been responsible for the marginal gains in total turnover in 2017. Special block sales accounted for 14% share of total volume in 2017 compared to 8% in 2016.
Excluding special block sales, daily board turnover fell by 5.01% in 2017! Shocks! Record Phisix on faltering trade volume!
The dominance of the top 5 in the context of returns and priciest valuations, the Sy group capture of the Phisix and the significant divergence in market breadth and volume does not exist in a vacuum. These are interrelated. These signify as consequences of the entrenched dislocations brought about by epic price rigging.
Since every action comes with time-inconsistent consequences, the tradeoff from cosmetically propping up of the Phisix comes with internal entropy and a massive buildup of concentration risks.
Considering that the Sy group has essentially corralled actions of the Phisix, the implicit leadership they have provided to attain a record upside could drastically reverse from adverse changes in fundamentals and or even in expectations.
6. BSP’s Liquidity Supernova and Exploding Loans to Financial Intermediaries
The mainstream holds practically little or no relationship between money supply and asset performance.
That’s simply because this doesn’t fit the popular narrative.
The peso represents the other half of every transaction (exchanges). Thus, changes in the supply and demand of the peso matters in every transaction whether in the real economy or in the financial markets.
The fluctuations of the domestic money supply, which virtually represents changes in credit conditions, are causally linked with price actions of the Phisix
For instance, in 2016, the PSEi 30 climaxed in July or a month after M3 vaulted to a one-year high in May
In 2017, the September 2017 PSEi 30 breakout has coincided with an August M3 breach of its 2016 high.
M3 has moderated in November, which corresponded with the slight decline of the Phisix in November. With December’s new record, has M3 been likewise recharged in December?
More importantly, sharp increases in financial intermediary loans appear to have fueled record Phisix in 2017.
Since 2014, price spikes in the Phisix has dovetailed with growth surges in financial intermediary banking loans (with one exception).
Have non-bank institutions been borrowing heavily from banks to finance the frantic pumping on the select issues of the PSEi 30???
If so, does extensive use of leverage to push prices been a salutary?
Hasn’t the credit cycle been instrumental in the shaping of the stock market cycle?
7. Phisix Record Is A Symptom of a Global Phenomenon
When stock prices rise, the public tends to embrace this as an accomplishment. On the other hand, external forces have mechanically used as scapegoats when stock prices decline.
How many of the establishment ‘experts’ would say that the record run in the Phisix may have been a function of a global dynamic: massive liquidity injected by global central banks?
The US stock markets provided leadership to global stocks.
US equity benchmarks, Dow Industrials +25.08%, S&P 500 +19.42% and Nasdaq +28.24%, have been at par or even outperformed the Phisix.
Through a clean sweep of monthly gains, global stocks attained an unprecedented “perfect year”. (middle window)
MSCI Asia closed the year on a record. The Phisix was the FIFTH best performer in the region after national benchmarks of Mongolia (+66.48%), Vietnam (+48.03%), Hong Kong (+35.99%) and India (+27.91%). Of Asia’s 17 bourses, only 2 suffered (Laos -1.59% and Pakistan -15.34%) declines while three (China +6.56% Australia +7.84% and Malaysia +9.45%) returned below 10%. (lowest pane)
Meanwhile, central bank assets surged to a fresh record. Assets of the BOJ, ECB and US Federal Reserve tallied to a record US$ 14.2 last November. Excluding the FED and the PBOC, global central banks bought about $1.96 trillion in 9 months according to Bank of America's Michael Hartnett. China’s PBOC added US $ 2.9 trillion in Total Social Financing as of November.
And part of central bank asset accumulation has been through equity markets. For instance, the Swiss National Bank bought $88 billion of US stocks as of the 3Q. The Bank of Japan has accumulated up to a staggering 74% of the nation’s ETF market as of October.
The massive injection of liquidity by global central banks has coincided with or has played a crucial role in whetting the risk ON appetite which not only drove stocks to record but also in bonds.
Even bitcoin’s phenomenal vertical rise can be traced to such easy financial conditions. (upper window)
At the same time, global corporate bond issuance hit record levels. Asian US dollar corporate bond issuance has also been at record highs.
Ironically, the string of records attained in 2017 came even as the US Fed raised interest thrice this year and five times since the financial crisis. The Fed has embarked on normalizing its balance sheets by rolling back its assets at the close of 2017.
On the back of tanking % growth in US commercial industrial bank loans, US yield curve has been sharply flattening (10 year 3 months, 10 and 2 year and 30 and 2 year).
Taken together, loose money conditions, which has fueled the serial record runups in risk assets across the globe, may have begun to reverse.
Or global stock markets sprinted to unprecedented heights as central banks have initiated the proverbial “taking away the punch bowl”
Even neighboring Malaysia have commenced using non-monetary tightening.
In fear of a contagion from an escalating property glut to the economy, Malaysian authorities will impose a ban on property development!
From Nikkei Asian Review (Malaysia's ban on development no relief for property glut, Malaysia's ban on development no relief for property glut: December 28, 2017) [bold mine]
Although 80% of the apartments had already been sold, only about 10% is occupied, according to Sim. Across the country, there are apartment blocks that share the same fate. Bank Negara, Malaysia's central bank, warned recently of the supply glut in commercial and high-rise residential property markets.
"If we are not careful, the oversupply [in the property market] could have a negative impact on the economy," said Governor Muhammad Ibrahim on Nov. 17. In a study, the central bank said office vacancy rate in Kuala Lumpur and its surrounding areas could rise from 24% currently to a record high of 32% by 2021, surpassing levels reached during the Asian financial crisis in the late 1990s.
Total property transaction nationwide dropped 6% in the first half 2017, according to government data. In a series of conflicting statements in November, the government said it would impose a ban on the development of luxury condominium units and commercial properties in a bid to ease the glut.
In the retail complex sector, the average occupancy rate has been declining over the past six years and is now hovering at a five-year low of 86%, said Nawawi Tie Leung in a research note recently. The Malaysian house price index's annual growth has been sliding from a high of 10.1% in the second quarter of 2014 to 5.6% at the end of June this year.
In a sign of how many shopping malls had been built over the years, the retail space per capita in the booming northern state of Penang alone exceeded both Singapore's and Bangkok's in 2016, said the real estate consultant.
The report added that the underlying stress in the retail sector was not just the typical demand-supply disequilibrium that could be resolved through the passage of time, rising affluence and an expanding population. Rather, structural changes including shopping habits, socio-demographics and technology would continue to impact the market.
Even with the government's ban, the market can still expect supply from a number of key real estate developments to flow through, adding pressure on the market.
Overcapacity, a symptom of malinvestments, is a product of political tinkering with interest rates. They are almost everywhere.
In the case of Malaysia, déjà vu 1997?
In the world of the Fear of Missing Out (FOMO) and the Greater Fool, hardly any of these will be taken to into consideration…
…until it matters.
