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
In this issue
Mania Shifts to Energy Producers! Reading through the Spike of Aboitiz Power’s Share Prices!
I. Patterns of Pre-Closing Pumps and Dumps, Redux
II. Mania Shifts from Telcos to Energy Producers
III. Who’s Driving the Gains? The Most Liquid Entities
IV. Aboitiz Power: Debt Growth Outperforms Revenue and Income; Energy is a Mature Industry
V. AP’s 12-Year Rounding Top, PSEi 30’s Rising Wedge
Mania Shifts to Energy Producers! Reading through the Spike of Aboitiz Power’s Share Prices!
I. Patterns of Pre-Closing Pumps and Dumps, Redux
There they go again!
The holiday-abbreviated week opened with a fantastic pre-opening rescue pump!
Down by almost 2%, the index managers went on a frantic bidding spree by 12 noon, pared the deficit to around -1.08% by the pre-closing bell. When the run-off phase opened, the index was up by an amazing 1.01% from a whopping 140.44 points or by a stunning 2.09% pump, one of the largest ever!
Figure 1
Volume spiked from Php 6.811 billion at the pre-close to Php 13.78 billion at the final bell. Or, the 2.09% operation involved a significant segment of the Php 7.1 billion transactions in the last 10 minutes of the session!
The volume of Php 7.1 billion in the FINAL 10 minutes was even significantly considerable than the average daily volume of July and August!
Such colossal volume demonstrates the extent of desperation employed to engineer the upside close of the major equity bellwether!
As one can observe, shaping the index takes only 15 minutes (5 minutes of float, 10 minutes of actual trade). So, why the heck go with the rigmarole trading sessions of the 3.5 hours every day?
As further proof of the concentration of trading activities, 63.84% of the transactions were accounted for by the top 10 brokers! The volume of the top 6 issues accounted for 36% of the mainboard.
As earlier noted,
Are dumps a cue for the index managers to takeover?
Well, the answer is yes!
The index was not even allowed to undergo a correction: It took a pre-closing dump for it to happen. But again, dumps are signs for coming pumps.
Perhaps, to avoid the fate of a bearish rising wedge chart, losses had to be avoided by forging the closing numbers. [More below]
And so the PSEi 30 racked up a 1.63% advance this week that piggybacked on a two-week winning streak. The three-week returns, thus, swelled to 9.13%, once again on meager but otherwise improved volume.
While the average person may not see its importance, a disciple of the markets knows that price controls or manipulation lead to distortions or imbalances.
And with that in mind, paraphrasing the late economist Herb Stein, "all unsustainable trends stop".
II. Mania Shifts from Telcos to Energy Producers
Figure 2
But because these pumps (and dumps) barely signify a product of spontaneous price discovery of the dynamic economic balance, a few issues benefited from distilled actions.
For instance, in the context of sectoral performance, the holding firms (+3.17%) and the industrials (+2.95%) delivered the gist of this week’s gains.
In detail: The power generators led by Aboitiz Power (+11.07%), First Gen (+12.72%), and AC Energy (+8.48%) took the helm, which boosted the AP’s parent AEV (+11.41%).
Since these were lightweights, the market cap heft had to be provided by heavyweights SM (+4.62%) and BDO (+3.39%).
The point being, after the telcos, the mania has now spilled over to the energy sector.
The unassuming energy sector took up the void left by the telco sector, which took a pause from its latest sprint.
Some of the firms, like ACEN and SPC, carved new milestone price highs this week. Others, like FGEN and AP, produced extraordinary returns. FGEN raced to knock at the door of its January record this week after it disclosed an offer from a Singaporean buyer for 5.7% of its shares.
But unlike the telcos, these feats emerged without much fanfare. Deficiencies in trading volume and the lack of rationalization by media exhibits its reserved role.
But here is the backstory.
Little known SPC was the first to reach a milepost in the 4Q of 2020. FGEN hit a record in January, which coincided with the zenith of the ACEN’s first leg sprint. Both SPC and ACEN found their second leg on the 2Q 2021. ACEN’s momentum intensified with its entry to the PSEi 30.
The rising tide is supposed to lift all boats. This phenomenon may explain AP’s vertical upside from the other week. Meanwhile, the low-volume buying frenzy in this sector appears to have percolated to SHLPH.
On the other hand, such bonanza has yet to spill over to the shares of three power producers, ACR, PERC, and GREEN.
Nonetheless, the three energy producers of the PSEi 30 outperformed the sector and the rest of the field, which suggests a buying rotation to push the index higher by broadening its participation.
As noted last week,
And more, perhaps, coming to realize that the current construct of index poses heightened market risks from concentration, index managers maybe engineering a redistribution of market share weightings to a broader spectrum of the elite membership.
An Escalating or Climaxing Telecom Bubble?! Globe and Converge Prices Go Vertical! August 29
Including ACEN, the % share of the free-float market cap of the power generators relative to the benchmark soared to its highest level.
III. Who’s Driving the Gains? The Most Liquid Entities
Figure 3
BUT the bulging three-week returns came amidst a mixed market breadth. That is, gains of the index manifest limited broad market participation. Ironically, decliners led advancers by a slight margin in the last two weeks.
Cumulative foreign participation bounced alright from the support its declining trend to 46% of total output this week, but net inflows signified a marginal Php 449 million. The category of foreign flows may not always be from foreign funds. Foreign flows may include trading activities of locally owned offshore companies.
Finally, lackluster broad-based activities, such as average daily trades, reflect the muted sentiment of retail participants. The low volume, wishy-washy market breadth, and uninspiring sentiment indicators reinforce such retail tentativeness.
Needless to say, with low retail and foreign participation, the recent gains have most likely emanated from domestic financial institutions and affluent individual players.
All these tell us much about how thin the stock market is, thus, susceptible to controls or manipulations.
With bank savings growth rate on a decline, the highly liquid entities or those who possess savings are the only ones capable of indulging in the stock markets.
And liquidity does not only implies savings but having access to credit lines too. And with the economy under pressure, beneficiaries of bank rescue and fiscal policies like the domestic financial institutions, the political bureaucracy, and firms of the elites are the most liquid economic agents.
IV. Aboitiz Power: Debt Growth Outperforms Revenue and Income; Energy is a Mature Industry
Figure 4
Among this week’s main benefactor is Aboitiz Power.
Like most of the PSEi members, the prominent feature of Aboitiz Power is the outperformance of debt relative to income and revenue.
First, while its income soared 170.6% in the 1H compared to last year, this represents mainly the low base effect. In nominal terms, AP’s 1H income has reverted to the pre-pandemic levels even when revenues remain marginally distant from the normal. The 5-year 1H revenue and net income have a CAGR (Compounded Annual Growth Rate) of 6.76% and .431%, respectively.
Second, falling margins continue to be a drag on AP’s income. Gross margins peaked in 2016 then cascaded to a low in 2020 before this year’s bounce. The question is, why the weakening margin? Because expenses have grown faster than revenues, have these been because of the surging maintenance costs of power plants?
Third, because debt levels continue to mount, financing costs and interest expenses have also soared. Though interest expense as a share of revenues slipped to 11.8% in the 1H 2021 from a record high of 13.6% in the same period last year, it is on an accelerating uptrend. The company’s debt and financing costs have a 5-year CAGR of 19.15% and 14.94%, respectively!
Thanks to the BSP’s zero-bound rate policies, which have subsidized borrowers at the expense of savers, the company has managed to contain the growth of the company’s financing costs. But policies tend to suffer from the law of diminishing returns.
So aside from shrinking margins, aggravating the pressure on the net income will come from the increasing financing cost from its mounting debt load (aside from interest rates).
While the company has vowed to expand its portfolio of renewable energy projects, the success of this shift will depend on its financial viability, e.g. improved demand and margins.
Will renewable energy be more price-friendly and baseload stable to its consumers/users?
None of this is assured, given the uncertainties of the current socio-political-economic environment.
Besides, despite the partial liberalization/deregulation through the EPIRA of 2001, the sector remains hamstrung by a rigorous regulatory regime that partly explains some of the efficiency albatross surrounding its participants.
It is unclear how the shift to renewable energy will improve this.
Finally, as a mature (value) industry, the energy sector growth dynamics are aligned mainly with the economy. This sector has a 5-year (nominal) CAGR of 4.3%, which should mirror the average industry sales growth.
From the Businessworld (September 1): NEW renewable energy (RE) investment between 2009 and 2020 amounted to P221.35 billion, the Department of Energy (DoE) said Wednesday, noting a growing interest in clean power since the enactment of the RE Law. “Between 2009 to 2020, we saw the addition of about 2,339 MW (megawatts) of RE capacity installations which translate to estimated total investments of P221.35 billion,” Senior Undersecretary Jesus Cristino P. Posadas said in a virtual event Wednesday.
Interestingly, contra the impression provided by media and authorities, as gleaned from data provided by the DOE, either on the installed capacity or power generation source, the contributing share of renewable energy to the total has been on a downtrend.
So fundamentals barely justify such aggressive price-multiple expansion. The price pumps signify nothing more than a liquidity-driven speculative excess and likely design to prop the index higher.
V. AP’s 12-Year Rounding Top, PSEi 30’s Rising Wedge
Figure 5
Now to the technical perspective.
Aside from rotation and the design to push the index higher, AP’s intense climb appears to have reacted to a descending wedge (or oversold conditions).
Nonetheless, AP remains on a 5-year downtrend channel, underpinned by a monstrous 12-year rounding top! Some critical obstacles to hurdle. But who knows anything can happen!
Having explained the likely design to avoid a bearish rising wedge thru pumps, this week’s gains primed by a monster pre-closing rescue of the index last August 31st have forged the third series of rising wedges since March 2020.
In the two previous episodes, when the wedge cracked, the index fell below the staging point of the cyclical rallies.
Further, the peso volume appears to be cresting, similar to the three episodes of rebounds.
Will index managers succeed in beating the charts they have created?
Or, will this time be different?
Yours in liberty,
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