Phisix 7,400: Intensifying Signs of Destabilizing Speculative Activities: Vertical Upside Morphs into Downward Spiral for JGS and MER

Below is a series of test post.

 

The Phisix rallied by 1.59% in a highly volatile week. 

Yet it’s not the headline numbers that counts. Instead the main focus should be what’s been happening WITHIN the PSE. Particularly, the intensifying destabilizing speculative actions that has gripped overall trading activities at the PSEi! 

Vertical upside moves which consequently transformed into crashes should serve as writings on the wall.

Two issues suffered crashes this week: Meralco and JG Summit. 

Meralco plunged 6.6%. This compounded on last week’s 5.52% loss for a total of 12.12%. From the recent peak to Friday’s close, Meralco has endured a 13.5% dive! And the crash didn’t just appear out of nowhere. It was an offspring to a parabolic move. (see upper window chart) 

Yet this week’s activities has seemingly resonated with the October-November 2015 mini-boom bust cycle where Meralco share prices also plummeted by 13.9%. As in the March to May episode, it was the same sharp ascent (parabolic move) that has led to its crash in October-November. 

Meralco has even had a bigger boom bust cycle in 2013. MER’s share prices soared from around Php 250 to Php 394 (57%) in just 6 months! Unfortunately, destabilizing speculation meant that ALL gains acquired over this very short period had to be RETURNED to the market! 

MER’s share prices regressed back to its original base by February 2014. The fundamental reason attributed to this volatile punt was the buyout of a 27% stake by JG Summit in Meralco from San Miguel. 

Yet current manic turned into panic developments in MER have even been more intense with JG Summit. 

Since the January’s nadir, share prices of the Gokongwei flagship have virtually gone berserk. Not only has JGS gone parabolic, since post elections, JGS share prices have rocketed vertically!  (see lower window) 

So it would not be unexpected for panic buying to morph into panic selling. All it needs was a trigger. And the said event was supposedly incited by Gokongwei’s selling of a portion the firm’s share for “estate planning purposes” (see my explanation in my next message) 

Yet in no point in the current cycle (2003-2016) has JGS moved in such stunning fashion. 

So what goes up must come down. 

Despite the two huge selloffs, and most especially, the selling pressure on the fourth biggest market cap issue JGS, the PSEi remained unscathed. 

Reason? 

Like in the PLDT episode last February, index managers had to make sure that such crash would remain isolated. So they resorted to the massive pumping of other key issues or the other heaviest market cap issues to neutralize the effect from JGS’ meltdown. 

No less than FIVE of the EIGHT biggest market cap issues posted gains of 4.5% and above this week!

If we include the top 15, 7 issues generated over 4% returns this week! 

And the distribution of gains has been virtually skewed towards the top 15. The average return of the top 15 was 2.41%, while the average gain of the next 15 was only .64%! 

Based on returns, the top 15 had 7 issues with over 4% as against only 3 issues for the next 15! 

Such may be seen as circumstantial evidence of the concentrated coordinated actions engineered to pump the index. 

The low volume-low liquidity of trade activities exposes the vulnerability of the PSE to manipulations. This has been most evident with the frequent and rampant use of "marking the close". Add to this, of course, are the regulators whom have been asleep at the wheel or possibly "captured" by entrenched manipulators. Nonetheless, manipulations enhance on the imbalances developing in the system.

Numbers alone will not do justice to the overall price activities of specific issues 

The above have accounted for as absolutely breathtaking pictures or depictions of mania and manipulation in motion. 

And these three (AEV, AC and SMPH) have not been isolated. The biggest market cap SM shares the same features with nearly equal intensity. Others like JFC, GTCAP, MPI and AP also manifest of the same symptoms but at a lesser degree. 

These are signs of imbalances and maladjustments that seem to have already reached epic or climactic proportions. Thus, vertical or near vertical moves are vulnerable or susceptible to exactly the same fate that has afflicted JGS and MER. 

And such destabilizing speculations combined with market manipulations have signified as products of the increasingly desperate and frantic attempts to push the Phisix beyond 7,400! 

As reminder, record 7,400 was first etched in May of 2013. This means 7,400 has signified a three year old resistance level which index managers have been attempting furiously to engineer a breakthrough during the last three years. 

They temporarily succeeded in the 1Q of 2015 to bring the Phisix to 8,127.28 in April of 2015. But apparently, the breakout failed to hold. Hence, the PSEi collapsed back to 6,100 last January. 

Now or current activities represent the FIFTH attempt. Yet what is of paramount importance is not merely a breakout, but the sustainability of the trend. That was the lesson of April 2015’s 8,127.48.  Yet Philippine stocks have reached 1996 levels in the context of valuations which proves to be a critical barrier for such an undertaking. 

For now, cracks in the likes of February’s TEL, and today’s JGS and MER has been interspersed and thus contained. But what happens when such fissures spread or escalate? Or what happens when index managers lose control? 

Two crashes happened within the span of 7 months or in the 2H 2015 through January of this year. Given that current actions have even been more radical than in 2013 and 2015, then the risks of a market crash is even HIGHER now than in 2013 or 2015! 

For now, it may be true that the crashes of MER and JGS may be partly recoverable. That’s because sentiment is largely a manifestation of risk appetite. And the present state of risk appetite has been underpinned by overconfidence. 

But sentiment is capricious, which consequently means that it is prone to instability and thus a breakout may be ephemeral. As proof, the dominant sentiment in the current environment runs in antipodal to that of December 2015-January 2016. Then it was fear. Today it is GREED…at the extremes 

Most importantly, sentiment cannot, over the longer period, supplant the basic function of stock markets as discounting mechanism of the expected stream of future cash flows. 

In kernel, stocks prices will remain anchored on fundamentals. 

So unless fundamentals improve FASTER than price based returns, any further push on today’s overvalued market will only exacerbate on the present mispricing dynamics. Prices will move further away from reality. Yet the bigger the gap, the more vulnerable to a violent reversion to the mean 

Understand that social policies affect the economy, the credit environment and financial markets. And this IS the PRINCIPAL reason why the stock markets has transmogrified into a gambling casino, as evidenced by severe overvaluations and extreme greed sentiments. 

At 7,411, the PSE bears a lofty average PER of 18.34 and the average market cap weighted PER of a horrifying 24.34*! In short, the market is paying Php 24 for every peso earned. And much of the peso earned by these firms have depended on leveraging. 

* the PSEi index is constructed from the ranking of its composite constituents based on the market cap weights. Thus PERs, Book Values and other financial ratios MUST reflect on the same distribution of market cap weighting and NOT just the average. 

The BSP’s negative interest rate policies have spawned and let loose a monster bubble which has now spilled over to the political spectrum.

The Other Possible Reasons Behind the $250 M Share Sale of JG Summit

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Shares of JG Summit collapsed 10.64% this week mainly due to the $250 million worth of share sales announced by owner John Gokongwei for allegedly for estate planning purposes. 

I will apply economic analysis predicated on 'demonstrated preference' on Mr Gokongwei’s actions and extrapolate from it the likely effect or consequences on JGS share prices

Austrian economist, Murray N Rothbard explained Demonstrated Preference as 

The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis. 

In layman’s terms, revealed or demonstrated preferences are virtually about “actions speaking louder than words”.

The fact is that whether the publicly announced goal of estate planning has been true or not, from the sale, Mr Gokongwei’s actions expressed preference for cash over equities. 

Q.E.D.

Some questions:

Why would Mr Gokongwei prefer cash through equity sales to a third party? And why would Mr Gokongwei prefer not only cash but in dollars worth of cash equivalent of JGS shares priced at week ago record levels?  

After all, if such were about “estate planning” then why has Mr Gokongwei not just transferred such shareholdings to his desired heirs? But that’s if Mr Gokongwei sees more value in his flagship’s shares than cash. But this does not seem to be the case. 

Again why? 

Could it be because Mr Gokongwei sees increasing risks in the BSP’s silver platter or windfall to him and his family?

Of course, no elite would ever say that his company is overvalued. Why would they? 

Overvaluation essentially inflates on the prestigiousness of their social status as measured by their net worth. The higher the share prices of companies they own, the bigger their net worth! Overvaluation translates to higher Forbes ranking in the global wealth profile. Mr Gokongwei has been ranked 270th among the world’s wealthiest and the SECOND richest in the Philippines based on Forbes calculations 

Overvaluation enhances the collateral values of their companies from which they can use to obtain more credit for business operations or expansions or even for personal consumption. 

Overvaluation enhances the moneyness (exchangeability or liquidity) of the shares of their companies which enables them to use or to conduct merger and acquisitions and other share backed or collateralized deals.

Overvaluation enhances their political clout or political capital in dealing with political agents to seal political deals or obtain political privileges.

And since no elite would generally admit to overvaluation of their company’s shares, would it not be better to see through their actions as a reflection of their insights? 

Could it have been that because Mr Gokongwei sees today’s prices at PER of 31.81 as unsustainable, hence the sale? The proceeds of which would be used to buyback JGS shares when they fall to more rational levels in the future?

Could it have been that Mr Gokongwei sees uncertainty in the political economic environment for him to raise not only cash but cash in USD holdings? Has the proceeds of the sale been kept abroad? 

Oh by the way, the above diagram represents JGS’ first quarter 2016 topline performance. At 6.2%, growth in JGS topline has accounted for the least in the last four years. JGS’s recent cash cow has basically been from his revitalized petrochem business (excluded from the chart) in the face of slower business conditions in 1Q 2016 relative to 1Q 2015.

Could this have been the reason or one of the reasons why cash was preferred to equities?

Yet if JGS share prices continue to advance, will the 82.1 level serve as a threshold for Mr Gokongwei to further sell shares for “estate planning purposes”?

If so, has Mr Gokongwei now served as a major resistance (as implicit seller) to any destabilizing speculation on JGS shares?

Or has Mr Gokongwei’s move been designed to self-regulate against speculators?

But JGS will be spending aggressively in 2016 according to media. Of course the devil is in the details. And minds can change, just look at the incoming president.

Nevertheless, if the sale has signified a politically oriented action, could it be that Mr Gokongwei may continue to hedge his wealth through even more share sales in the name of estate planning with proceeds stored abroad?

Very interesting developments.

6.9% GDP Growth In the Face of Falling Tax Revenue Growth and Online Job Recession

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6.9% GDP Growth? Then Why Has 1Q Tax Collection Growth Rate Plummeted to only 1.8% as Deficit Swells 

More signs of political economic legerdemain. While the government says the 1Q GDP was 6.9%, tax revenue growth continues to move towards the opposite direction!

Based on Bureau of Treasury data, for the 1Q 2016, tax revenues grew by only 1.79% which was the lowest level since Q1 2013. That’s because of the 7.8% crash in tax collections last March essentially negated January and February’s gains of 9.4% and 4.7% respectively.  

One can blame politics to the lapses in 1Q tax collections. 

Perhaps tax officials allowed lesser intake in order for corporations to fund the elections campaign. Maybe tax officials joined the elections campaign. Or tax officials were uncertain of the prospective tax policies by the coming administration. But while some of these excuses maybe valid, this won’t be enough to rationalize the decline.  

That’s because falling tax collections have been a trend. The rate of growth of tax collections has been in downtrend since Q1 of 2015, or even from a longer period or from Q4 of 2012.  

What a paradox: NGDP has been climbing since the low of Q1 2015 even as tax collections growth has been plunging to reach to its recent low (1Q 2016)! (see chart in upper window)  

Yet tax collections look as if they mirror on the nominal topline growth rate of PSEi’s 30.  

If RGDP was indeed 6.9% (NGDP 7.6%), then why has tax collections been cascading????  

And the consequence of sagging tax collections and ballooning expenditures has been to enlarge the fiscal deficit.  

And higher deficits would eventually lead to higher debt levels and even MORE downside pressure on the peso!    

Government debt by rose by only 2.57% in the 1Q 2016 with foreign denominated debt taking the load of increase at 7.6%, while domestic debt was almost unchanged up by only +.45%.  

And expect more splurges from the incoming administration to put pressure on the government’s balance sheets

6.9% GDP Growth and the Online Job Market Recession 

It’s not just tax collections.

Private sector’s online hiring statistics continues to show of a job opening recession.  Monster.com’s online hiring tumbled by a huge 24% last March. In the first quarter, job placements plummeted by 32.45%! 

And it is not just Monster.com. 

My weekly tabulation of Jobstreet.com’s numbers* has essentially mirrored Monster.com. From about 110,000 in December 2014, jobstreet’s numbers are now at around 60,000 to 62,000. That’s a collapse of about 45% from 2014. Although current levels have recovered from a low of 48,000-50,000 last January. 

*Jobstreet has no official employment index so I do my own tallying 

Meanwhile Jobs.db’s hiring numbers have entirely collapsed from 37,000 in April 2015 to only 70s (yes seventies) last week! In fact, jobs.db announced that it will cease operations starting June 30! 

Economic boom in the face of jobs drought. Yeah right! 

The only alternative explanation would be that the job hiring process has been taking place outsidethe online spectrum. Perhaps a return to traditional media advertisement (Bulletin) or through direct channels conducted through viral means. Nonetheless, such alternative job advertisement and hiring process would translate to a more inefficient and costly way of getting new employees. Will employers sacrifice profits by going for higher cost of recruitment? 

If the economy has been growing by 6.9% then why has online job placements been cratering? Like taxes, the government aggregated economy wide-survey and actual economic activities simply do not square. 

I will wait for PSE’s 1Q official data on its universe of listed firms.

Test Post

Test post. Purpose is to find out if email subscribers would still receive blog post even in private setting

Prudent Investor Newsletters Will Go Into Hibernation…

It seems time to go into deep meditation.

So this blog will go into hibernation.

First I will set blog to private,

Then updates will cease...until perhaps the time will be ripe.

Nevertheless, thank you very much for patronage.

I offer a farewell prayer for us all. From Psalm 23:

The LORD is my shepherd,

I lack nothing.

He makes me lie down in green pastures,

he leads me beside quiet waters,

he refreshes my soul.

He guides me along the right paths for his name’s sake.

Even though I walk through the darkest valley,

I will fear no evil, for you are with me;

your rod and your staff,

they comfort me.

You prepare a table before me in the presence of my enemies.

You anoint my head with oil; my cup overflows.

Surely your goodness and love will follow me all the days of my life,

and I will dwell in the house of the LORD forever.

Yours in liberty,

Benson

Vote Buying, Election Spending and Money Supply Growth

At the Library of Economics and Liberty, Ms Emily Skarbek cited an interesting study that correlates vote buying with money supply growth: (bold mine)

Traditional theories of political business cycles - Nordhaus (1975), MacRae (1977), Persson and Tabellini (1990) - predict monetary expansions in the run up to an election. Stimulating the economy, they argue, can help the incumbent politicians win elections. These theories suggest that the growth in M1 is a result of deliberate manipulation of the money supply leading up to the election as a means of gaining support.

But what if that isn't the story in countries with weak institutions? What if the increase in the monetary aggregate occurs actually as a by-product of outright vote buying, which happens concurrent with the election because of increased cash demand? This is the hypothesis for democracies outside the OECD put forward by Toke Aidt, Zareh Asatryan, Lusine Badalyan, and Friedrich Heinemann in a recent working paper.

The paper looks at month-to-month fluctuations in the growth rate of M1 in 85 low and middle-income democracies. The evidence shows a sizeable increase in the growth rate of M1 in election months. Their mechanism to explain this is vote buying in machine politics, where vote buying means outright payments or gifts in exchange for voting in a particular way or for showing up to vote.

The idea is that vote buying requires significant amounts of cash to be disbursed right before the election is held. This increases the demand for liquidity and affects M1 in several ways. First, resources to buy votes could come from converting illiquid assets into cash. This substitution from broad money into cash or deposits directly increases M1. Second, vote-buying funds may come from the shadow economy. Once this is used to buy votes, a fraction of it ends up in bank deposits. Third, incumbent governments may simply run the printing press. Each of these would result in a spike in M1 very close to the election date.

What they find is that systematic, large-scale vote buying has short-run effects on aggregate measures of the money supply. But to be an effective electoral strategy, vote buying requires weak democratic institutions, poorly monitored elections, and an electorate willing to "sell" their votes. Their pattern of evidence supports this, finding no effect of this mechanism in established OECD democracies.

I'd expand the issue as not just direct vote buying but also indirect vote buying or overall election spending; particularly campaign materials (shirts, tv ads, wrist bands etc), campaign spending (travel expenses, food lodging, etc), cost of mobilization of campaign machinery and more.

Let us see how this applies to the Philippines. Below are changes in M1* 1 year prior to national elections

* note M1--consists of currency in circulation (or currency outside depository corporations) and peso demand deposits (BSP).

2004 national elections (presidential and senatorial)

2007 senatorial elections 

2010 national elections (presidential and senatorial)

2013 senatorial elections

2016 national presidential and senatorial elections

Hmmmmm