In this issue

Phisix 8,450: SY Group and Ayala Corp Deliver ONE HUNDRED Percent of Weekly Gains! Lessons from Sodom and Gomorrah

-Lessons from Sodom and Gomorrah

-Top FOUR of the Five Issues Monopolize Gains

-PSEi's Top 5: The SY Group Erodes Ayala’s Share.  Sy Group’s Increasing Capture of the Phisix

Phisix 8,450: SY Group and Ayala Corp Deliver ONE HUNDRED Percent of Weekly Gains! Lessons from Sodom and Gomorrah

Lessons from Sodom and Gomorrah

In the Old Testament, Sodom and Gomorrah were cities deeply entrenched in sins and vices. To spare these cities from destruction, Prophet Abraham negotiated with God by proving that righteous people still existed in them. God agreed and sent his angels, who disguised themselves as guests of Abraham’s nephew, Lot.

However, ingrained and habituated to the imposition of abuses, the denizens of the city fixated on Lot’s guests. To excuse these guests from harm, Lot instead offered to sacrifice his two virgin daughters. The assailants refused then shifted to violence, but the angels blinded them.

Under the instruction by angels, Lot and his family decamped the city. Lot had also been admonished not to look back to witness the devastation "look not behind thee". Sodom and Gomorrah were, thus, consumed by fire and brimstone.

However, in defiance of the angels’ behest of not looking back, Lot’s wife morphed into salt.

It was not just vice and sins that condemned Sodom and Gomorrah to perdition, the perversion of morality assimilated as a cultural and ethical norm were the principal factor. Abraham wanted to show some exceptions which he failed to do.

Top FOUR of the Five Issues Monopolize Gains

How do the lessons of Sodom and Gomorrah apply to the state of Philippine markets?

 

Philippine populist politics predicated on the “end justifies the means” reflect on the state of the financial markets. Actually, populist politics signify a byproduct of the political systematic destruction of the purchasing power of the peso. Financial markets are just part of such emission.

In the context of Philippine stocks, the mainstream will do “whatever it takes” just to bring about a RECORD.

Whether through the price-fixing process or by coordinated pumps or even by a combination thereof, such milestone would have to be forcefully attained.

And it doesn’t matter if these actions would lead to the systematic degeneration of the markets and the economy. Instant gratification has taken precedence.

Vice has now transformed and assimilated as a societal norm.

A new record was not just on the price levels, but also in the degree of consummated depravity.

FOUR stocks, particularly, the SY group + Ayala Corp delivered ALL or over 100% of the PSEi’s 1.65% gains of the week!

Proof?

Let me use the difference in the market cap weight share between the week ending October 6 and October 13 (see middle pane).

The share weight of the top 5 issues (SM, SMPH, ALI, BDO and AC) jumped to an amazing 42.8% from 41.58% or by 2.93% the highest week-on-week gain since March 4, 2016.

The top 10 issues hold 65.82% weight and the top 15 comprise 80.33%. Seen differently, the top 5 accounted for over half of the top 15’s share weighting. The last 15 have been benchwarmers.

Even more, when segregated by quintile, the group of the top 5 registered not only an average gain of 3.11% this week; it was the only group that posted growth in market cap share! All the rest of the quintile categories suffered from dilution! (lower window)

Essentially, gains to the PSEi’s market share gravitated into the top four of the five issues, which came at the cost of the broader PSEi!

Simply amazing!

Such substantial advances in market weight share had been brought about by eye-popping weekly returns of BDO (+7.5%), Ayala Corp (+5.52%), SM Prime (+5.34%) and SM (+4.5%)! Truly stunning!

Security Bank (+4.67%) and Megaworld (+3.22%) also posted considerable gains which translated to increases in their respective market weight share. However, losses by their respective group quintile members more than offset their growth.

To top it all, the PSEi 30 breadth wasn’t as ebullient as the top 4 issues. Advancing issues (16) edged out declining (14) issues by two firms. 

Moreover, the Phisix ramp was bereft of broader market participation. Decliners trounced advancers by a considerable margin of 96 from a 532-436 differential. Sellers ruled the market unanimously or in 5 out of 5 trading sessions of the week!

The obsession to power up the Phisix, at whatever costs, has been evident in the blatant disparity in the performances of the top 5 compared to the broader PSEi, as well as, the broader markets

And these combined with the mark-the-close price-fixing process, the Phisix, thus, carved a fresh 8,450.

The end justifies the means, so what else could go wrong??

PSEi's Top 5: The SY Group Erodes Ayala’s Share.  Sy Group’s Increasing Capture of the Phisix

  

And here’s more.

Of the share in the market cap weight of the top 5, Ayala’s share (AC and ALI only, BPI excluded) has consistently been eroded or taken away by the SY Group!

More evidence that the Phisix has become an alter ego of the SY group!

And this gravitation to the Sy’s has NOTHING to do with relative earnings performance. Ayala has consistently outperformed its rival.

Question is: Which group or WHO has frantically been pumping up the shares of the Sy group of companies? Another question is WHY? Why the need for interventions if the SY group of companies has sound fundamentals?

SMPH’s Php 4.9 billion worth of related party purchases could be a clue to the current meltup. [SM Prime’s Growth Model: In 1H 2017, Every Peso of Growth Was Funded By SIX Pesos of DEBT! SMPH Bought Php 4.9 Billion of Related Party Shares! August 13, 2017]  But surely that would only be part of the answer.

With the SM group yanking the PSEi market share from the Ayala Group, one would have the impression that trading activities would have mirrored the same dynamics.

To the contrary, it goes the opposite way.

The two charts above reveals of two time frames: first, daily activities during the September pre-breakout and the breakout week, and second, the daily activities of the last two weeks.

At the PSEi 8,450 level, last week’s average of Php 7.31 billion of main-board trade volume had significantly been below the breakout high of Php 10.941 billion. Main-board trading volume grew by 11% week-on-week.

And instead of the SM group generating interests, volume has been building in the Ayala Corp. That’s because AC has registered substantial foreign buying over the past two weeks. On the other hand, the SY group and Ayala Land were bought mostly by locals.

The SM group’s volume, as a share of the main board and as a share of total turnover, has materially dropped last week to pre-breakout levels. That’s even as prices of its three issues have gone parabolic!!!

I was supposed to show the charts here; however the MDR newsletter I sent earlier already incorporated these. 

When share prices rise, this translates to a decline in the purchasing peso power relative to shares. Said differently, MORE pesos are required to buy the same number of shares.

Hence, the erosion of buying power for these shares at a higher price level would be embodied by a falling volume. And this is what we have been witnessing.

And chasing prices by relentless upside bidding requires funding. Funding would be derived from either injection of new money (spare income, savings or credit) or from a rotation in asset holdings (sales or liquidations of other equity holdings or financial assets). 

The non-participation in the upside momentum of the broader market partly suggests the latter.

Moreover, these funding dynamics have been amplified by the absorption of domestic risk assets by local participants. 

What has prevented the disgorging risk assets given the steep climb of these securities?

Perhaps, the encouragement by sell-side institutions to their clients to refrain from sales could be a factor.

Collaborative support from a cabal of institutions, both from the sell-side and the buy-side, to meet head-on any significant sellers could be another factor.

 

In the past, foreign money has either provided leadership or has accompanied locals in a bidding spree which led to the twin 8,100 levels. Not anymore.

This episode has almost been exclusive for locals. Foreign inflows like in September had been inconsequential (top chart). In a way, this time would seem different.

Finally, the Phisix may be at a new record in local currency terms or in pesos alright, but not when priced in the USD.

Strength in most of Asia’s currencies has brought about a febrile jostling for yields that has powered to region’s record-breaking stocks

The Phisix-peso, as one of the region’s outlier, has departed from this paradigm.

Instead of a healthy economy, the tandem has manifested increasing strains of monetary malaise. Worst, the markets have become vastly dependent on sustained manipulations.

This third breakout run by the Phisix hardly resembles a functional market. Instead, they seem like a Sodom & Gomorrah market.

BSP Has Been Right: No Foreign Exchange Crisis…For Now; But Devaluation Policies Amplify Risks!

From Daily Mail:

MANILA, Aug 25 (Reuters) - The Philippine central bank is in firm control of the peso and is confident that the country is not facing a foreign exchange crisis, its governor said on Friday, as the currency hovered around 11-year lows. "We allowed the peso to adjust moderately and gradually but I can assure you the BSP (central bank) is in firm control of the exchange rate," Nestor Espenilla told a business forum. "We remain confident that we are not talking about a freefall situation. Definitely we are not in a foreign exchange crisis."

Huh? Foreign exchange crisis? Didn’t the Philippine peso ever get the memo from the asset bubble religion that NOTHING can ever go wrong???  I repeat with emphasis: NOTHING!

And that “crisis” as a socio-economic lingo signifies a taboo? Why then the utterance of a “crisis”? That would be so politically incorrect!

 

It seems that the BSP has been reacting to concerns raised by some influential quarters. Otherwise, such “crisis talk” would not surface at all. The BSP’s response to the “free falling peso” has not been the first time or has signified a follow through from the other week.

Well, the USD peso has risen 1.63%, 1.0% and fell .8% over the last three weeks. Or the peso tanked by 1.8% in three weeks. Year-to-date, the USD peso remains up at 2.74%. In a world of falling US dollar, the peso has stuck out like a sore thumb in the Asia region (left).

So concerns over these may have prompted for the BSP’s reaction.

Though I would agree with the BSP for now, I would add to his statement "we are not in a foreign exchange crisis…YET"

Let me give you a hint when the pesos’ fall mutates into a crisis…

From the great Austrian economist Ludwig von Mises* (bold mine)

"If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely.  The purchasing power of the monetary unit will decline more andmore, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. "

*Ludwig von Mises 1. Monetary Depreciation p.2-3 I. The Outcome Of Inflation The Causes Of The Economic Crisis, Mises.org

By the way, Venezuela’s hyperinflation evidenced by the crashing bolivar represents a real-time example of this phenomenon.

And as I have repeatedly been pointing out here, the BSP has engaged in aggressive monetization of the National Government’s (NG’s) debt. Such money printing (emergency) operations, which had been reactivated in the 2H 2015, represents inflationary financing. In short, as evidenced by incumbent policies, the peso ispurposely being devalued. (see Chart of the Day: Debt Monetization represents a Policy of Devaluation! July 7, 2017)

Below represents proof that the present BSP actions have been designed.

From a lecture by BSP’s Dr. Dante Canlas in 2012**

[**Dr. Dante Canlas, BSP Sterling Professor of Monetary and Banking Economics, Business Fluctuations and Monetary Policy Rules in the Philippines: Lessons from the 1984­1985 Contraction April 30, 2012 p 14-17 BSP.org.]

"A prior issue is this: is inflation a monetary phenomenon Friedman had said “inflation is always and everywhere a monetary phenomenon.” With a quantity theory of money in mind, if the central bank increases the money supply from a position of balance, then the real money stock exceeds the demand for it. To restore balance, the general price level must rise, which means inflation rate, defined as the percentage change in the general price level must rise.

And thus…

"Money growth that is inconsistent with a fixed exchange rate or a tightly managed float tends to be unsustainable. A fixed exchange rate collapses in finite time, particularly if money growth, rooted in persistent deficit financing of the government budget is excessive. Likewise, a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation

"If the central bank increases the money supply… rooted in persistent deficit financing", then incumbent policies represents demonstrated or revealed preference. The peso is being devalued.

Pls. understand that speculative attacks on a currency have neither been random events nor have emerged out of a vacuum. ‘Speculative attacks’ signify as symptoms of imbalances extant in the system. Theimbalance of which, as stated by the expert, has been excessive money supply growth. Thus, the BSP practices some theories consistent with the Austrian economics. So when the currency markets smell something wrong, the markets prices the currency to approach its “equilibrium” price level or exchange ratio through arbitrage opportunities.

Back to the great Mises who reinforces the market’s function as an equilibrating mechanism***:

"Whenever such opportunities for profit exist, buyers would appear on the foreign exchange market with a demand for the undervalued money. This demand drives the exchange up until it reaches its “final rate.” Foreign exchange rates rise because the quantity of the [domestic] money has increased and commodity prices have risen. "

***Ludwig von Mises 2. PURCHASING POWER PARITY V. COMMENTS ON THE “BALANCE OF PAYMENTS” DOCTRINE p.26-27 The Causes Of The Economic Crisis, Mises.org

Hence, when the BSP threatens to implicitly intervene through the statement that they are in “firm control of the exchange rate”, they are simply contradicting themselves. 

Back to Dr. Canlas, “a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation”

The more interference in the price setting motion, the greater the fall of the peso!

Interventions have always had time inconsistent effects. Interventions may smooth currency price actions today at the expense of more imbalances tomorrow.

Even more, while debt monetization weakens the peso, actual intervention only attenuates the BSP’s balance sheets thereby reinforcing the peso’s fall overtime.

Strains of the peso have been everywhere…

 

In 2013, I questioned the sustainability of the “record” narrowing of spreads between US treasury yields and the Philippine yield equivalent, “Per capita GDP of the US represents 11.32x the Philippines, yet bond markets are presupposing that the Philippines will narrow the gap substantially soon (!!)…Yet how will we attain this? Pump up bigger bubbles?” [Phisix: The Convergence Trade in the Eyes of a Prospective Foreign Investor November 11, 2013]

What was once convergence has now transformed to divergence! The yield spread between 10-year bonds of the Philippines and the UST notes have been increasing. Such embodies the broadening differences in relative inflation (uppermost chart). Yes, that would be another bullseye for me!

Additionally, the BSP has increasingly depended on forex derivatives to bolster its Gross International Reserves. FX derivatives have now reached “record” levels. (middle window)

Finally, BSP-NG selling of UST holdings in support of the peso has been apparent even in the US Treasury TIC data (lowest window)

This brings us back to the BSP response to media on the foreign exchange crisis.

“Current Account” or “BoP” has only served as the convenient bogeyman. Imbalances of CA and the BoP signify manifestations of the domestic policies. I will elaborate on this in the future.

As a side note, even as tax revenues outperformed, July’s fiscal deficit has swelled again. The Bureau of Treasury (BoTr) has yet to issue the updated data on the National Government’s outstanding debt. The Bangko Sentral ng Pilipinas will release its depository survey/liquidity survey and bank lending conditions next week. I will discuss this only when the data have all been in place.

Please understand too that BSP deficit financing has not just been the only cause of the plight of the peso.

I have been a USD-Php bull since 2014, or when the BSP exploded its money supply growth at 30%+++ rate for 10 consecutive months. Then, it had entirely been the banking system responsible for the remarkable money supply inflation.

Today, both the BSP and the banking system have been working overtime to expand the money supply. Monetary inflation has been aimed at generating revenues for the NG through direct taxes and through the inflation tax.

In conclusion:

All actions have consequences.

The travails of the peso signify an outcome or a ramification of the FREE LUNCH policies implemented by the government.

The risks of a currency crisis will only magnify IF the BSP continues or even accelerates the prioritization of such invisible transfers to the government and to the elites, through the channels of debt monetization and easy money policies.

In reality, the BSP has not told the public the truth. The government, through the BSP, has willfully embraced policies to devalue the peso.

Asset Bubble Religion and the Propensities to Swindle

And curiously, while the BSP has been alleviating the public’s concern of the foreign exchange crisis, the asset bubble religion has only become more entrenched.

Fanatics have come to believe that asset bubbles come with no costs/no risks and have only benefits. And because they believe that asset bubbles have become a permanent fixture, intensifying intolerance has become a response towards any opposition to such utopian outlook.

They can be analogized to the growing political fragmentation in the US between the extreme (Antifa) left and the extreme nationalists, the “alt right”. Because of the intensifying intolerance due to “you are with us or against us” mentality (false choice), violence has been mounting. Even some unfortunate Filipinos (recently in Canada) have been caught in the crossfire from such increasingly partisan or divisive politics.

 

Intolerance spawns friction.

One can’t generate “business” unless one belongs to the bullish camp. So they say.

In domestic stocks, transactional payoffs have been made primarily on the upside. Additionally, shorts are hardly used. Therefore, the current system built on an upside bias make this assumption partly true. But that certainly does not apply now.

Well, the Phisix has been locked in at 8,000 for the past 2-3 weeks, yet where has the business been????

Daily trade volume has shriveled at a stunningly rapid rate – faster than its previous predecessors in 2015 and 2016! (upper chart) But for the antecedents, volume shrinkage matched prices: The PSEi had been in downtrends! This time it is different.

The average volume last week was at Php 5.7 billion. In 2017, there had been only three occasions where volume was equal or lower than this: March 3 (Phisix 7,247.12), February 3 (7,226.7) and January 20 (7,232.66). 2016 ended with Php 4.35 billion (6,840.64).

In other words, volume has not matched prices at present levels.

So despite sinking volume, why has the Phisix remained at 8,000? One simple and obvious answer: Corrections have NOT been permitted (see lower window).

Price fixing has become institutionalized! “Volume PRECEDES prices” a chart technician would say. But such would be a truism in the condition that markets have been allowed to work.

The prevailing mindset has been that markets are out there for convenience (sensory and egotistical gratification, hedonism, social status among many others) and not for allocation purposes. So the deformation of markets has become the order of the day. In short, stock markets have been perceived as free money ATMs.

Price fixing has already signified symptoms from such asset bubble zealotry. Such depravity, of course, also means many uncovered malfeasances elsewhere.

As historian Charles P Kindleberger****, “The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And for the signal for panic is often the revelation of some swindle, theft, embezzlement and fraud.”

****Charles P Kindleberger Manias Panics and Crashes Third Edition p.66

In the US, one of the biggest banks was recently fined for the opening of many spurious accounts. The same bank was likewise accused of making unauthorized changes to customer’s mortgages or even without the customer’s knowledge. Lately, the same bank had recently been exposed for charging unneeded auto insurance to people who took out car loans.

In Canada, early this year many employees went on air to whistleblow on their employers for hard selling to their clients.

From the CBC News (March 15, 2017): “Employees from all five of Canada's big banks have flooded Go Public with stories of how they feel pressured to upsell, trick and even lie to customers to meet unrealistic sales targets and keep their jobs. The deluge is fuelling multiple calls for a parliamentary inquiry, even as the banks claim they're acting in customers' best interests.”

Stunning.

These have been occurring at the time when global stock markets have been treading at record highs.

And I’m quite certain that these activities have not been limited to these countries

The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.

For redistribution to take hold, the policy of rewarding debtors at the expense of savers affects people’s outlook. These policies fundamentally change people’s incentives, and consequently, actions. And such incremental change in incentives involves the narrowing people’s time orientation (Austrian economics lingo: high time preference). When priorities have been skewed, many become vulnerable to the employment of unethical or unscrupulous means or instruments to attain their short-term agenda or interests or objectives. Or differently put, when greed becomes a priority, the propensities to speculate morphs into the propensities to swindle.

At the end of the day, greed’s nemesis will be its undoing.

Back to Mr. Kindleberger: (p.82)

“What matters to us is the revelation of the swindle, fraud, or defalcation. This makes known to the world that things have not been as they should have been, that it is time to stop and see how they truly are. The making known of malfeasance, whether by the arrest or surrender of the miscreant,or by one of those other forms of confession, flight or suicide, is important as a signal that the euphoria has been overdone. The stage of overtrading may well come to an end. The curtain rises on revulsion, and perhaps discredit

Why do volumes decline in bear markets? Answer: Because losses become the dominant force. Losses thereby spread to affect the balance sheets of speculators and investors.

Plainly stated, fear or revulsion takes on the driver’s seat.

Since the opposite side of greed is fear, while greed overwhelms today, eventually it will be fear’s turn.

 

Fanatics have been worshipping the Phisix at 8,000. But when priced from the USD that 8,000 level shrinks. Said differently, the inflation adjusted Phisix won’t be at 8,000. It would much much much lower.

Mass Delusions.

To be clear, I am not saying that the 2015 record won’t be broken. Given the intense price fixing process, whether it does or doesn’t shouldn’t be a concern. What matters will be the peso as an outlet for present policies. The Phisix hasn’t only been outclassed by the falling peso, in the context of record breakthroughs. The plight of the peso will also serve as a critical obstacle to the Phisix.That’s unless the Philippines will suffer from a hyperinflation – which is unlikely.