Ten Signs of a Frothing Speculative Mania in the Philippine Stock Exchange!

 

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present—John Kenneth Galbraith, A Short History Of Financial Euphoria 

 

In this issue 

Ten Signs of a Frothing Speculative Mania in the Philippine Stock Exchange! 

I. Vertical Prices, Concentration, and Record Breadth 

II. Extreme Overconfidence, Manic Speculations 

III. Excessively Overbought, Detachment with Fundamentals 

IV. BSP and Global Central Bank Liquidity Injections and the K-Recovery 

V. Conclusion: Equal and Opposite Reactions: From Melt-ups to Breakdowns 

 

Ten Signs of a Frothing Speculative Mania in the Philippine Stock Exchange! 

 

Sir John Marks Templeton, philanthropist and the founder of the Templeton growth funds, once described the stock market cycle as, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria…The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” 

  

Neither skepticism nor pessimism has been reached to establish the typical birth of a bull market. Yet, people have been made to believe that political solutions via “vaccines and reopenings” are sufficient and necessary ingredients for the rekindling of a sustainable bull market.  

  

Has the BSP overridden or conquered the stock market cycle? 

  

Or, are we witnessing a bear trap writ large? 

 

Figure 1 

I. Vertical Prices, Concentration, and Record Breadth 

 

First, the price actions of many issues or even indices have risen vertically.  

 

Since the March lows, there have been two episodes where key sectoral indices have returned by about 20% in four weeks.  Or, the first sowed the seeds of the second melt-up.  

 

Second, the distribution of sharp price increases of the composite members of the headline index has become asymmetric. 

  

In the first installment, except for the financials, all the sectoral indices spiked by at least 20%.  

  

In the current series, the share weight of gains has become concentrated on the property and the holding sectors. In the meantime, the price momentum of one of the previous leaders, the service sector, appears to be fading.  

 

The recent upside thrust amidst the narrowing participation or widening skewness of performance could be signs of incipient exhaustion or seminal indications of a distribution pattern in the works. 

 

Third, bullishness may have reached an interim peak. For the first time since late 2015, market breadth has exhibited a bias in favor of the bulls, with the number of advancers outclassing decliners. However, following the recent all-time highs, the pace of bullishness may have reached extreme levels.  

  

While the current behavior of the market internals partly resembles the low of 2009 in the prism of the PSYEi, which became a foundation for the 10-year bull market, there is a stark divergence between the fundamentals then and the present period. 

 

Figure 2 

 

II. Extreme Overconfidence, Manic Speculations 

 

Fourth, the average daily trade, which represents the number of transactions in a day, hit another milepost high last week, the second for the year. The first event occurred when the headline index reached a low in March and rallied ferociously from it. Unless incited an onrush of new accounts, this may represent the rapid churning of trades by active participants.  

  

Fifth, the average daily traded issues, which represent the number of issues traded daily, reached the second-highest level last week. Etched a few days apart from when the headline index carved the milepost 9,058.62 level in January of 2018 was the latest pinnacle of the average daily trade. 

 

Record trade turnover, and the second to the all-time in average daily trades, as well as the highest spread in market breadth in favor of the bulls, exude extreme overconfidence, and manic speculations. Furthermore, the serial massive mark-the-close pumps on the headline index appear to continually exhibit the brazen gaming of market prices by some participants.  

  

Sixth, the peso daily main board volume hit a multi-year high last week.  

  

Unlike today, the corresponding robust increases in the board volume transactions and healthy market internals characterized the foundations of the genuine bull-market of 2009-2013.  

  

Last week’s vertical price actions, which represent a continuum from March, however, accompanied by a burst in volume resonant of 2015 and 2017 episodes, may eventually, frazzle like its forebears. 

 

 

Figure 3 

 

III. Excessively Overbought, Detachment with Fundamentals 

 

Seventh, the headline index has reached extremely overbought levels, as measured by the MACD and the RSI, which are at epic heights. Lopsided buying or selling conditions have previously led to amplified volatility in the opposite direction.  

 

And though the index has managed to fill the gaps from the March meltdown, it is about to test two major long-term resistance trend lines from 2009.   

 

However, over the interim, the recent golden cross, or specifically, the crossover of the 50-day moving averages, which rose above the 200-day moving averages, provides temporal support to the index.  

 

Eight, fundamentals should still matter over time.   

 

Like developments overseas, the local stock market appears to be veering away from reality.  

 

From the Businessworld (November 11): THE Development Budget Coordination Committee (DBCC) may revise macroeconomic projections once again, after latest data showed the economy is recovering slower than expected. “The DBCC will be meeting immediately to reassess the latest numbers to see if there is a need to adjust the full-year projections,” Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua said in a media briefing Tuesday. Gross domestic product (GDP) slumped by 11.5% in the third quarter, after a 16.9% contraction in the second quarter pushed the country into its first recession in nearly three decades. In its July 28 meeting, the DBCC projected GDP will shrink by 4.5-6.6% this year, before growing by 6.5-7.5% in 2021 and 2022. 

 

With a second consecutive quarterly 11.5% slump in the 3Q GDP, the National Government may likely revise its macro targets downward for the year. Again. And again.  

 

The point is not that they have been wrong, yes they have been consistently and flagrantly wrong, but rather, their rapidly shifting projections do not even seem to be even driven by data or by context.  

 

The most important lesson, aside from the moving goalpost, has been that the NG subjected the population to a repressive social “health” policy when they were either clueless of its economic implications or had an unstated different agenda in mind.  

The Failure of the Centrally Planned ECQ Health Policy, Statistical Charades, and 1Q Real Estate Divergences July 12, 2020 

 

The mainstream’s targets had also been wide-off their mark. 

 

Figure 4 

 

The GDP is a statistic of the National Government’s formulation. With public spending down, as measured in their fiscal accounts, authorities should have known this was coming.  

 

After hitting a record high in the 2Q, public spending as a share of GDP dropped to 14.79% as growth decelerated substantially to 8.15% current or 5.84% real, hence amplifying the drag on the GDP, which registered the second steepest contraction since 1981! Yet, public debt soared by 18.5% over the same period [explanation in the coming outlook]. 

 

To be clear, this author does not believe that any value added to the economy from public spending.  

 

As noted earlier: 

 

So, 3Q’s aggregate public and infrastructure spending, aside from revenues, suggest a GDP still in deep contraction, though partially improved relative to the 2Q…. 

Dismal 3Q Fiscal Performance Point to Another Substantial GDP Decline! November 1, 2020  

 

But all insisted that GDP as a number, the Philippine economy remains invulnerable to any downturn. Neither a credit bubble nor a big government bubble would tarnish its macroeconomic trend.  

 

And one can guess that the PSA’s data may even be an upside to their estimates. 

 

Despite being told that the economy is supposed to recover meaningfully from such regulatory easing, mobility indicators from Apple and Google tell of a different story… 

 

And so while loosening has been the well-received story that has populated media, the economy has been operating substantially below capacity. 

Decoupling! The BSP Leads Emerging Markets in QE Use! Stock Market Meltup: More Reopening or BSP’s Php 540 billion of QE Injections? October 25 

 

And here’s the thing, in the face of immense income, revenue, job losses, real per capita household consumption GDP shrank 10.5% in the 3Q. 

 

3Q Financial Statement disclosures of composite members of the PSE appears to bolster the case of deteriorating conditions of consumers. 

 

The aggregate revenues for listed retail firms, composed of Jollibee, Shakeys, Maxs, Puregold, Robinsons Retail, Metro Retail, Philippine Seven, All Home, SSI Group and Wilcon Builders, had only been up by 10.43% in the 3Q on a quarter-on-quarter basis.  

 

Though a slight improvement from the 2Q contraction of 23.2%, compared to the 1Q, retail revenues still dropped by 15.13%! 

 

Please note that the growth of international revenues, which was up 11.6% in the 3Q, embellished Jollibee’s revenues. On the other hand, domestic sales plummeted 46.82% in the same period.  Excluding JFC’s international sales, the revised aggregate retail numbers would translate to a smaller 9.36% growth (QoQ) in the 3Q and a bigger decline of 16.98% compared to the 1Q. 

 

And that’s just the retail sector. Despite the power push on share prices of key property issues, 3Q activities have been turning out to be a disappointment. Once the PSE publishes the FS of all the members of the property index, we shall deal with this. 

 

In any case, panic bidding has engulfed the PSE even as uncertainty and underperformance have loomed larger than the mainstream has expected.  

 

IV. BSP and Global Central Bank Liquidity Injections and the K-Recovery 

 

Ninth, the BSP’s QE, infused mostly to the banks from March, had not only been instrumental in keeping the PSE afloat but likewise energized a frenzied bid in the PSE following additional rounds of liquidity infusions in October.  

 

The BSP’s net claims on the national government surged by 45.7% in September to lift Year to date balance to Php 439.82 billion. 

 

Yet, the blarneys of successful vaccine trials and the prospects of returning to the Pre-Covid era have rationalized the speculative orgy. 

 

Figure 5 

Concerted liquidity injections by global central banks, including the BSP, have been disguising insolvency risks by pushing financial assets to extreme record levels. The hope is that increased consumption by those benefiting from these will trickle down to the general economy through the ‘wealth effect’ mechanism. With last week’s melt-up, the MSCI World (MSWORLD) and Emerging Market ETFs (EEM) are knocking at historic highs. 

  

If, by betting on financial assets, money can be generated for free, why take more risk in the general economy by investing?  

 

And even if we grant the possibility of its effectivity, how can the wealth effect trickle down when governments, by increased interventions through asset purchases, have been socializing or taking over implicitly the financial markets? 

 

Finally, related to the above, the vertical surge in global stocks may be producing a K-recovery.  A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession, according to Investopedia. For instance, the net worth of American billionaires zoomed in 2020, even as the economy has struggled. That's mostly from record highs in the US stock markets fueled by the US Fed’s liquidity expansion. 

  

Here, the distribution of ownership of listed securities at the Philippine capital markets, as well as the distribution of trading participants should give us a clue of the main beneficiaries of the central bank liquidity pumps. 

  

In the US, it is called Wall Street versus Main Street. The ramifications of which would become apparent as people become more divided politically. 

 

V. Conclusion: Equal and Opposite Reactions: From Melt-ups to Breakdowns 

 

In the finale, while additional BSP actions may extend the lifespan of overbought PSEi levels and embolden speculations that should magnify its divergence from economic conditions, such would only aggravate the risk environment that should intensify the buildup of destabilizing economic, financial, and political forces over time. 

 

Furthermore, as local financial markets have become increasingly dependent on the BSP, any withdrawal of support should expose its vulnerability to disorderly adjustments.

In any event, the supply shocks from the ravages of the recent typhoons should escalate the fragility from the deepening imbalances embedded in the political economy.  

 

That is, following Newton’s law that for every action there is an equal and opposite reaction, increasing accounts of market melt-ups, which underscores mounting economic and financial misallocations, should be arrayed with the prospects of harrowing breakdowns.  

 

 

 

 

Inflating the PSE’s Bubble: The Bid-en Global Financial Assets Boom Compounds on the BSP’s Php 1.9 Trillion Liquidity Infusions

 

As in all periods of speculation, men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy—John Kenneth Galbraith, The Great Crash 1929, published 1954 

 

In this issue 

Inflating the PSE’s Bubble: The Bid-en Global Financial Assets Boom Compounds on the BSP’s Php 1.9 Trillion Liquidity Infusions 

I. No Free Lunch: The BSP’s Php 1.9 Trillion Liquidity Infusions  

II. Philippine CPI: The Cantillon Effect on Street Inflation, The Peak of the Great Philippine Treasury Boom? 

III. BSP’s The Inflation Tax: Negative Real Rates To Inflate Debt Away 

IV. BSP’s Liquidity Injections Magnify the Stock Market Bubble! 

V. The Bid-en Global Financial Assets Boom!  

 

Inflating the PSE’s Bubble: The Bid-en Global Financial Assets Boom Compounds on the BSP’s Php 1.9 Trillion Liquidity Infusions 

 

I. No Free Lunch: The BSP’s Php 1.9 Trillion Liquidity Infusions  

 

The effects of the massive Php 1.9 trillion of liquidity infusions (and counting) will eventually manifest itself in the economy and the financial markets through prices (goods, services, and or assets), allocation of resources, and credit conditions.  

 

Unless the credit impairments in the banking system have been as large to negate these, once the Bangko Sentral ng Pilipinas’ injections percolate into the economy, relative price surges are the likely ramifications. Yet, both the National Government (NG) and the BSP intends to offset or mop the money tsunami with more debt issuance.  

 

Examine their financing mechanism. First, the NG issues debt to finance public works/spending. Then, to finance NG debt, the BSP prints peso, channeled directly and indirectly (mostly) through banks and financial institutions via deposits. Later, to counteract its currency or peso issuances, the BSP generates debt in competition with the NG. So, the money printing and debt response of the BSP actually resemble a switch-and-bait scheme. 

 

Again, such a radical policy has been assumed by the establishment as a necessity. 

  

Interestingly, barely anyone bothers to ask WHY such extreme measures are required when the macroeconomic fundamentals are supposedly sound as popularly sold to the public.  Importantly, why has the mainstream been reticent of the underlying costs of such measures?  

If benefits can only accrue from the use of the money printing press, why not use them always? 

 

Like the lockdown, the citizenry is once again a guinea pig of the BSP’s gambit.   

 

II. Philippine CPI: The Cantillon Effect on Street Inflation, The Peak of the Great Philippine Treasury Boom? 

 

For now, weak demand has been able to counterbalance the deluge of the BSP’s liquidity infusions. 

 

According to the BSP: Year-on-year headline inflation rose to 2.5 percent in October from 2.3 percent in the previous month and was within the BSP’s expected range of 1.9-2.7 percent for the month. The resulting year-to-date average inflation rate of 2.5 percent was within the Government’s target range of 3.0 percent ± 1.0 percentage point for the year. By contrast, core inflation—which excludes selected volatile food and energy items to measure underlying price pressures—eased to 3.0 percent year-on-year in October from 3.2 percent in September. Meanwhile, month-on-month seasonally-adjusted inflation increased to 0.4 percent in October from nil in the previous month.  

 

 

Figure 1 

Rising food prices from the typhoon and disease-related disruptions on supply have boosted the headline CPI, so deduced the mainstream experts.  On the other hand, the non-food component, the CORE CPI, which still registered feebleness, continues to manifest enervated discretionary spending of consumers.   

 

In short, the gargantuan liquidity injections, manifested by surging money supply growth, have done little to boost demand. 

 

But aside from the superficial portray of reality, here is what’s really happening. 

 

The impact of liquidity injections signify a process.  

 

The Cantillon Effect tells of the divergent impact of money supply’s entry to the economy.  

 

As Austrian economist Mark Thornton explained, (bold added) 

 

It begins with an increase in the money supply and who first receives the money. That means the increase of money changes income distribution in favor of who first receives the new money. Then, depending on the preferences of those who first receive the money, some goods will experience an increase in demand, while other goods will experience a relative decrease. This in turn changes outputs of various goods and ultimately investments. Cantillon famously noted that if the new money comes into the hands of savers, that the interest rate would decrease, but if it comes into the hands of consumers, the interest rate would increase, as entrepreneurs would need to borrow more to meet the increased demand for goods. 

 

Mark Thornton, Money, Inflation, and Business Cycles: The Cantillon Effect and the Economy 

 

As the primary recipients of such BSP policies, whatever the banks and financial institutions use or spend on, relative prices from these are bound to increase. The bureaucracy represents the secondary point-of-entry for the newly minted money. 

 

That is, from such entry points, the allocation and spending process should lift a larger spectrum of relative prices over time. 

 

When the BSP instituted its QE in the 4Q of 2015, this eventually diffused into the economy to send price level higher, as measured by the CPI, which climaxed with a rice crisis in 4Q 2018. 

 

A 14-month gap emerged from the peak of M3 (August 2017) and the zenith of the CPI (October 2018) to showcase the transmission mechanism of the Cantillon effect from the first wave of QE. 

 

In any case, such gigantic liquidity injections (about 10% of the NGDP) will most likely fuel runaway street prices in the coming months/years. That is in the condition that the scale of credit problems of the financial institutions have not been as large as the amount of liquidity used to bail-out the system.  

 

Importantly, another important consequence would be to amplify the misallocation of finances and resources. The current developments in the stock market are manifestations of these. 

 

The spread of Philippine Treasuries has been steepening to indicate higher inflation ahead. While wider spreads tend to benefit the banking system through bigger interest margins, ascendant rates for a highly levered system will tend to offset such benefits.  

 

And the likelihood is that gargantuan infusions by the BSP won’t be ending anytime soon. 

 

From the Businessworld (October 21): “With the huge amount of liquidity injected into the system, we are fully aware of the need to carefully assess the appropriate timing of the unwinding of all these measures,” Mr. Diokno said in a credit rating call with Moody’s Investors Service held on Oct. 14. “Doing it too late or too early may have serious repercussions on the economy,” he added. 

 

On the other hand, the Philippine great bond boom, which has supported the banking system’s topline, appears to have climaxed.  

 

Unless banks resume lending to the economy, artificial support from the Treasury boom is about to fade. 

 

III. BSP’s The Inflation Tax: Negative Real Rates To Inflate Debt Away 

 

Figure 2 

 

Because pushing interest rates down represents the main direct effect of such colossal liquidity injections from the BSP, it has caused a stark divergence between bond yields and the CPI. 

 

As such, the yields of 10-year Philippine Treasuries, which have recently dropped to historic lows, have dramatically deviated from climbing CPI rates. The spread or the difference of the 10-year yield and the CPI have plummeted to a 6-year low. Such subsidy, through lower repayments of government’s debt, comes at the expense of savers. This is the inflation tax or financial repression.  

  

Such deviations are also signs of distortions embedded in the pricing system.  

  

Back in 2014, when the CPI surged as the growth of money supply exploded by over 30% in 10-straight months, Philippine Treasury yields failed to keep pace with the CPI, hence the disparity.  

 

In the present circumstance, falling yields have been a function of QE policy use at an unprecedented scale. 

  

The negative spread between the CPI and 1-year T-bills also demonstrates the Financial Repression in action.  

 

However, the steepening spread of the yield of the 10-year bond and 1-year bill may be pointing to the reversal of such implicit subsidies enjoyed by the NG.  

  

Through negative real rates, the government intends to inflate away its mounting liabilities. Sadly, this means a lower standard of living for the average citizenry. Even retirees of the government bureaucracy will lose from such inflation tax. Stagflation will likely encompass the Philippine economy.  

 

IV. BSP’s Liquidity Injections Magnify the Stock Market Bubble! 

 

While the spectacular vertical moves of the share prices of many issues may have perked up the adrenaline of the speculative crowd, principally the members of domestic financial institutions, it is a concerning sign of massive marketplace contortions brought about by the throwing-the-money rescue policy of the BSP. 

 

Naturally, as the primary recipient of liquidity injections, banks and the financial system have used such spare money to trade and buoy financial markets, instead of lending to the economy, which represents a high-risk engagement. 

 

The BSP is due to publish the updated liquidity and bank lending metrics for September next week. 

 

By the way, the so-called profits declared by banks have emanated by the near halving of deposit expenditures in the 3Q, which are likely from the implementation of Bayanihan 2.0! We shall talk about this once the full details become available. 

  

So, while such the massive pumps in the broader market have created a façade of a bull market, last seen in 2009-2012, the fragile support from the BSP measures, to shore up the asset prices to stave off deflationary consequences on collateral, has only magnified the discrepancies between asset valuations and its underlying fundamentals! 

 

For the 10-component issues of the headline index, which published their 3Q Financial Statement last week, the so-called reopening has brought about only a startling 2.6% increase in revenues, Quarter-on-Quarter!  Or, using the 1Q as a base point, revenues dropped 9.7% in the 2Q, while the 3Q had a 7.3% decrease. Some improvement, eh?  

 

And once again, the only meaningful gain on their balance sheets has been on debt accumulation! 

 

Think of how this applies to the GDP? By the way, next week, authorities will announce the survey-based 3Q GDP. Insignificant improvements in social mobility, poor fiscal conditions, and weak 3Q financial statements published by a third of the members of the elite index prognosticate paltry improvements relative to the 2Q. But then again, GDP is a political statistic. 

 

That said, the BSP’s liquidity infusion policies have only been inflating a massive bubble! 

 

V. The Bid-en Global Financial Assets Boom!  

 

But here is the thing. Exogenous events have further compounded the panic buying spree of local assets. 

 

US media repeatedly said that the triumphant sweep of the "blue wave" meant a buy on US stocks.  

 

But when election results showed a nail-biting cliff hanger and that there was no landslide, with surveys falling flat on their faces once again, similar to Brexit, and the 2016 US Presidential elections, the narrative changed.  

 

It was to be a Bid-en up for the global asset markets! 

 

 

Figure 3 

 

The plunge in the US dollar prompted a buying spree that covered almost every financial asset: aside from stocks, bitcoin (traded above USD 15,000, a 2018 high), commodities, treasuries, and bonds. 

  

The unwinding of hedges, mostly through the derivative markets, must have spurred a global risk ON. 

 

Asian assets rallied ferociously this week. Except for India’s rupee, Asian currencies soared. Indonesia’s rupiah and the Thai baht surged 2.84% and 1.78%. The Philippine peso added .37% this week.  

  

Asian bourses averaged a phenomenal 3.98% return this week. National benchmarks consisting of Hong Kong’s Hang Seng, Korea’s KOSPI, Singapore’s STI, Japan’s Nikkei, India’s Sensex, and the Philippine Phisix stormed higher by 6.66%, 6.59%, 6.39%, 5.87%, 5.75%, and 5.72% respectively.  

  

Japan’s Nikkei hit a 29-year high. 

 

Figure 4 

The US S&P 500 had the best showing during the election week since 1932! 

 

The global supply of negative-yielding bonds hit a historic USD 17.1 trillion! The yields of US junk bonds and 30-year mortgages tumbled to fresh lows!  

 

Again, how sustainable are ebullient asset prices fueled by the printing press of central banks in the face of continued dismal economic performance?  

Chart: How to Trade the US Elections