Diminishing Returns Have Plagued the PSEi 30 Since 2009!

Led by orchestrated pumps on a few heavyweights, the PSEi registered an incredible 10.2% MoM return in November.     

Figure 1 

Combined with the 7.2% gains in October, the two-month returns represent the largest since Sept-October 2010, the onset of a bull market.   

 

Many financial pundits have called for a "turnaround from the bear market." 

 

But are they looking at the right pictures?  

 

In contrast to popular opinion, diminishing returns have haunted the PSEi 30 since 2009.    

The YoY % change in November remained in a deficit, reinforcing its secular downtrend since 2009. 

 

The question is, what brought about such conditions?   Only from knowing the causation can we get a clue on its reversal.  

 

The BSP's zero-bound rates have led to the benchmark's lower returns.   

 

Figure 2 

It has fueled a surge in systemic debt (public and bank credit expansion) which also resonates with the decline in the yield of the PSEi 30.

As leveraging expanded, it eventually sapped out liquidity from the financial system through malinvestments, and so did the returns of the PSEi 30. 

Figure 3 

The liquidity classification for the above is the money supply growth (M3), representing the economy and bank liquidity via the cash-to-deposits ratio.  

 

Figure 4 

Finally, the slowdown in the CPI coincided with the peak in returns of the PSEi 30 in 2009.   

However, the comeback of the CPI in 2015 has also been accompanied by the slowing of the yield rate. 

Let us be clear.  The (statistical) inflation has always been present, except for the September and October deflation in 2015.   

What changed is the trend of the rate of change or its asymmetric distribution.   

But (monetary) inflation turned up in different areas at different times. Or, the process appeared as stages.  

First, the asset markets absorbed the liquidity.  

Later, liquidity percolated into the real economy as “inflation.” 

The PSEi 30 rode the 'genuine' bull market from 2009 to 2013 from its deluge.   The bull market was not just stocks but also seen in the peso and the fixed-income markets. 

But as the equity benchmark sprinted higher, returns declined.  

 

Next, the spillover of excess liquidity into the real economy magnified economic imbalances.  

 

Subsequently, this eroding bank liquidity spread into the financial system and the economy.   

Figure 5 

Such imbalances became evident in the downtrend in turnover of the PSE. 

 

Consequently, it reverberated in the returns of the equity market. 

 

BSP policies have plagued the PSEi and the PSE through the law of diminishing returns.

With all the accumulated maladjustments, how do you think the BSP can undo or overturn this?

Reopening Growth? The PSE’s EPS Low-Base Effect Illusion; Buffett Indicator Soars in 2021! PSE Volume Echoes Bank Liquidity Conditions

 

The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we incentivize malinvestment and prevent technology substitution by implementing massive government stimuli and liquidity injections—Daniel Lacalle 

 

In this issue 

 

Reopening Growth? The PSE’s EPS Low-Base Effect Illusion; Buffett Indicator Soars in 2021! PSE Volume Echoes Bank Liquidity Conditions 

I. As Expected, Organized Pumping of the Real Estate Sector Powered the PSEi 30 

II. The PSE Earnings Growth Illusion: The January 2022 EPS Growth Emanates from Low-Base Effects! 

III. The 2021 Buffett Indicator (Market Cap-to-GDP) Approached Record High! 

IV. PSEi 7,400: January 2022 Turnover Crashes; 2021 Volume Spike as Share of Foreign Trade Plummeted!  

V. BSP’s Liquidity Operations "Owns" the PSEi 30’s March 2020 Rebound; Economic Distortions from the "Managed Stock Markets" 

 

Reopening Growth? The PSE’s EPS Low-Base Effect Illusion; Buffett Indicator Soars in 2021! PSE Volume Echoes Bank Liquidity Conditions 

 

I. As Expected, Organized Pumping of the Real Estate Sector Powered the PSEi 30 

 

From our observation of the PSE last week… 

 

Aside from ICT, Jollibee, and the banks providing support, the Real Estate sector cushioned last week’s decline. The property sector jumped 2% last week, hoisting higher its free-float share of the market cap. 

 

Curiously, this rally emerged principally from SMPH, which share prices benefited from an incredible pre-closing pump last Friday to help power the week’s gains to 4.56%. 

 

Amazingly, pre-closing dumps dominated this week's trading sessions! 

 

Yet, share prices of ALI, SMPH, MEG, and RLC have been drifting in trading ranges or sideways.  

 

For this sector to lead the PSEi 30, it would require not just outperformance but sharp upside gains to drive up its share of free-float market caps.  

 

The property sector is immensely sensitive to changes in interest rates because it heavily depends on debt for financing.  

 

With yields of the benchmark 10-year Treasury bonds surging higher, it should be a riddle how this could happen. 

 

But who knows, "whatever it takes" has been the shibboleth of index managers in their campaign to prevent a deflationary spiral.  

 

They did it with Telcos. They will surely try this sector as potential candidates thin out. 

 

Stunningly, a spike in volume accompanied last week's selloffs. 

  

In essence, the weak market internals of the "managed markets" exposes its vulnerability.  

 

How will the mispriced PSEi 30 and maladjusted fundamentals cope with a sustained rise in rates? That should be very interesting. 

 

See Kaboom: The Telco Bubble Deflates as Globe Crashes into a Bear Market, Will Organized Pumping Shift to the Real Estate? February 14, 2022 

 

First, each time the PSE encounters a selloff, it is met by a more violent upside move. 

  

Up 2.04% for the week, the PSEi 30 almost regained the deficit incurred of the previous week as the average weekly main board volume fell by 33.3% from Php 11.07 billion to Php 7.4 billion.  

 

Despite a considerable weekly advance, breadth remained marginally tilted towards gainers.  

 

Again, the hefty gains of the headline index reinforced the "managed markets," which lacked the support of the broader markets based on market internals and volume. 

 

Figure 1 

Second, massive pre-closing pumps have usually accompanied violent rallies but are not limited to them. Pumps include either saving the index from declines or cushioning the deficits too. (Figure 1, topmost pane, charts from the Technistock) 

  

And aggregate gains from pre-closing pumps comprised about 64% of the weekly returns cementing the close at above 7,400.  

Pre-closing pumps are the most visible form of orchestrated activities or the appearance of gaming the PSEi 30. 

 

Third, as predicted, the real estate sector led the charge. (Figure 1, middle left pane) 

  

Index managers used the bounce off the telco selloffs to push the index higher, targeting the largest market caps this time around to magnify the upside momentum.   

  

Led by the furious charge of Ayala Land 6.73% and Robinsons Land 8.33%, the property index soared by 3.13%.  

  

The holding firms also played a key role. 

  

Powered by the 6.43% advance of AEV, the Holding sector came second with a weekly return of 3.01%. 

  

Once again, supporting issues provided the flank. ICT (5.34%), MER (4.76%), and JFC (+2.92%) were also significant contributors to gains of the PSEi 30. (Figure 1, middle right pane) 

  

Fourth, as it happened, parabolic upside slopes have characterized the run-ups of issues in pursuit of a higher index level. New information typically drives such price actions. 

 

But the "new" information here remains moored toward the same "reopening" equal "growth" meme. The charts of the property and financial sector evinces such spikes. (Figure 1, lowest pane) 

 

Again, "whatever it takes" to portray to the world that "revenge growth" is in place!  

 

Yet, cui bono? The average citizenry? Or political favorites running for elections? How about the hope the bonanza earned by elites will trickle down? 

 

II. The PSE Earnings Growth Illusion: The January 2022 EPS Growth Emanates from Low-Base Effects! 

 

Now to the mispriced equities and the maladjusted fundamentals. 

 

Statistical economic growth from the reopening is supposed to justify the levitation of the index. 

 

But even from the PSE-BSP data, this establishment meme seems woefully missing.    

Figure 2 

 

After almost a year of programming the public that a reopening will drive growth, the BSP-PSE Price Earnings Ratio (PER) remains at a stunning pre-Asian Crisis 1996 high! (Figure 2, upper window) 

  

Because of the lack of disclosure from the PSE on the source of its earnings per share (EPS), we assume that this represents the HIGH side of the estimates. 

 

I suspect that the ratio would be much higher once the annual reports are published.  

  

Nevertheless, the EPS (PSEi 30/PER) data shows that the much-touted growth is a function of the low-base effect.  

 

Surprise! The nominal eps in January 2021 remain at a striking 34% below the June 2020 pinnacle! 

 

III. The 2021 Buffett Indicator (Market Cap-to-GDP) Approached Record High! 

 

Figure 3 

And that’s not all. 

 

Because the market cap returns of the PSE vastly outpaced the growth of the GDP, the market cap to the PCE-adjusted GDP ratio closed 2021 at 97.7%, the third-highest on record! 

 

But the possible inflation of the GDP may have understated the Buffett Indicator or the market cap-to-GDP ratio. If true, this figure must be almost at par with the record highs! 

 

While the public’s throat continually has been rammed down with the growth meme, the evidence is that the current pumps are nothing more than price multiple expansions with little fundamental basis. 

 

IV. PSEi 7,400: January 2022 Turnover Crashes; 2021 Volume Spike as Share of Foreign Trade Plummeted!  

 

 

Figure 4 

But there’s more. 

 

While PSEi 30 closed 2021 down by a marginal .24% from a year ago, gross volume soared by 26.06%. (Figure 4, topmost pane) 

  

But this was mainly due to special block sales led by Aboitiz Power and many IPOs, especially from the REITs. 

  

In 2021, the mainboard volume improved by 16.4%. 

  

Here is the thing.  

  

In January 2022, the PSEi 30 soared to 7,361.5 (3.3% YoY) on a stunning Php 45% crash in volume! (Figure 4, middle window) The incredible plunge in volume strengthens the case of a fragile run-up of the headline index founded on "managed pumps" with little participation from the broader markets.  

  

The January 2022 dynamic was hardly isolated. These are instead extensions of past activities. 

  

For instance, foreign participation to overall volume plunged to 37.15%, the lowest since 2011! In January 2022, it was about 35%. (Figure 4, lowest window) 

  

The low volume pump likely implies that a cabal of domestic institutions took command of the "managed pumps." 

 

V. BSP’s Liquidity Operations "Owns" the PSEi 30’s March 2020 Rebound; Economic Distortions from the "Managed Stock Markets" 

 

Figure 5 

As stated elsewhere in this space, the BSP "owns" the rebound of the PSEi 30 since March 2020 through its record injections to the banking system. The BSP's direct infusions to the financial system through funding of the National Government eventually spilled over to the PSE. (Figure 5, upmost pane) 

 

By extension, the BSP's bailout translates to the indirect politicization of the domestic stock market. 

 

The thing is, the turnover of the PSE depends on disposable income, savings, credit, and or from BSP monetary operations. These are not manna from heaven and are limited. 

 

Hence, bank liquidity measures have consistently reflected on the fluctuations of the PSE volume, such as the liquid asset-to-deposit ratio and deposit liabilities growth. (Figure 5, middle and lower panes) 

 

Of course, given the significant role of "managed pumps", the possibility that some of the turnover or volume manifest "wash transactions" and many other forms of market manipulations could not be discounted.  

 

People hardly realize that the markets are intended to clear demand and supply.  

 

"Managed pumps" effectively signify price controls that lead to distortions not only on the stock market. The falsified signals diffuse into the economy through the discoordination and the misallocation of resources, as well as, the misdirection of credit distribution.  

 

In my humble opinion, because "malinvestments" are unsustainable economic factors, these are subject to eventual liquidations. 

 

As Chief Economist of Degussa and Honorary Professor at the University of Bayreuth Thorsten Polleit wrote*, 

 

In close cooperation with commercial banks, the central banks artificially lower the market interest rate through credit expansion, which increases the money supply. Consumption increases and savings decline, while capital expenditures go up. Taken together, this means that the economy is living beyond its means. While the injection of new credit and money at artificially low interest rates causes an initial surge in economic activity, this boom will and must be followed by bust. 

 

*Thorsten Polleit, Government's Money Monopoly and the "Great Reset", February 1, 2021, Mises.org 

 

Yours in liberty, 

 

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