Important Insights from the Philippine PSEi 30’s Melt-Up!

 

Investors believe in Keynesianism.  They believe that increased government spending will make us all richer.  This illusion is what is driving this stock market. Bubbles are based on illusions—Dr. Gary North 

In this issue

Important Insights from the Philippine PSEi 30’s Melt-Up!

I. Philippine PSEi 30 Returns Among the World’s Highest

II. Lessons from China’s Previous Easy Money Experiments

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience

IV. Retail Players Emerge

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion

Important Insights from the Philippine PSEi 30’s Melt-Up!

What does the outperformance of the PSEi 30 likely mean?

I. Philippine PSEi 30 Returns Among the World’s Highest

The Philippines' primary equity benchmark, the PSEi 30, stretched its weekly winning streak to five with this week’s 0.53% gain.

This week’s gains pushed its year-to-date returns to 15.8% (as of October 4th).

Figure 1

Accompanied by a massive rally in the Philippine peso, the Philippines' ETF, the EPHE, joins the ranks of global top equity ETFs in terms of US dollar returns (as of October 2nd). (Figure 1, upper window)

Year to date, the PSEi 30 ranked fourth in Asia, after Pakistan, Hong Kong, and Taiwan. (Figure 1, lower image) 

With 16 of the 19 regional benchmarks up by an average of 13.13% in local currency terms, we can generalize that 2024 has been a year of the bulls. Of course, we have two more months to go.

II. Lessons from China’s Previous Easy Money Experiments

Despite recent elevated rates, the current surge in global stocks signifies a product of easy money.

Due to the massive coordinated bailout package unleashed by Chinese authorities to rescue its struggling asset markets (stocks and real estate), Chinese and Hong Kong equities skyrocketed, rising by a stunning 23.4% and 31% over the last four weeks.

However, the returns of China’s equity markets have been capped due to a week-long holiday.

Figure 2

Though many international experts have suddenly become apostates to a perceived return of China’s bull market, I recently pointed out in a tweet that... (Figure 2)

"While previous episodes of government stimulus did bolster valuations, they turned out to be short-lived, highly volatile, and resulted in diminishing returns for #SSE levels. The 2016 & 2020 support had little impact on its bear market. Will history rhyme?"

Or whatever boom that took place before tended to morph into a bust. Even worse, the subsequent stimulus produced diminishing returns with the lower levels of the Shanghai Composite Index (SSE).

In other words, monetary inflation or stimulus from credit expansion must be applied at a much larger scale than before to magnify the effects of a boom. 

As the great Dean of Austrian economics, Murray Rothbard, once warned 

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. (Rothbard, 2015)

China’s experience has somewhat resonated with the Philippines.

Figure 3

It took a combination of historic rate cuts, massive reductions in reserve requirements, unprecedented relief measures, and direct injections by the BSP into the banking system via the expansion of its balance sheet to rescue the Philippine PSEi 30 in 2020. (Figure 3, upper image) 

The PSEi 30 peaked in 2022 along with the cresting of the BSP's assets. 

It is also not a coincidence that the PSEi has wilted in the face of the slow-motion erosion of the BSP’s balance sheet, which was eventually reversed in 2023. 

The BSP’s U-turn put a floor under the PSEi 30 and rebooted the current rally. 

One can probably thank Other Financial Institutions (OFCs) for representing part of the National Team supporting the PSEi 30. 

The BSP has been rebuilding its asset base, this time from external borrowings by the National Government and the banking system. 

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience 

Of course, the difference between the bull market of 2009-2013 and today is that the PSEi 30 run has barely been supported by volume and breadth. 

Main board volume remains substantially below the level reached at even lower PSEi 30 levels in 2022. (Figure 3, lower graph) 

Because of this obsession with pumping the index to portray a bull market, the "national team" has concentrated its aggressive stock-pumping activities on the top heavyweights. 

As a result, the market capitalization share of the top five companies reached 51.1% last October 4, following a record 51.92% last April.

Figure 4

Furthermore, because RRR cuts and BSP rate cuts were sold to the public as policies that would accomplish economic nirvana, the Financial/Banking Index roared, with year-to-date returns spiking 37.7% and its index soaring to a record high! (Figure 4, upper chart) 

Astoundingly, shares of China Bank [PSE:CBC] have spiraled in ways echoing Bitcoin, GameStop [NYSE:GME], and Nvidia [Nasdaq:NVDA]! (Figure 4, lower pane)

CBC posted 91.3% year-to-date returns, with much of that accomplished in the last four weeks!

Figure 5

If history tells us anything, bank share prices going berserk could mean anything other than economic or financial prosperity. The experiences of Lehman Brothers and Bear Stearns provide examples: their share prices sprinted to an all-time high before collapsing, heralding the Great Financial Crisis (2007-2008). (Figure 5, topmost chart)

To be clear, we aren’t suggesting that CBC and other record-setting bank shares, such as BPI, are a simulacrum of Lehman; rather, we are pointing to the distortive behavior of speculative derbies that may hide impending problems in the sector. 

Of course, foreign buying did provide support to the national team. For the first time since 2019, the PSE posted net inflows of Php 108 million in the first nine months of 2024. (Figure 5, middle graph)

Meanwhile, in the PSE, the cumulative market share of the PSEi 30’s best-performing ICT and the three PSEi 30 banks has reached 32.73%, which is closing in on August's record of 33.14%.  

IV. Retail Players Emerge 

However, signs indicate that the retail segment appears to be jumping on board the developing mania, which has been marketed as another version of the "return of the bull market." 

Though still negative, 2024’s nine-month breadth has had the best showing since 2017. (Figure 5, lowest image)

Figure 6

Furthermore, the declining share of the top 10 brokers relative to the MBV could be another contributing factor. It was 60.4% in the week of October 4th, down from a recent high of over 65%. (Figure 6 upper visual) 

Major brokers could utilize 'done-through' trades or outsource trades with partner brokers to conceal or dilute this number.

Despite the paucity of volume, the trading share of the top 20 most-traded issues has dropped to about 80% for the fourth consecutive week from the previous range of 84-86%. (Figure 6, lower diagram)

Figure 7

Since the low on June 21st, the returns of the top 10 heavyweights delivered the bulk of the gains for the PSEi 30. While 23 issues closed higher, 2 remained unchanged, and 5 declined. The average return of the top 5 was 26.84%, while the average return for the top 10 was 26.4% (Figure 7, topmost graph) 

Breadth was largely incongruent with this week’s 0.53% returns, 83% of which were attributable to Friday’s pre-closing pump. Although 18 of the composite PSEi 30 issues closed down, the upside volatility allowed for a positive weekly return of 0.21% (Figure 7, middle image) 

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion 

Finally, SMC share prices continue to move diametrically opposite to the sizzling hot PSEi 30. (Figure 7, lowest graph) 

What gives? Will SMC’s debt breach the Php 1.5 trillion barrier in Q3?   

Have SMC’s larger shareholders been pricing in developing liquidity concerns? If so, why are bank shares skyrocketing, when some of them are SMC’s biggest creditors? 

Bottom line: The levels reached by the PSEi 30 and its outsized returns attained over a few months barely support general market activities, which remain heavily concentrated on the actions of the national team and volatile foreign fund flows. 

Instead, the present melt-up represents an onrush of speculative fervor driven by the BSP’s stealth liquidity easing measures, even before their rate cut. Moreover, real economic activities hardly support this melt-up.

___

reference 

Murray N. Rothbard, Why the Recurring Economic Crises?, August 27, 2015, Mises.org

 

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

What's been lost in this frenzied competition for eyeballs and "likes" is the distinction between opinion and journalism. The post-truth cliche is that there is no distinction, that everything is mere opinion and spin, but this is not true: journalism is different from opinion and spin—Charles Hugh Smith 

In this issue

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?"

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30?

VI. The Unannounced "Historic Moments" 

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window 

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?" 

Along with the region's sanguine performance, the Philippine PSEi 30 broke past 7,000. Could this signify the start of a bull market, as the media and consensus have suggested?

Figure 1

Businessworld, September 13: The PSEi achieved a significant milestone, closing above 7,000 for the first time in over 19 months. Strong foreign buying and expectations of a US Federal Reserve rate cut contributed to this historic moment. (Figure 1, upper picture) 

Historic. Moment. 

Sure, the PSEi 30 has traded above 7,000 for the last five days and closed above this threshold in the last two. However, how is reaching a 19-month high equivalent to a "historic moment?" 

Media is said to reflect the prevailing mood or express the public’s level of confidence. That’s according to the practitioners of ‘Socionomics.’ 

Could this headline be indicative of the market’s mood? 

Let’s examine public sentiment by analyzing the market internals. 

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops 

Foreign buying was certainly a factor. 

This week, aggregate net foreign inflows amounted to Php 2.7 billion, marking the fifth consecutive week of net buying and the second-largest inflow during this period. (Figure 1, lower diagram) 

However, foreign inflows accounted for only 41.44% of the average weekly turnover, the lowest in five weeks. 

This suggests that local investors have begun to dominate the transactions on the Philippine Stock Exchange (PSE). 

Additionally, the scale of weekly foreign investment was far from record-breaking.

As a side note, in today’s digitally connected, "globalization-financialization" world, foreign inflows could also include funds from offshore subsidiaries or affiliates of local firms.

Figure 2

Sure, expectations of the US Federal Reserve's interest rate cuts have not only fueled a strong rebound in ASEAN currencies but have also energized speculative melt-up dynamics in the region's equity markets, driven by foreign players. 

ASEAN currencies outperformed the global market from July 10 (following the US CPI release) through September 11. (Figure 2, topmost table) 

Yahoo Finance/Bloomberg, September 12: Southeast Asian equities have cemented their position as a favorite play of money managers positioning for the Federal Reserve’s policy pivot. Four of the five best-performing Asian equity benchmarks this month are from the region, with Thailand leading the pack. The buying frenzy has put foreign inflows on track for a fifth consecutive week while the MSCI Asean Index is now trading near its highest level since April 2022. [bold added] (Figure 2, lowest chart) 

Moreover, the yield-chasing phenomenon has spilled over into the worst-performing equities, or the laggards of the region. 

Yahoo Finance/Bloomberg, September 12: After being sidelined by investors for much of this year, some smaller equity markets are suddenly winning favor. The trend is particularly evident in Asia, where Thailand, Singapore and New Zealand rank as the top performers in September. Their benchmarks have risen at least 3% each so far, even as MSCI Inc.’s gauge of global stocks has fallen about 1% following a four-month winning streak. Investor focus seems to be shifting as the world’s biggest equity markets such as the US, Japan and India take a breather, and China’s slump deepens. For many of the smaller Asian markets, a limited exposure to the artificial intelligence theme means their valuations aren’t expensive, making them attractive just as the Federal Reserve’s dovish pivot helps boost their currencies and allows some central banks to embark on rate cuts. [bold added] 

The "core to the periphery" phase indicates that investors have been pursuing yields in less developed and less liquid markets, which are inherently more volatile and considered higher risk. This shift could signify a late-cycle transition. 

So yes, while there may be a semblance of increased confidence due to foreign participation, this dynamic appears to be limited to the most liquid and largest market capitalization issues—those capable of absorbing significant trading volumes.

And that’s exactly the case. Except for last week’s drop to 81%, the percentage share of the 20 most traded issues relative to the main board volume has risen in tandem with the PSEi 30 since mid-June. (Figure 2, lowest image)

That is to say, the PSEi 30’s performance was largely driven by concentrated trading volume in a select group of elite stocks.

Figure 3

Using the BSP’s portfolio flow data, July’s portfolio flows represented the largest since April 2022. (Figure 3, topmost image)

However, the larger point is that foreign money flows tend to chase the peaks of the PSEi 30.

In fact, foreign investments often surged during the culminating (exhaustion) phase of the PSEi 30’s upward momentum, a pattern observed since 2013.

Will this time be different?

It’s important to note that the BSP’s portfolio flows include foreign transactions in the fixed-income markets, but the size of these flows is relatively insignificant.

In a nutshell, the purported confidence brought about by foreign participation has been largely limited to the PSEi 30. 

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

Does media sentiment resonate with the PSE’s market breadth?

In a word, hardly.

The PSEi 30 rose by 1.25%, marking its second consecutive weekly advance and its ninth increase in 12 weeks since this upside cycle began in the week ending June 28th.

This week’s rebound pushed its year-to-date returns to 8.88%.

While we have seen some substantial returns due to heightened volatility in some of the PSEi 30's underperformers, such as Converge (+10.5%), Aboitiz (+8.4%), and Bloomberry (+8.3%), it was the performance of the two largest market capitalization stocks, SM (+3.47%) and ICT (+2.75%), that drove this week’s free-float gains. (Figure 3, middle pane)

The PSEi 30’s average return was 1.03%. The difference between this figure and the index reflects distortions caused by free-float weighting.

Yet, the increasing volatility in the share prices of several PSEi 30 and non-PSEi 30 firms suggests the formation of miniature bubbles.

With a 17-13 score, decliners outnumbered gainers in the PSEi 30, indicating a divergence between market breadth and the headline index.

Despite reaching the “historic moment” of the PSEi at 7,000, market breadth continues to weaken. (Figure 3 lowest chart)

Declining issues have outpaced advancing issues for the second consecutive week, with the 69-point margin nearly double last week’s 37. Declining issues led the market in all five trading sessions.

Figure 4

Yet, the market capitalization weighting of the top five issues rose from last week’s 51.15% to 51.34%, primarily due to ICT’s increase from 10.83% to 10.99%. (Figure 4, topmost chart)

Or, 5 issues command over half the PSEi 30 price level!

This week’s pumping of the PSEi 30 pushed ICT’s share price to a record high of Php 418.6 on Thursday, September 12th. (Figure 4, middle graphs)

To put it another way, ICTSI has shouldered most of the burden in pushing the PSEi 30 to 7,000.

Additionally, ICTSI's rise has been supported by rotational bids of the largest banks, SM, SMPH, and ALI (the six largest), which is publicly shaped by media and the establishment narratives through the promotion of BSP and US FED easing as beneficial to stocks and the economy.

The public has been largely unaware of the buildup of risks associated with pumping the PSEi 30, driven by a significant concentration in trading activities and market internals

The market breadth exhibits that since only a few or a select number of issues have benefited from this liquidity-driven shindig, the invested public has likely been confused by the dismal returns of their portfolios and the cheerleading of media and the establishment.

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume 

Does the market’s volume corroborate the media’s exaltation of the PSEi reaching 7,000?

Succinctly, no.

To be sure, main board volume surged by 22%, increasing from an average of Php 4.9 billion to this week’s Php 5.9 billion. (Figure 4, lowest image)

However, main board volume remains substantially lower than the levels observed when the PSEi 30 previously reached the 7,000-mark.

Figure 5

Moreover, despite a 4.2% monthly surge in August that pushed year-to-date returns (January to August) to 6.94%, the eight-month gross volume fell to its lowest level since at least 2012. (Figure 5, topmost visual)

That’s in addition to the disproportionate share weight of over 80% carried by the top 20 issues on the main board volume, as noted above.

Incredible, right?

But there’s more. 

The main board volume consists of:

-Client-order transactions

-Dealer trades (usually day trades)

-Cross-trades (trades from clients in the same broker)

-Done-through (intrabroker/broker subcontract) trades 

Last week, the top 10 brokers controlled 53.84% of the main board volume, averaging 56.75% since the end of June.

Or, concentration in trading activities has also been reflected in the concentration of broker trades.

The point is, what you see isn’t always what you get.

Main board (and gross) volume doesn’t necessarily reflect broader public participation.

The sharp decline in direct participation by the public in 2023 underscores this reality. The PSE’s active accounts comprised only 17.6% of the 1.9 million total accounts in 2023—the lowest ever. (Figure 5, middle image)

Instead, trades within the financial industry have played a significant role in the PSE’s overall turnover.

For instance, in Q1 2024, the BSP noted that claims of Other Financial Corporation (OFC) on the other sectors "grew as its investments in equity shares issued by other nonfinancial corporations," and also “claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares”

Have OFCs been a part of the national team? OFCs include bank subsidiaries, public and private insurance and pension firms, investment houses, et.al. (BSP, 2014)

Why would the PSE’s volume endure a sustained decline if there has been significant savings to support the alleged increase in public confidence?

Historic? Hyperbole. 

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30? 

Finally, why would everyone discount, dismiss, or ignore the brazen "pumps-and-dumps" and "pre-closing price level fixing" at the PSE?

In the last five days, managing the index level involved early ICTSI-fueled pumps, aided by frenetic rotational bids on the other top five to six market caps. (Figure 5, lowest images)

After surpassing 7,000-level intraday, the local version of the "national team" dumped their holdings—using the 5-minute pre-closing float—onto unwitting foreign and retail buyers.

Despite this, the PSEi 30 managed to close above the 7,000 level during the last two days—albeit on low volume, with negative market breadth and concentrated trading activities.

Still, does everyone believe that the mounting distortions in the prices of (titles to) capital goods will come without consequences for the financial markets and the real economy?

What happened to the army of analysts and economists? Has the fundamental law of economics escaped them?

Or does the management of the PSEi 30 levels represent part of the establishment’s manipulation of the Overton Window?

Sure, the mainstream media has been so desperate to see a "bull market" that they describe a 19-month high as a "historic moment."

However, much of today’s media reporting seems to be more than mere cheerleading: genuine journalism has been sacrificed in favor of copywriting for vested interests paraded as news. 

VI. The Unannounced "Historic Moments" 

But the so-called "Historic Moment" has manifested in many unpopular and unannounced forms.

Let us enumerate the most critical ones: 

First, systemic leverage, consisting of PUBLIC DEBT plus TOTAL bank lending, has reached Php 28.515 trillion as of July 2024, accounting for 113% of the estimated 2024 NGDP!  Public debt servicing has also reached unparalleled levels!

Second, Q2 public spending, the financial industry’s net claims on the central government (NCoCG), and the banking system’s held-to-maturity (HTM) assets have also reached all-time highs.

Third, the banking sector’s business model transformation—from production loans to consumer loans—has been unprecedented.

Fourth, the savings-investment gap has reached a significant milestone.

Fifth, PSE borrowings, led by San Miguel’s Php 1.484 trillion, have also reached historic highs.

Sixth, the money supply (M1, M2, and M3) relative to GDP remains close to its record highs in Q1 2021.

Figure 6

Seventh, the BSP’s asset base remains near the record high attained during the pandemic bailout period (as of June 2024.) (Figure 6 topmost chart)

While there are more factors to consider, have you heard any media or establishment mentions or analyses of these issues?

Don’t these factors have an impact on the "fundamentals" of the PSE or the economy?

Or are we expected to operate under a state of "blissful oblivion," or the blind belief that "this time is different?" (The four most-deadliest words in investing—John Templeton)

It not only fundamentals, the current phase of the market cycle also tells a different story than the consensus whose primary focus is on a "return to normal" phase. (Figure 6 middle and lowest graphs)

Good luck to those who believe that the PSEi 30’s 7,000 level signifies a bull market or a historic moment.

____

References

The OFCs sub-sector includes the private and public insurance companies, other financial institutions that are either affiliates or subsidiaries of the banks that are supervised by the BSP (i.e., investment houses, financing companies, credit card companies, securities dealer/broker and trust institutions), pawnshops, government financial institutions and the rest of private other financial institutions (not regulated by the BSP) that are supervised by the Securities and Exchange Commission (SEC).

Jean Christine A. Armas, Other Financial Corporations Survey (OFCS): Framework, Policy Implications and Preliminary Groundwork, BSP Economic Newsletter, July-August 2014, bsp.gov.ph

 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

 

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong—George Soros 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

The ABS headline bannered, “PSEI back to 6,800 as investors cheer BSP rate cut.”

Figure 1

Well, the entire Asian equity market seems to have celebrated the rising expectations of rate cuts by the US Federal Reserve. In particular, 15 of the 19 national bourses closed 1.96% higher over the week. (Figure 1, upper chart)

The wonders of financial easing have also been manifested in strong rallies in the region’s bonds (falling yields) and firming currencies. The Thai baht, Indonesian rupiah and the South Korean won were this week’s strongest Asian FX. (Figure 1, lower image) 

Essentially, bad economic news is good news for the Overton Window anchored on speculative narratives. From their perspective, “MOAR” credit and leverage drive prosperity, hence the revival of various forms of leveraged speculation, such as the carry trade. 

Put differently, Main Street woes accrue to the benefit of the Wall Street class around the world. 

Has the Marcos-nomics Liquidity Driven Rally Broken the SONA Cycle?

Back home, while the BSP rate cut(s) has been worshipped by the establishment as the path to economic nirvana, the rallying PSE instead reflects the full rollout of “Marcos-nomics”—including the BSP’s easing—manifested through liquidity growth.

Figure 2

The PSEi 30 rallied by 3% for its second-best weekly showing of the year, mainly due to Friday’s 2.31% spike.

Sharp changes in liquidity conditions have influenced the PSEi 30 in a time-lag. (figure 2, upper graph) 

The liquidity-driven PSE may have broken the SONA cycle. (Figure 2) 

However, was the PSEi 30’s rally really about rate cuts? The devil is always in the details. 

PSEi 6,850: Targeted Heavy Pumps on ICT, ALI and a Select Few

Figure 3

This week’s rally was widespread across the PSEi 30, with 18 stocks rising, 11 declining, and one remaining unchanged. (Figure 3, topmost visual) 

However, it was ICTSI’s [PSE: ICT] massive 10.4% weekly surge that contributed significantly to the index’s performance. (Figure 3 middle chart) 

ICT's share of the free float-adjusted market cap of the PSEi 30 soared by 7.7% from 10.06% to an all-time high of 10.84%. It is closing in fast on the largest firm, SM, with a free float cap of 14.44%. 

Ayala Land's [PSE: ALI] 10.33% gain provided flanking support. Ayala Land's free float market cap also surged by 7.6% from 5.75% to 6.19%. 

The substantial rebounds of Jollibee (9.2%) [PSE: JFC] and Meralco (8.53%) [PSE: MER] helped too. Up 19%, Converge [PSE: CNVRG] was this week's best performer. However, from the free float market cap standpoint, their contribution remained negligible. (Figure 3 lowest graph)

Understanding the distribution of price changes in the PSEi 30's market cap provides significant insight into the price dynamics of the index.

For instance, while most people call the PSEi 30 the "market," an index with 5 issues driving it skews this holistic principle. As of August 16, the top 5 issues in the PSEi 30 carry a free float weight of 50%, while the top 10 account for 72.9%.

The fact that a few issues comprise the weightings of the PSEi 30 deforms the index's representation, making its price directional movements vulnerable to manipulation.

As a Global Company, ICT is Sensitive to Fed Actions; Debt Outgrows Income

Why would the investing public panic-bid on ICT shares when its revenues are principally derived from international sources? ICT is more exposed to the Fed's actions than the BSP's.

Figure 4

And why the parabolic price action when ICT’s debt is growing faster than its income? In H1 2024, ICT’s debt grew by USD 630.6 million against a net income expansion of USD 113.87 million, meaning that for every USD increase in net income, it drew USD 4.5 of credit. Consequently, interest payments have also surged. How sustainable is this? (Figure 4, topmost window)

Besides, ICT looks susceptible to adverse global events like a hard landing or a recession, as well as bellicose geopolitical developments.

Rate Cuts Driven Rally? Why the Divergence Between the Real Estate and Financials?

Interestingly, while banks and real estate are supposedly the prime beneficiaries of the BSP’s easing, BDO declined by 1.6%, and the relatively modest increases in Bank of the Philippine Islands [PSE: BPI] by 2.12% and Metrobank [PSE: MBT] by 3.7% led to a reduction in their share of the free float index.

On the other hand, ALI’s 10.33% spike, backed by SM Prime Holdings [PSE: SMPH] with a 3.4% gain, increased their index weight. The result is a divergence in the performance of interest-sensitive industries. (Figure 4, middle chart)

It’s not just the PSEi 30; members of the financial index (ex-PSE) and the property index also exhibit the same skew. Gains were seen in most constituents of the Property index (67%, average +1.47%) compared to the Financial index (42%, average all -.43%, average index -2.6%).  (Figure 4, lowest table)

Interestingly, the two PSEi 30 property firms account for 73.7% of the industry’s index, while the three banks comprise 90% of the 8-member Financial index (ex-PSE).

Distortions in Volume: Mounting Concentration Risks

Figure 5

The distortions are even apparent in trading volume. The rising share of ICT and the telcos (PLDT, Globe Telecoms, and Converge) in the mainboard volume has been accelerating, indicating intensifying speculative interest. Their share of the mainboard volume reached 22.25% in the week of August 16th, higher than their 2024 seven-month aggregate of 21.9%. (Figure 5, upper graph) 

Interestingly, despite the PSEi 30 at 6,850, weekly volume remained lackluster. That is to say, volume remained concentrated in PSEi 30 firms. The top 20 most active issues accounted for 84% of the main board volume. (Figure 5, lower chart)

Mixed Breadth, Foreign Inflows and More Signs of Concentrated Activities

Figure 6

And while the positive advance-decline prevailed at the PSEi 30 over the week, even with Friday's 134-68 differentials, breadth was barely positive (495-476) in favor of the buyers this week. (Figure 6, upper pane)

And yes, "foreign buying" indeed helped. PHP 1.44 billion of foreign inflows was reported for the week, while foreign participation accounted for 38.8% of the overall main board turnover.

The top 10 brokers also constituted 54.74% of the weekly mainboard volume.

All of this suggests that trades were hardly dispersed but rather concentrated, mainly among institutional brokers (domestic OFCs and foreign).

Or, the positive headlines may have misled the public to believe in whatever increases in the PSEi 30 means relative to the underlying activities.

Which History will Rate cut(s) Rhyme? 2011 or (2016) or the 2018 Episode?

Finally, as previously mentioned, unlike in 2011 and 2016, where rate cuts led the PSEi 30 to soar, 2018 saw the reverse—rate cuts led to a decline in the PSEi 30. Balance sheet conditions (public and private) played an important role in this difference. So far, the PSEi 30 appears to be following the 2016 pattern in its current run. Of course, Marcos-nomics stimulus could be the defining nuance.  (Figure 6, lowest chart)

Yet it will be interesting to see how lasting such low-volume parabolic pumps last.

Be careful out there.

 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

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 3

The 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 5

This 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 7

The 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