Phisix 7,900: Knowing The Price Of Everything And The Value Of Nothing

The current state of the market has reached what literary wizard Oscar Wilde described as “knowing the price of everything and the value of nothing”.

Here is a trivia. How did the Phisix respond to the declaration of martial law in September 1971? Answer: on a monthly basis, the Phisix crashed by a shocking 35%!!!

Though the incumbent likens the current martial law with its antecedent, I know that today’s martial law is different from 1971.

Last month, the Phisix even climbed 2.3%

The Phisix hasn’t been jarred by the slowing GDP and eps growth, the Marawi crisis, the declaration of martial law and by a lone wolf attack at a casino.

Such showcases the prevailing entitlement mentality of special interest groups, comprising mostly the banks and non-banks financials, which now sees stock prices as a one-way street. For them, all forms of risk have been assumed away – out of existence!

The day of the attack on a casino, the Phisix even soared by about 1% to 8,000 at the opening bell, for the second time in barely a month, but succumbed to late day selling.

The better term is PUMP and DUMP!

 

Last Friday’s mark on close dump orders had been pretty awesome! (see leftmost pane) Some notable numbers: JGS -2.85%, MBT -1.6%, SM -1.3%, GTCAP -1.3%, BPI-1.2% and TEL -.8%! Stunning!

Imagine orders from a 6-minute transition window creating such fantastic price changes to determine the closing numbers???!!!!

These dumps wiped off the gains (-.56%) that transformed into a loss for the Phisix (-.25%)!

And during the week, days where the Phisix suffered a decline, sauve qui peut pumps were used to mitigate losses.

That’s how one breaks 7,400 and get to 8,000. And this is called normal…only in the Philippines!!!

The essential function of the stock market is to coordinate demand and supply of capital and savings through the pricing system. Apparently, not even highly paid ivory tower experts, analysts and CFAs appear to understand this basic economic function.

So when the pricing system is impaired so is the economic structure that pillars them. (As evidence, media has recently acknowledged the emergence of significant number of vacancies in the race to build shopping malls)

 

The evidence is all over.

Such rampant price fixing process has engendered magnified price volatility!

This week’s .51% jump in the headline index comes with 70% of issues with at least 1% price change, 47% with at least 2% and 40% with a minimum of 3%!

Such marvelous episode of volatility signifies a symptom of the deepening pricing or financial instability. And this should be one of the principal reasons why the Newton’s law will eventually and ultimately govern.

And because of the obsession to maneuver the Phisix past its previous record, what has been happening is that most of the price actions have centered on the top 15. Most especially the top 5 which carries a market cap weight of now FORTY percent! (as of Friday, June 2)

For instance, the hefty price gains of the top 5 had been responsible for over 54% of the market-weighted performance of the PSEi’s weekly .51% gain.

And as a result of massive pumping on the biggest market caps, the distribution of imbalances can be seen via the priciest of securities which have likewise been concentrated on the top 5.

The slope reveals the direction of price pumps through the years.

And yes, 2 Sy issues once again set new records this week. SM hit its fourth record-breaking high for the year while SMPH hit its third.

So 50% or half of the annualized 22 Price Earnings Ratio (PER) of the PSEi 30 (based on the market cap) has been due to the top 5.

And because of the difficulties in the participation of broader issues, the PSEi have tactically been driven to current levels via vertical prices!

 

And because of the concentrated vertical price pumps, record highs have either been reached or within the vicinity for 6 issues including SM and SMPH

So about 10 of the biggest market cap firms have been responsible for PSEi at 7,900…mostly through vertical price pumping!

One would wonder how econometric and statistical models of the establishment firms work.

Here’s the thing. The price level or the form doesn’t signify the essence. Rather the main issue is the substance or whether these actions are sustainable or not.

Vertical pumps have failed in two attempts as shown above. The 2015 version was more disciplined of the three previous records.  Yet it also faltered.

Now the Phisix is experiencing the third episode of vertiginous vertical pumping. Whether this ends in a terminal BW-SSO dynamic or another 7,400 jumping rope is something to be experienced. 

Nevertheless, what is unsustainable won’t last. In the Phisix’s 50 years of existence, ALL vertical price pumps succumbed to the Newton’s Law. This time won’t be different.

And given all the world problems, (housing and stock market bubbles, raging debt levels, intensifying geopolitical risks, rising protectionism or deglobalization) which are being suppressed by central bank interventions, I understand that world stock markets could similarly be in quasi-blowoff phases (see below FAW chart).

And all it takes is one proverbial prick to pop these bubbles. The chain effect would be on a global scale.

Oh My, Has the BSP Commenced on Tightening???

2016 was a year of records. There were many unprecedented actions that were largely unreported.

At Php 353.422 billion, fiscal deficits (nominal peso) swelled to its highest level ever.

The Bangko Sentral ng Pilipinas (BSP) bought a landmark Php 341.55 billion worth of the National Government’s Debt. Or the BSP engaged in the most aggressive quantitative easing ever.

The official interest rate was forced down by the BSP to historic lows.

Nominal peso based bank credit zoomed to phenomenal heights.

In gist, a historic degree of monetary and fiscal stimulus buttressed the Philippine economy!

Because there is no such thing as a free lunch, such stimulus carries with it costs.

The sharp rise in real economy prices, sustained pressure on the peso, exceptionally volatile prices of financial assets and much more… were among the key impact or costs that emerged with it.

 

Because of such costs, now the BSP appears to have second thoughts on pursuing their side of the stimulus.

The consensus thinking is that because the BSP knows what it is doing, it can only have a beneficial effect.

No one seems to ask what role does the central bank take? How have their actions affected commercial activities?

There seems little interest to understand the roots or origins of aggregate revenues and earnings. Monetary policies play a crucial role in shaping them.

Last week the BSP reported its depository survey corporations for April. To my surprise, the BSP’s net claim on NG debt posted a gargantuan Php 149.3 billion plunge for the said month! (upper window)

The lower window above illustrates that the BSP went into a panic mode in mid-2015 where it mounted an aggressive program to inject liquidity into the financial system by drastically buying NG debt from financial institutions.

Aside from impelling for private sector spending financed by bank lending spree, the BSP’s actions provided liquidity for banks to finance the government insatiable appetite to spend. The resultant spending actions spurred money supply growth in the financial system. Yes, the PSEi’s 6.8% revenue and 12.1% earnings growth in 2016 was a consequence of such historic stimulus. (April 2017 PSE report)

By the end of the 1Q in 2016, the BSP’s rate of NG debt monetization slowed but still increased nominally. The slowing rate of NG debt monetization reflected on M3 even as bank credit expansion continues to bulge. Over the last few months or since the advent of 2017, the BSP’s subsidy of NG expenditures dramatically dropped to less than 10%. M3 continues to follow such trajectory.

At the same time, the slowing M3 appears to have percolated into government’s CPI. At 3.4%, April CPI, which was similar to the other month, appears to have peaked.

 

The PSA’s General Retail Price Index has sharply dropped for two successive months. April’s 3.9% has signified a 120 bps retrenchment from February 5.1%!

With the BSP backing off from providing further subsidies to the NG, the stimulative effects of such monumental subsidies appears to be losing traction.

With the BSP’s implied tightening, this leaves all the onus of weightlifting the eps and the GDP to the banking system.

 

What prompted the BSP’s actions?

My initial impression was that government’s revenue collection in April was a smashing success such that it could have broken the lethargic trend

Since the deadline for tax filing for the previous year is on April, the month generates the most revenues. Yet government revenues (BIR, BoC, and Non-Tax) slumped by 4.36% yoy mostly due to non-tax revenues which plummeted 54.16%. Government revenues (in millions of pesos) continue to exhibit what appears to be a critical inflection point (lowest window).

Bureau of Treasury data here.

Meanwhile, April tax revenues (BIR + BoC) grew by only 3.83% - a snail pace (upper window). That’s LESS than half the Nominal GDP rate of 9.0% (NGDP) in the 1Q!!!

Yet the monthly BIR + BOC growth rates continue to shrink (middle window)!

April’s budget surplus was the second smallest in the last four years after 2015!

No wonder the government is after a tax reform. That’s because the tax reform represents a general tax INCREASE!

 

So given that the BSP will now sit on the sideline, just how will the national government finance its ambitious overall spending program especially the enormous Php 8.4 trillion infrastructure projects?

Well, the answer is by debt!

Domestic debt soared 10.37% in April. Foreign debt growth decelerated to 4.53%. Total debt swelled by a hefty 8.27% in the same month. Month on month government debt grew Php 180.6 billion!

Bureaus of Treasury data debt data here.

Debt financing (PLUS Php 180.6 billion) has taken over the BSP’s debt monetization (MINUS Php 149.3 billion).

So the public sector will now compete with the private sector for the public’s savings (both in domestic and international markets)! Yes, the crowding out effect has come into motion!

Remember, one major indirect provider of monetary liquidity in 2015-2016 has been the BSP. By retrenching subsidies to the government and to the banking sector, the BSP effectively engaged in partial tightening.

And again, the government will now again compete with the private sector for access to savings. Such crowding out will likely drive up interest rates and siphon liquidity in the system. Monetary tightening will, thus, put pressure on the USD PHP (could be happening now) and on risk assets. And risk assets have been acutely dependent on the sustenance of loose money.

And just what will happen to the continuing frantic race to build shopping malls, condo office and residential and horizontal housing projects and hotels??????????? Will vacancies explode???

And given the developing weakness in the government’s revenues and where deflation signifies an ideological taboo, it won’t take long where the BSP will most likely intervene by providing subsidies again!

A Predecessor To The Resorts World Manila Attack: Mexico August 2011

"Kung ISIS siya, namaril na siya doon (If he was from ISIS, he would have shot the people there)," Dela Rosa also said, explaining that a terrorist would have carried out a suicide bombing to inflict maximum casualties.”-Rappler.com,  June 2, 2017

Because of the lack of evidence of the use of firearms to shoot people down and also because the assailant “stuffed his backpack with P113 million in stolen casino chips” (Inquirer June 3, 2017), the administration declared that the attack at the Resorts World Manila was a work of a “crazy man” who “did not want to kill” (Inquirer June 4). 

And because terrorism was ruled out in the Resorts World Manila attack which unfortunately and sadly claimed 38 lives, the administration allayed concerns that martial law would be imposed nationwide (GMAJune 3). 

Martial law (Proclamation 216) was imposed over Mindanao last May 23 supposedly in response to the outbreak of violence by a rogue ragtag group of ‘terrorists’ in Marawi City. The Marawi siege and mopping up operations reportedly continues (GMA June 3)

Earlier, the administration floated the idea of a nationwide martial law “if the threat of ISIS persists” and spread elsewhere outside Mindanao (Rappler, May 24)

So in spite of the claim by ISIS that the Resorts World Manila incident was their handiwork (Rappler June 2), it’s probably better to just accept the administration’s interpretation of the current events.

Today, the Inquirer posted RWM's in-house video of the assailant’s “methodological” actions which implied premeditation or a planned set of actions.

But let me share a little secret.

What happened to Resorts World Manila would hardly seem unparalleled.

Flashback in August 2011, a group of armed men barged into a casino in Mexico.  Similar to the Manila, instead of shooting people, the group set ablaze a segment of the casino. The unfortunate incident trapped and claimed 52 lives. But in contrast to Manila, the Mexican president declared that the killing was “perpetrated by "terrorists" motivated by greed” (CNN August 26, 2011)

And unlike current events where the risks of violent actions have been targeted at religion based terrorism, the Mexican episode was blamed on drug cartels in reaction to the war on drugs implemented by the administration (CBS August 26, 2011)

Thanks to the gambling chips the scenario changed for Philippine politics - where events are all subject to the 'desired' official interpretation.

The reason why this should be kept a secret is that the alternative likely political option - nationwide martial law - would be harsh and drastic if this would be labeled as a 'terror event'. 

Ignorance is, thus, a bliss.