With the progress of inflation more and more people become aware of the fall in purchasing power. For those not personally engaged in business and not familiar with the conditions of the stock market, the main vehicle of saving is the accumulation of savings deposits, the purchase of bonds and life insurance. All such savings are prejudiced by inflation. Thus saving is discouraged and extravagance seems to be indicated. The ultimate reaction of the public, the "flight into real values," is a desperate attempt to salvage some debris from the ruinous breakdown. It is, viewed from the angle of capital preservation, not a remedy, but merely a poor emergency measure. It can, at best, rescue a fraction of the saver's funds—Ludwig von Mises
In this issue
The PSEi 30’s Amazing Low Volume Rebound as Asia Celebrated the Possible Comeback of Easy Money
I. As Asia Celebrated the Prospects of the Easy Money Regime Comeback, PSEi 30 Jumped on Multi-Year Low Volume, Helped by Foreign Buying
II. The PSE’s Fate is Determined by Volume
III. The Sy Group as Example: Volume Drives Price Levels, Returns and Position at the PSEi 30
IV. PSE’s Volume is a Product of Savings and Credit
V. BSP’s Bubble Policies and Deficit Spending Erodes Savings/Capital
The PSEi 30’s Amazing Low Volume Rebound as Asia Celebrated the Possible Comeback of Easy Money
The Philippine PSEi 30 joined its Asian equity peers in jubilance that the easy money regime could mount a comeback. Yet, its rally lacked vitality, as signified by the conspicuous slack in volume. Why?
I. As Asia Celebrated the Prospects of the Easy Money Regime Comeback, PSEi 30 Jumped on Multi-Year Low Volume, Helped by Foreign Buying
Do they adore the scent of easy money!
Following the June US CPI slump to 3% from 4% a month ago, global and domestic stock markets celebrated through a manic buying spree as the US dollar plunged and US bond yields dived, anticipating the end of Fed rate hikes.
Figure 1
It was a stellar week for the PSEi, which surged by 3.85% this week, the second-highest weekly close in 2023 after January 13th's 4.25%. Though the local benchmark reflected the region's performance, it was ranked third among the top performers after Hong Kong (+5.71%) and South Korea (+4.02%). (Figure 1, topmost pane)
Bulls dominated this trading week with unanimity: all national bourses closed higher with an average return of an incredible 2.43%. Mongolia's MSE closed for holiday festivities. Japan’s Nikkei 225 was flat (+.01%)
This bullish sentiment oozed to PSEi 30 members. 20 of the 30 members were up, with financials assuming the leadership.
The broader market tepidly shared this sentiment: advancers led by a slim margin of 24 from an aggregate score of 459-435 (decliners).
The overriding concern is that the headline-grabbing rally came amidst a feeble mainboard volume, a daily average of Php 3.887 billion. Moreover, substantial cross-trades, which accounted for about 11.35%, padded this volume and were implemented mostly by the top 3 brokers of the day (in aggregate).
The top 10 brokers comprised an average of 60.98% of the main board volume, which means that aside from the cross trades, the bulk of main board transactions emanated from institutional accounts.
Worst, though this week's Php 3.887 billion turnover signified a 35.4% improvement, the previous week registered the lowest weekly main board volume since at least 2017! (Figure 1, middle chart)
Or, on the week ending July 7th, the PSE racked up an average daily volume of only Php 2.871 billion (a multi-year low)!
This volume slack wasn't an anomaly. The average daily main board volume since the first trading day of July was only Php 3.379 billion, resulting from 5 days of Php 3 billion or less. (Figure 1, lowest graph)
As previously asserted, volume precedes prices. Without volume as the foundation, there can hardly be any bull market—unless a hyperinflationary environment engulfs the economy. But the latter is barely relevant for now.
Figure 2
More to this point, this week's gross volume was bolstered by foreign trade, which accounted for 56%.
Modest foreign buying worth Php 2.577 billion comprised about 11.36% of the gross volume. (Figure 2, topmost diagram)
As it turned out, domestic institutions had to have a hand from foreign savers to boost equity prices.
II. The PSE’s Fate is Determined by Volume
As previously pointed out,
In all this, the evidence of the importance of savings exhibited by the corrosion M2 savings, which in turn led to the PSE's deteriorating volume/turnover. The popular money supply benchmark, M3, illustrates a similar relationship.
Again, unless conditions warrant improvement in disposable income and savings, the PSE will remain under pressure, regardless of how a few entities attempt to manage the PSEi 30's price level—mainly via pre-closing pumps—which, unfortunately, undermines the market's price discovery function. (Prudent Investor, 2023)
Again, PSEi 30's returns have been interdependent with its volume.
Though the PSEi 30's returns spiked in 2009—in response to the culmination of the Great Recession—and turned the corner in 2010, the peso volume continued to climb and hit a zenith in 2013. From here, it was southbound for gross volume and PSEi 30 returns. (Figure 2, middle and lowest charts)
The PSEi 30 record high of January 2018 came amidst weakening volume, reinforcing my view that this feat was a product of "gaming" the index.
That is, the supposed accomplishment represented the ramifications of concentrated pumps on select issues—which is the reason behind the vastly skewed distribution of free float weights. And because the milepost high was artificial, it was unsustainable.
Be it known that the top 5 issues have an aggregate free float weight of 47.3%, and the top 10, 68.74%, as of July 14th. To wit, the price changes of these 5-10 issues determine the outcome of the PSEi 30 levels.
III. The Sy Group as Example: Volume Drives Price Levels, Returns and Position at the PSEi 30
Figure 3
For instance, after declining to a low of 30.27% in February 2022, the Sy Group's free float market cap share of the PSEi 30's pie continues to regain its lost ground, helped by its gradually increasing share of the main board volume over the same timeframe.
In the case of SM Group (SM Investments [PSE: SM], BDO Unibank [PSE: BDO], SM Prime Holdings [PSE: SMPH]), volume equals price levels and their PSEi 30 share of weight.
The paradox is that while the Sy group has a 33.87% share representation in the PSEi 30, their volume comprised only 25.96% of the main board as of July 14th. (Figure 3)
Let us expand this outlook to cover the first two weeks of July. The Sy Group's average free float share of the PSEi 30 was 33.7%. In the meantime, its average share of transactions to the main board was only 22.4%.
As it turns out, it doesn't require as much turnover to generate this share representation in the PSEi 30.
The transaction relative to the share representation of the Sy Group showcases the astounding disproportions in the PSE's trading activities.
Do you see now why end-session pumps are there for? Instead of intervening during the trading day, the "Viagra" pre-closing pumps are probably the cheapest way to attain the goals of maintaining specific price levels/ranges intraday.
In any case, the trading activities of Sy Group illustrate how volume drives price levels, return, and even its position in the headline bellwether.
IV. PSE’s Volume is a Product of Savings and Credit
Figure 4
How do we know the conditions of savings and credit as drivers of the PSE volume?
First, as the primary agents of financial intermediaries, bank liquidity has played an important in the capital markets.
The synchronous deterioration in the YoY change of bank cash reserves, deposits, and savings has coincided with the decaying volume at the PSE. (Figure 4)
Figure 5
Further, PSEi returns have, as well, been congruent with the corrosion of cash-to-deposits. (Figure 5, upper chart)
V. BSP’s Bubble Policies and Deficit Spending Erodes Savings/Capital
The thing is, deteriorating volume and returns are symptoms of the BSP easy money policies malady. (Figure 5, lower graph)
It is, therefore, unsurprising to see the perpetuation of the low rates (BSP ON RRP) coincidental with entropic PSEi 30 returns.
Figure 6
By forcing down rates below their natural levels, the BSP induced the public to magnify spending on consumption and increased speculation via overinvestments financed by bank credit while motivating the government to amplify their deficit spending. These Keynesian-influenced policies have been designed to boost the GDP and the tax intake of authorities.
Yet its unforeseen repercussion is to consume savings.
Bank credit expansion dovetailed with the ebb and flow of the PSEi index and volume. (Figure 6, topmost and middle charts) Malinvestments, or the diversion of financing towards consumption and overspending on investment fads, result in the attenuation of savings.
And as the fiscal deficits swelled, the PSEi index topped. (Figure 6, lowest window) The crowding-out effect from the record deficit spending reduces finances and resources available for investments that diminish productive activities and savings. That's aside from the erosion of purchasing power via monetary expansion from bank credit expansion and the (bank/BSP) credit financing of such ambitious deficit spending.
Yes, foreign savings may indeed help propel the PSE. But aside from highly volatile yield-chasing dynamics (e.g., global liquidity propelled carry trades), what conditions should attract them to sustain portfolio flows? A monetary architecture founded on the gold standard, perhaps?
Strictly speaking, this bear market is a symptom of the consumption of savings/capital.
Under this premise, has there been a structural or (even) a material change in the political-economic framework to improve the conditions for the public to save?
Have political authorities allowed the domestic market to function efficiently by sacrificing its "spending"-based and "trickle-down" development paradigm?
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Philippine Economy: Bullish Forecasts, Bearish Markets; Volume Precedes Price: The PSE’s Sectoral Performance as Exhibit June 25, 2023; Substack, Blogger
