Phisix 7,310: A Journey to the Bullmarket or Perdition?

Phisix 7,310: A Journey to the Bullmarket or Perdition?

A journey of a thousand steps, wrote philosopher Laozi in his Tao Te Ching, begins with a single step. A journey typically requires a destination. And the 'thousand steps' must have a direction which may or may not lead to the intended destination. In short, the journey represents an end with every step taken as means to reach this end.  

Randomness, for as a long as such signify voluntary choice of action/s, also represent an end.

This can be applied to the financial markets. Or even to the Philippine equity markets.

Applied to the PSE, the popular desired journey is for the continuity of the bullmarket.

I share that wish too.

But the means to this end matters. And that’s the difference.

That’s because the “destination” requires a careful assessment of the consummation of the series of steps or actions. Will present set of actions, quantitatively and qualitatively, lead to such sustainable outcome?

Let us put this in concrete examples

100% of Last Week’s Gains Courtesy of End Session Pumps!

The Phisix ended the week higher by 42.1 points or by .58% to 7,311.72. For the 1Q and year-to-date basis, returns have expanded to 6.89%. This is what is seen.

But there is the unseen or the ignored.

Yet it was another week where PUMPS (and dumps) dominated the closing bell.

The week characterized the unanimity of closing PUMPs. Or, there were NO end session dumps. Though most of them occurred in the first half of the week, the cumulative number of closing PUMPS which is at 56.02 points accounted for .77% of the previous week’s close!

With pumps contributing 56.02 points (.77%), which is higher than the official 42.1 points (.58%), this demonstrates that over 100% of the week’s returns had been due to end session activities! Or seen from another angle, if these pumps were omitted, the Phisix would have closed slightly down (-13.92 points or -.19%)!

The short of this is: last week’s gains had entirely been artificial. Fake numbers, ergo phony returns. So just how would, the much hoped for bullmarket be soundly sustained if prices are artificial?

And even in days where activities at the PSEi seemed quite refreshingly normal, marked by minimal marking the close, furious pumps and dumps merely neutralized one another behind the scenes!

There has been little realization that these price fixing actions, has meaningfully contributed to violent price actions or price instability

Concentration of Trading Activities and Huge Disparity in Price Performances

Internal market activities clearly demonstrate of the ongoing price instability.

SM’s stunning (+4.65%) surge combined by subsidiary SMPH’s (+1.07%) jump this week essentially weightlifted the Phisix to its closing positive numbers. With a combined 18.16% share of the PSEi 30’s free float market cap (as of March 31), both issues signify as the two largest listed firms.

Peso volume for both issues at Php 4.17 billion accounted for 9.16% of the market’s aggregate turnover. Yet last week’s peso volume was inflated by special block sales at Php 10.251 billion or 22.54% of the total. This entails that outside special block sales, volume of two issues would easily exceed 10% of total trades

As a side note, SM and SMPH posted foreign buying which accounted for 40% and 21% of their respective turnovers.

Meanwhile, the sharp gains by some in the latter half of PSEi 30’s top 15 (upper left window) were merely counteracted by losses in the rest of the market (upper right window).

For the week, in the context of the PSEi basket, decliners edged out advancers 15 to 13 with 2 issues unchanged. So the asymmetry of price changes which favored the heavyweights decided the final outcome. End session pumpsabetted on such dynamic.

With SM near a new record, oddly, only three Sy-owned issues have etched fresh record levels in 2017 even when the PSEi has yet to transcend May 2013’s high at 7,400!

Even more, the Phisix, which has traded in the bandwidth of 7,100-7,400 for the over two months, had primarily been the result of the sustained rotational pumping in the Sy group of companies.

While others have recently joined the Sy group mostly issues within the top 10, e.g. AC, JGS, BPI, ALI and ICT, the glaring deviance in the performance of some of the elite firms relative to the rest of the PSEi component issues has caused the concurrent extended trading range.

This shows not only of the stark division in price performance between the biggest heavyweights and the rest but also the concentration of trading activities to the biggest, mostly index sensitive issues.

Sustained Price Instability

And such fixation on big cap index issues combined with the gaming of the index continues to fuel violent price actions.

Take SM. Since the one-day 9.24% crash last March 10, SM has soared 16.36% in just 15 days (as of March 31) or 1.09% a day! That’s a vertiginous vertical ascent! And SM is just off 1.9% from its record close at Php 710.5 attained last January 25.

Pumps and dumps were not limited to mark on close orders but likewise to intraday activities.

For the week, 7 issues or 23% of the PSEi 30 basket closed over 3% (plus or minus).  To pare down to 2% (plus or minus), there were 12 issues or 40%. At 1%, 19 issues or 63.33%. (see lower left window). Such showcases the excesses in price movements.

And while Sy owned companies have been flirting with new records, and where others have joined them, prices of several companies slumped back to their December 2016 levels or have drifted in proximity to such levels, e.g. GTCAP, JFC, MPI, MEG, DMC, AP, AGI, FGEN, RLC and PCOR (the latter has broken the December 2016 lows).

Price volatility and divergences can be seen in the week’s sectoral performance where price gains of four mainstream sectors were significantly pruned by heavy losses in the property sector (lower right window)

Hence, the upside thrust by a select few has been countered by selling pressures in the others. Or, the bidirectional violent price activities in many component issues has had an offsetting effect to result to a rather tamed or rangebound PSEi.

This implies that for an upside breakout of the index to come to fruition, such requires the participation of the broader PSEi.

Otherwise, if the heavyweights get afflicted by fatigue from the vertical brutal price actions, then they are likely to be pulled down by the latter group. And such which would likely entail of a breakdown of the 7,100.

Taken together, the gaming of the system, artificial or distorted prices, trade concentration, price instability/violent price episodes and diametric performances, would hardly lead to a salutary bullmarket.

Instead, the more measures are undertaken to artificially inflate the index, the greater the accretion of imbalances, thus the larger risks of a systemic blow up.

International Media Finally Sees the Adverse Consequences of Gaming the System

Some in international media get it, at least part of it. Intervening in the stock market creates unintended consequences.

Here’s Nikkei Asia on China’s National Team (China’s SOE’s openly intervenes in the stock market and have been labeled as the National Team) [bold mine]

However, the excessive effort put into controlling the stock market is rather baffling. Such intervention effectively deprives the market of its ability to perform core functions… 

But this policy has also produced unwanted side effects. The market has lost its ability to put pressure on corporate management, generating moral hazard among Chinese companies.

China's corporate debt swelled to 166% of GDP at the end of September last year, more than 70 points higher than the average of 20 major countries, according to the Bank for International Settlements. The figure rose nearly 50 points in five years, meaning that corporate borrowing grew at a faster rate than the economy.

Chinese companies have spent borrowed money on excessive capital investment, turning many of them into zombies. 

Yet the more I come across the financial statements of domestic buy side institutions, the clearer I see how vulnerable the financial industry is to a crash in the domestic equity markets.  And the ongoing deliberate price distortions have somewhat resonated with conditions in China. In particular, elevated stock prices have motivated the race to build the supply side financed by a tsunami of debt.

And because the Philippine equity markets have hardly been about retail activities but about institutions (both buy and sell side as well as banks), which has grown accustomed to the asset and income windfalls from stock market inflation, these factors provide the latter the likely incentive to keep the party going. Since easy money is addicting, some appeared to have ‘doubled down’ or put in a larger exposure in the equity market in hope that free money would last forever.

So, along with some public institutions, perhaps some of these firms could have been part of the syndicate that has assumed the role similar to China’s national team. And part of that added equity expansion could be about end session pumps or the price fixing mechanism.

Yet it is sad to see that the establishment seem to have little understanding of the basic functions of the stock market.

For many, stock market prices are akin to prices seen in casino gambling halls. So if prices can be controlled, then just game the system. Damned the consequence.

Yet others try to rationalize the market’s mispricing in the intellectual garb of statistical G-R-O-W-T-H to further their and the public’s misperceptions.

Unfortunately, they have nary an understanding of qualitative conditions of the markets and the economy. But for as long as such serves their commercial interest, the game must be played. Whatever it takes.

Yet the stock market is a mechanism for capital formation. Prices serve as signals to manifest on capital conditions. Higher prices are, in theory, designed to reflect on the reward for the efficientuse of capital. Lower prices are supposed to show of the opposite; penalty for inefficient use.  And integral to the price mechanism, stock markets function also as the platform to raise capital. It’s why IPOs, stock rights, secondary and other hybrid offerings are made. The public’s savings are thus, channeled to firms in need of capital through the stock market. And the public is thus rewarded or penalized for risk taking based on the performance of the issuer of equity.

But all these changed when central banks made the stock market as a policy tool. See Ben Bernanke’s A Crash Course for Central Bankers.

For instance, I recently wrote about the war against equity bears in Indonesia. [See -The Indonesian Government Wages War on Stock Market Bears and Interest Rates! Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2017]

Governments worldwide have earnestly defended or subsidized the stock market in the hope that rising stocks would enhance Keynesian concept of demand based economic growth model through consumption. Governments hoped that the “consumption” derived from the “wealth effect” would “trickle down” to help smooth out the government’s onus from the welfare state, as well as, to assist in financing of their snowballing debt burden.

And thus the thrust to inflate the stock market has now morphed into a monster global bubble.

And this has little been different with the Philippines. The BSP’s “trickle down” policies have been the prime mover of the domestic stock market bubble.

As I wrote in the recent past, [See email Signs of Historic Times? Online Broker Warns on Wild Speculative Punts! February 19, 2017]

Monetary policies, which has effectively been reducing people’s time horizons (or increases time preferences), have impelled for such febrile speculations, which redound to gambling, as well as, to employ market manipulations.

People’s actions do not exist out of a vacuum. Instead they have been subtly or indirectly induced to do so from social policies.

Or when the cost to speculate, to gamble and to price fix or game the system have been lowered due to the BSP's negative real rates policies and backed by sleeping at the wheels by the market regulatory agencies, then there will be more of rabid speculation, gambling and price fixing!

So addiction from easy money policies has likewise transmogrified a functioning market to a dysfunctional market anchored on the price fixing platform.

And because part of the means to inflate the stock market bubble, requires participation from the public, aside from direct participation, the stock market has been packaged into many forms of securities or investment vehicles, UITF, equity linked funds, mutual funds, exchange traded funds, and more.

And because the establishment outfits are main beneficiaries of central bank subsidies, these are promoted and pushed into the public particularly to the unwitting retail, aided by media and industry experts. The result is not only to spread risk, but also conflict of interests (agency problem).

Here is a wonderful example. Employees from several Canadian banks have surfaced to spill the beans on their employers.

From CBC News Canada. [GO PUBLIC 'We are all doing it': Employees at Canada's 5 big banks speak out about pressure to dupe customers, March 15, 2017]

Employees from all five of Canada's big banks have flooded Go Public with stories of how they feel pressured to upsell, trick and even lie to customers to meet unrealistic sales targets and keep their jobs…

A financial services manager who left BMO in Calgary two months ago said he quit after having a full-blown panic attack in his branch manager's office as she threatened to stifle his banking career because he hadn't met sales targets.

"It was like the only thing they cared about at BMO," he said. "If you weren't selling, you weren't worth having around." 

He claims his manager once told him not to tell clients who wanted to invest more than $40,000 that the markets were down, because putting their money into GICs wouldn't earn the branch as much sales revenue.

He said she also told him to attach high interest rates on mortgages and lines of credit and to not tell clients those interest rates are negotiable.

He said he was "pressured to lie and cheat customers," but refused to do it.

The revelations about other banks came pouring in after Go Public revealed last week that front-line staff at TD were under pressure to sell customers products and services they may not need and that some employees were breaking the law  to hit their sales revenue targets.

Well, that’s historian Charles Kindleberger’s fraud, swindle and defalcation at bubble tops in action!

I believe that this wouldn’t be different anywhere else. And this includes the Philippines.