Sunday, March 19, 2017

PSE’s Fairy Godmother, The Rampaging Financial-Banking Index, Why Newton’s Law Will Prevail

When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear—Thomas Sowell

In this issue

PSE’s Fairy Godmother, The Rampaging Financial-Banking Index, Why Newton’s Law Will Prevail
-PSE’s Fairy Godmother in Action, Again
-Typical Weekly Pattern, Friday’s Amazing Pump and Dump
-More Evidence of the Price Fixing Dynamic
-Banking Index in Vertical Ramp, Nears Record
-Rampaging Bank Stocks in the Face of Growing Risks
-Why Newton’s Law Will Prevail


PSE’s Fairy Godmother, The Rampaging Financial-Banking Index, Why Newton’s Law Will Prevail

PSE’s Fairy Godmother in Action, Again


Does such represent a gambit to stir incensed bulls into action? Or has this signified a backfiring of the sustained pumps and dumps?

The coming days should give us an answer

So my suspicion was spot on.

The other Friday’s DUMP transposed into a massive weekly PUMP this week!

If you haven’t noticed, each time turbulence comes into play, the Phisix would see a violent meltup in response. The most conspicuous of them were the two major selldowns, both in 2016, or the two troughs of January 21 and December 23, which had been countered with astonishing vertical pumps.

It seems like the PSEi has an invisible fairy godmother, or might I say an equivalent of the US Plunge Protection Team (PPT), an unidentified group which provides implicit support to the PSE.

From this perspective, having replaced the fundamental functions of the capital market with politics, free lunch rules the PSE. Demand and supply be damned! The Phisix has been “mandated” to only go UP!

So after last week’s 1.39% plunge, which was spearheaded by SM’s 9.24% crash on Friday, increased usage with intensified dosages from magic spells by the fairy godmother, the PSEi generated a massive 2.78%, the second largest weekly increase for the year!

The fairy godmother turns a pumpkin into a magical coach!

Typical Weekly Pattern, Friday’s Amazing Pump and Dump

Yet it’s not the headline numbers that have really been important. Rather, it’s HOW these numbers have been attained or the MEANS to the END.

Nevertheless, it’s been a routine or a pattern for most of the year: a Monday PUMP, defense of the Monday’s gains in the intermediary, and a closing or a Friday PUMP or DUMP.

This is all “legal” anyway, regardless of what’s been stated in the BSP or the SEC’s regulations.

The PSEi posted increases in four of the five trading days last week. The bulk of these were accomplished in Monday (+1.21%) and Friday (+.91%). The two days accounted for 76% of the week’s gain

Figure 1: Same Pattern, Friday’s Pump and Dump

The only day where the Phisix corrected, was even met with a massive “mark the close”! (see upper middle pane) And that’s after another afternoon delight operation! The Phisix even almost closed in green had the price fixing pumps not been offset by a single dump on GTCAP.

For this Friday, to ensure that the Phisix would close in the green, a concerted enormous pumping operation went into action just right after lunch. Four major sectors participated in the synchronized operations (lower left window): property, services, financials and holding firms.

The Phisix raced to over 7,400 intraday, backed off from the near closing highs, and ended the regular session with a stunning surge of 108.91 points or +1.5%!

However, at the closing bell, mark on close orders rained down on the PSEi. These lopped off a staggering .58% of the day’s gains for the headline index to post only +.91%.

And significant price changes from mark-on-close orders virtually affected NINE of the top TEN issues! Seven issues were DUMPED, while two issues were PUMPED! Truly astounding.

Perhaps, those liquidations were made to finance Monday’s next bidding frenzy.

You see, the Philippines has accounted for as the only country whose bourse has been characterized by wild pumps or dumps at the closing bell!

But don’t worry, it’s the best stock market in Asia! Destruction of the elementary function of markets has been considered a virtue.

Well, that’s familiar. War is peace, freedom is slavery and ignorance is strength.

More Evidence of the Price Fixing Dynamic

Yet footprints of deliberately designed pumping can be seen in many places.

Figure 2: Weekly gains concentrated on Top 5 issues

For this week, the average increase by the top 5 biggest market cap was a shocking 5.332%! The closing numbers for this group has really been gigantic: SM +10.52%, JGS 9.53%, BDO +3.82% and ALI +2.96%!

The average gain by the top 15 was at 3.07%. That includes ICTSI’s striking 14.59% vertical nauseating climb!

In perspective, the market cap weight share of the top 5 as of Friday was at 39.58%. The market cap weight share of the top 15 as of Friday was at 79.75%. This shows that the concentration of pumping occurred mostly around the top 5 issues with diminishing pumps at the farther end!

See now how the 2.78% was derived?

Again this is no stock market. Instead, this is a price fixing mechanism.

In fact, the average gain by the benchwarmers, or the next 15, which holds a 20.24% share weight of the PSEi, was only a mere .56%! Though there were big rallies in the said group such as PCOR (+6.18%) and LTG (+5.34%), they were hardly contributors to the headline. Yet losers in the group largely offset such big gains.

And another astounding fact: outsized volatility has resurfaced to drive the index.

Among the PSEi 30, gainers dominated losers 18 to 11 with an unchanged issue. Yet, 16 of the 18 advancers saw increases of more than 1%! Even more, 12 of the 18 advancers had gains of 2% and above!

In the opposite end, 7 of the 11 decliners posted more than 1% loss!

Prior to the last two weeks, while volatility had been internally present, it was subdued in the context of the headline index. This went on for a month or in four consecutive weeks.

But time has apparently changed convictions. Bulls have become restless and impatient

The past two weeks has shown accelerations in price instability as revealed by violent price actions! This means that the current efforts to break 7,400 have been channeled through forcible pumping!

And here’s more. General market breadth went in the opposite direction of the Phisix. Decliners LED advancers by a modest margin of 42 from the weekly numbers of 486 to 444

Foreign money remained net sellers for the ninth consecutive week. Foreigners sold Php 1 billion worth of shares to locals. Interestingly, the share of foreign trade to total volume spiked to 62.01%, the highest for the year.

Meanwhile, peso volume turnover jumped 12.7% this week to an average of Php 8.4 billion. The improvement in volume was partly helped by special block sales which contributed to 9.45%. Special block sales for the week tallied at the highest since December 15th.

What’s the message here?

Despite the enormous gains in the headline index, market sentiment was in a state of paradox: a mix performance.

Here’s why. Local participants were mostly responsible for the aggressive bids that gravitated mostly towards PSEi 30 issues. Since locals were buying from foreigners, as marginal price setters, such forceful bids translated to larger volumes and magnified price volatility. Remember, MORE pesos are required to buy PSEi 30 issues at HIGHER prices.

And because of the concentration of activities, perhaps rotation provided the finance for such violent buying dynamic. In short, for locals, the tactic used was: buy PSEi 30, sell PSE.

This may partially explain the divergent activities of the broad market from the PSEi 30.

Banking Index in Vertical Ramp, Nears Record

The Phisix may be still below the May 15, 2013 high of 7,400, but the financial index as of Friday has now just been a hair away (-1.44%) from April 10, 2015 summit of 1,888.8 and (-1.2%) from September 15, 2016 zenith of 1,883.79.

Figure 3: Financial Index Close to Landmark Highs, Divergent PSEi Bank Performances

The bank-financial index has taken a startling vertical flight! (see figure 3)

It was up 3.17% this week and 12.45% year to date, the second best performer in terms of year to date; only eclipsed by the service sector (+14.82%).

BDO’s (red) string of record highs backed by BPI’s (green) ramp has significantly boosted both the PSEi and the financial-bank index.

Prices of both issues have virtually run amuck!

Interestingly, SECB (violet) and Metrobank (brown) appears to have lagged the leaders. Why?

Have these been signs of a strictly a BDO-BPI dynamic? Or will the BDO-BPI manic pumping spillover to MBT and SECB?

Figure 4: Little Signs of Rising Tide in Other Financial Index Members

When seen from the broader financial issues, there have been little signs of the rising tide lifting the other financial boats.

While most issues improved compared to last year, it’s only UBP (blue) that has made significant but gradual strides. Yet UBP’s actions depart from the BDO-BPI vertical rocket ships.

The rest, namely AUB (black), PBB (orange), EW (indigo), CHIB (red), RCB (dark green) and PNB (gray) have substantially underperformed.

Again, the 64 trillion peso question is why? Will BDO-BPI price rampage diffuse into the rest? Or will this signify an act strictly for the dynamic duo?

Present developments reverberate with the record run of 2015 which peaked on April 10, 2015.

In that cycle, about half of the PSE firms were in bear markets while only some of the PSEi’s top 15 were responsible for milestone PSEi at 8.127.48. Again, signs of an engineered pump.

Déjà vu?

Rampaging Bank Stocks in the Face of Growing Risks

Figure 5: Financial Portfolio, Trade versus Property and BSP’s Portfolio Exposure in Bubble Sectors

Yet why the frantic bidding of select financial-banking stocks?

Could recent money flows provide some clues?

What’s the relationship between growth rates of the banking system’s financial intermediary loan portfolio with the PSE’s near record sprint by the financial index? (upper window) A seemingly tight correlation can be seen above.

Perhaps it’s more than just correlation; there could be a causal nexus. Or to extrapolate, financial institutions could have borrowed so much money to speculate in the Philippine Stock Exchange. The performance of the PSEi, thus, has been coincident with the changes in the banking system’s financial intermediary’s portfolio.

If true, then such would serve as circumstantial evidence that point to the likely parties responsible for ‘mark on close orders’ which has resulted to the perpetual price system impairing, marking the close.

Also if true, this shows why financial institutions are vulnerable to a PSEi crash. And that’s why they will do a Mario Draghi’s “whatever it takes” to float the index.

No wonder why the regulators (BSP, SEC) have been asleep on the wheel.

Yet what happened to risks? Have banks been immune to risks?

I have previously noted that based on government’s statistics, the % share of the key bubble sectors—namely construction, real estate and trade—have swelled to 38.61% of the 2016 GDP.

Add the financial sector, the bubble sector’s share of GDP bulges to 46.7% over the same period! It’s almost like putting all eggs in one basket! With nearly 50% of GDP, a slowdown in these sectors would have a substantial detrimental effect on the economy and on the banking system! Such represents signs of growing concentration risks!

And even more fascinating has been the ratio of trade/gdp vis-à-vis the property sector/gdp. The ratio indicates which of the two sectors have grown faster. (middle window)

Since the BSP began its subsidy program through trickle down negative real rates in 2009, the property sector has almost consistently outgrown the trade sector.

Yet the cumulative share of loan portfolios of both sectors plus the construction vis-à-vis total banking loans has burgeoned to 38.92%. Or the share of loans of such bubble sectors comprises nearly two fifths of the total loan portfolio of the banking system! To include financial intermediary and hotels would spike the accrued sector’s share of loans to 51% or half of the banking system’s loan books!

And growing anecdotal accounts of saturation or oversupply in both retail and the property sector tell us that the banking system IS vulnerable to credit risks despite the much ballyhooed statistical but untested “capital reserve” base as declared by the government and the mainstream.

So banks shares have soared even in the face of mounting risks!
Figure 6: Construction and Wholesale Prices Soar Past 2014 Highs

To add spice to the paradox, the Philippine Statistics Authority reported last week their surveys of real economy prices via February’s construction material wholesale (upper right) and retail prices (upper left), as well as January general wholesale prices (bottom).

Prices of all three statistics have zoomed past 2014 highs!!!

And surging real economy prices will boost bank lending conditions????

I don’t have to repeat what I have been saying about the adverse impact of rising inflation on the economy. Here’s a clue on how inflation will hurt earnings, from McKinsey.com, How inflation can destroy shareholder value”

Why Newton’s Law Will Prevail

In so many words, quality (economic and financial foundations) will matter more than quantity (PSE’s price levels) overtime.

For the moment, the establishment PPT or the PSE’s fairy godmother may generate the momentum required to push the headline index higher. Part of which could be a breakout by the banking financial index to a milestone. But this, like its two predecessors, would be unsustainable.

And to repeat, manic bidding of domestic stocks have occurred even as endogenic systemic risks continue to escalate. These internal risks includes the massive leveraging of balance sheets, the sustained frantic race to build supply, deepening signs of overcapacity, rising concentration risks, surging real economy prices, the crowding out effect from a leftist government, increased government interventions in the marketplace, the falling peso and emergent interest rate pressures—which account for the most fundamental reasons.

Such risks are not isolated but are intertwined and interdependent.

And that’s aside from a multitude of external risks.

Even in the PSE, signs of entropy have been intensifying. Such includes the rampant and brazen (desperate) manipulations, the divergent performances of PSEi components which likewise have been manifested in the broader market, growing accounts of unstable prices manifested by vertical pumps (BW-SSO syndrome), the concentration of activities to a few issues and amplified price gyrations in the face of faltering volume.

At the end of the day, since vertical price trends are symptoms of mispricing founded on a maladjusted economy and (pseudo) markets operating on falsified prices, Newton’s Law (via mean reversion) will eventually rule.

Newton’s Law has governed solidly the past 50 years. What should make this time different?

Sunday, March 12, 2017

Pumps and Dumps Intensify, SM’s Friday Dump: A Gambit To Stir Bulls Into Action? Or Signs of Backfiring of the Price Fixing Mechanism?

Pumps and Dumps Intensify, SM’s Friday Dump: A Gambit To Stir Bulls Into Action? Or Signs of Backfiring of the Price Fixing Mechanism?

Market Manipulations Run Amuck!

Manipulations in the Philippine Stock Exchange have now gone way beyond control!

 
The pricing system, or the economic function of the domestic exchange, is systematically being impaired by the fantastic egregious practice of serial pumps and dumps!

This week’s activities put into the spotlight the intensifying entropy of the PSE’s market functions.

Monday’s .92% gains was a product of synchronized pumps in ALL major sectors that went into operation immediately after lunch (upper leftmost). The PSEi was down by about .42% at lunch break and when the PM session opened, many heavy caps which belonged to all mainstream sectors simultaneously charged up to push the index to 7,300 (or up by about .7%)!  That was a vertical 1.12% pump in less than half an hour (more like 20 minutes)! Incredible!

And in the next three days the same pattern occurred: The PSEi had strong openings. Early gains fade.  And all three sessions ended in a splendid end session “mark the close” dumps!

Friday (March 10) was the most spectacular (lower middle pane). It was a day that moved beyond the daily template. The Phisix was weak throughout. The afternoon delight was curiously absent. Going to the close, the Phisix emaciated further. At the climax, down by the .95% at closing phase of the regular session, the Phisix suddenly crumbled to -2.04% when the runoff period opened. Such mark-the-close dump (80.2 points) accounted for 53.76% of the day’s deficit of 149.18 points (-2.04%)! Or the loss from market intervention-runoff phase was even more than or has exceeded the pre-market intervention losses of 68.98!

For the week, the PSEi was down 100.85 points or 1.39%. The week’s combined end-session dump at 123.75 points was even MORE than the noted cumulative weekly difference. This means end-session activities constituted the ENITRE trading outcome this week!

This isn’t a stock market anymore.

Dissecting SM’s Friday 9.24% Plunge; Pumps and Dumps Beyond SM  

SM’s stunning 9.24% crash contributed significantly to the Friday’s 2.04% retreat. Yet, astonishingly, 87.12% of the day’s loss emanated from mark-the-close!

Because SM represents the largest market cap issue, media and establishment experts immediately went on air to exorcise Friday’s action

From the Rappler:

“In less than an hour, SM Investments Corporation lost P73.479 billion worth of stock value, ahead of the main index rebalancing next week. 

Facts of the SM’s 9.24% plunge. 

As noted above, 87.12% of Friday’s 9.24% deficit happened during the 6 minute (floating) transition period or the market intervention phase to the runoff and to the close.

90.08% of SM’s peso total volume (Php 846,315,815) for the day was derived from this period.

33.07% (458) of SM’s total transactions (1,385) also occurred during that window. 

So media attempted to frame such event as an outcome of the market’s action. It was hardly about the market.

"We saw a market-on-close order from CLSA Limited [a Hongkong-based brokerage and investment firm], selling close to 500 million worth of SM. Given the size and nature of order, it looks like a foreign fund exiting," Luis Limlingan, managing director of Regina Capital Development Corporation, said in a mobile phone reply. 

CLSA was the most evident seller because it was the biggest (852,080 shares) among the end of the session, as well as, of the overall seller on Friday.

Broker selling came in the following order during the runoff phase: Col Financial, Philippine Equity Partners, Macquarie, Deutsche, Credit Suisse, CLSA, ATR, Deutsche (again), Philippine Equity Partners (again), UBS, Deutsche (again) and Astra. Broker sales came in different peso and share volumes.

There had been others ahead of CLSA. But given the volume, CLSA could have functioned as the key price setter.

Ironically, SM posted a Php 102,002,995 of net foreign buying.

Has the CLSA selling order emanated from a local account/s or from a local seller/s??? Could this have signified sales from an insider or related to insiders??? From an elite, perhaps? If so why???

The sharp drop caused SM Prime Holdings Incorporated to overtake SM Investments as the country's most valuable listed company in terms of market capitalization. 

The market cap share weightings, according to the PSE, as of March 10: SM 9.82%, ALI 8.03% and SMPH 7.93%. So unless the world has turned upside down where 7.83 is GREATER than 9.82, then the statement is utterly false. But no problem, fake news is the fad, anyway.

According to Corazon Guidote, senior vice-president for SM Investments' Investor Relations, there is no fundamental reason for the 9% drop in SM share price. 

Of course, investor relations officers are spokespeople for the firm. Their work is to promote the firm’s image through public relations. They are the last persons to admit to anything wrong.

Even worst, SM’s dive has been attributed to “rebalancing” based on the consensus expert opinions covered by three different newspapers including the above, plus Inquirer and Businessworld

This should be an example of reasoning from price changes.

There will indeed be a re-composition of the PSE members next week where EMP will be replaced by PGOLD. However, because X (PSEi re-composition), thus Y (price change because of rebalancing). The PSE reportshere and here doesn’t show that SM will be included in next week’s alteration. But it’s a convenient way to get one’s name published in the media for status signaling—just say something popular regardless of its relevance!

And again, this has hardly been about a normally functioning market.

If someone wanted out of SM, why not sell at Php 650s (or higher) from the start to the close of the regular session? The seller/s could have saved a lot of money. Think Php 50 per share. At 1,272,670 million shares transacted at Php 599/share, that translates to Php 63.63 million lost!  Yet the dump, why??? To provoke the bulls into an emotive denial reaction through panic buying sprees that could push the index up in the coming sessions?

As one would note, such “mark on close orders” has transformed into a tool for price fixing. Instead of attempting to attain optimum outcomes from transactions, the expressed desire to set prices at the close has not only led to amplified pricing inefficiencies and increased volatility but notably to higher transaction costs.

Yet for what purpose/s?

And because of end-session pumps and dumps, such time window has morphed into THE focal point of trading activities.

Yet for the mainstream, upside and downside spikes operate like a black hole—either they don’t exists or have been seen as having insignificant bearings on the markets

As proof, media’s focus on SM ignores ALL other PUMPS and DUMPS of Friday.

Yes, it wasn’t just SM.

JGS Summit was DUMPED 1.53%, MBT 1.5% and URC 1.12%! (lower rightmost pane)

To put into perspective, JGS closed -2.44% Friday. This means 62.7% of losses were due to Friday’s closing dump. And because JGS closed the week down 4.15%, Friday’s dump accounted for 36.87% of the week’s loss!

Yet how about the opposite: GTCAP was PUMPED by a shocking 3.96% and AEV 1.16%!

Here’s another frame: since GTCAP closed Friday up by 1.82%, this shows that such majestic 3.96% pump magically transformed the entire day’s 2.14% losses into 1.82% of glory!! How wonderful!

The alchemy of turning lead into gold happening here only in the Philippines!

The same phenomenon applies to GTCAP’s weekly outcome of 1.65%! ALL it took was 6 splendid transition minutes PLUS the runoff period to change the complexion of GTCAP’s outcome for the WEEK from bloody red into scintillating green!!!

Some normally functioning market eh?

As I have repeatedly been saying here, the PSE should just cut trading activities to one day in a week instead of 5. Additionally, trading time should also be limited to a mere 30 minutes. It seems pointless to exhaust vast manpower and resource logistics for pseudo daily “trading” activities when the pricing system has virtually ceased to exist!

Here are the Friday and the weekly performance for the rest: MBT Friday -3.69%, weekly -5.46%; URC -1.19%,-3.01% and AEV +1.03%, +1.16%. Apply the same logic to them

And yet why the ZERO comments on these (by media backed by the highly paid experts)????!!!  Survivorship bias? Or Selective perception?

Was the Dump a Setup for the Bulls? Or Signs of Backfiring from the Systematic Perversion of the Markets?

As noted above, because the focal point of trading activities has mainly shifted to the closing transitional phase, such has only magnified price volatility. And some players (outside of the circles of price setters) have only adapted to the changes in the current “trading” patterns at the PSE, or have recalibrated their activities to take advantage of such amplified price gyrations.

This suggests that excessive volatile price movements (in either direction) may or may not have relationship/s with what’s popularly attributed as “fundamentals”.

For instance, the big selling order from CLSA on SM may represent a request for an immediate significant withdrawal by a wealthy client (for personal or non-fundamental reasons) that may have prompted the designated fund manager to liquefy its most liquid holding (if the relationship is fiduciary). And to fulfil such request would likely induce a price ‘dump’ on security/ies sold.

Of course, “fundamentals” could also have been a factor. Although present and past performance may provide some hints, the pricing of corporate fundamentals is about the FUTURE. Perhaps new information unavailable yet to the public may have prompted such action. Yet mainstream has rushed to SM’s defense to write this off.

With SM’s subsidiaries BDO hitting a fresh summit and SMPH unchanged this week, it looks likely the former than the latter.

But then again SM has been priced dearly despite this year’s BSP-stimulus eps bump.

And since Friday’s seller appears to be local, such is the question of motive.

Again has the seller been an insider or related to the insider? Yet why the panic dump?

Does such represent a gambit to stir incensed bulls into action? Or has this signified a backfiring of the sustained pumps and dumps?

The coming days should give us an answer