Ayala Corp’s Blowoff Phase: Will This Time Be Different?‏

The PSEi staged another mighty 1.47% rally today. With yesterday’s 1.1%, the cumulative two day gains have accounted for a whopping 2.58%!

That’s aside from last week’s weekly gain of 1.38% and the other week’s 1.54%. So the vertical or blowoff phase has only been escalating.

The two day pump has also sent the PSEi past 7,700.

As I said during the weekend, such panic buying (combined with manipulations) seems to indicate that the Philippines is about to attain ‘nirvana’. And since paradise means abundance, there would be no need for money, prices, trade and production. So better take the chance of enjoying the last vestiges of the world of scarcity.

Sarcasm aside, English novelist Aldous Leonard Huxley once wrote “That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.”

Let me showcase the history of Ayala Corp in the face of its experiences with the VERTICAL CLIMB dynamic. 

Ayala Corp closed unchanged today.

The long term chart of AC shows of the various blowoff phases it had encountered since 1984. Question is: What does history tell us of the lessons of blowoff phases?

From the depth of January 21 2016, AC has skyrocketed by a stunning 42.5% (so far)!

Yet the previous path to April 10 2015’s 8,127.48 was hardly the same as what is being experienced today.

Current activities look more like the how the first PSEi 7,400 was attained in 1H 2013.  Then or in 2013 AC soared by a staggering 64.91% with the vertical climb occurring at the final runup phase (March to May). Unfortunately, what followed was a crash -25.82% to the bear market levels

Through another colossal vertical +60.25% post crash ascent from August to November 2007, AC also beat its July 2007 high. Sad to say, this ended in tears as AC plunged by wretched 66.35% through the close of 2008. 

 

Oh, in the 1996-97 episode, AC experienced THREE parabolic runs. 

The first wave (leftmost arrow) delivered a mammoth 59% return in over 6 months. But like the 2013 and 2007 counterparts, the same bidding mania eventually hit the wall. AC tumbled 30.19% or regressed almost back to the price level where the blowoff run started. 

Like today and 2007, the 30.19% crash resulted to a violent upsurge (the second wave see middle arrow) where AC soared by 31.76%. However, like the modern day peers such momentous rally faltered. AC plummeted 41.02% from end April to June 1997. The crash prompted AC to reach a price level below the origin of the parabolic pump in 1996.

Nonetheless, like today, bulls will have none of such retreat. So AC stormed back with a dazzling 3 month 73.91% vertical run. This marked the third wave. But then again, violent upside transformed into violent downside. When AC hit its exhaustion, the firm's share prices suffered an eight month titanic 79.75% collapse!!

Rewind back to the seeds of the boom of the 90s or the post balance of payment crisis and the post Marcos era.

AC which partly represented the very cheap Phisix skyrocketed by a fantastic 206.53% in the 2H of 1989. The vertical climax was however draped by a political event—a botched coup d'état. AC consequently crashed 40% in less than a month! Notwithstanding the minor vertical climb in March to April, AC resumed its horrifying decline. At the end of the cycle, AC lost a monumental 65%! Importantly, AC returned to its July 1989 level. 

This serves as a wonderful example of the Newton’s Third law: For every action there is an equal and opposite reaction!  Much of the occurrences above have manifested signs of Newton's Third Law of motion. 

Yet it didn’t take too long for AC and the Phisix to recover and initiate a second parabolic climb. This new cycle began in early 1991 and culminated in May for a 122.2% return. But then again, violent upswings led to violent downswings. So after the peak, AC dived by 40.7% in 3 months!  

For the current cycle, at 42.5% returns, AC could still have room to climb—if it were to mimic gains of the recent episodes. Most of which had about 60% gains.  But at what costs would such price chasing actions be? A tradeoff of a potential less than 18% gains with probable losses of 25% and up? And what if AC won't follow past patterns of 60% return?

If there is anything history has to share to us, it is that destabilizing mania will end up badly. Or said differently, the obverse side of every mania is a crash. 

That’s of course unless "this time is different"

Why 4G Has Hardly Been A Factor For Some African Telecom Monopolies

Sure, countries of Africa are NOT the same as the Philippines. And sure, African monopolies are state owned. 

Just to repeat. TEL-GLO’s deal makes their 4G company a monopoly. This firm may not be technically state owned, but such have been a product of prohibitionist- anti-competition legal environment. And no, they are hardly emblematic of a “natural monopoly”. That’s because again since their existence has been dependent on legal protection, hence they are instead “rent seeking” firms or crony firms. 

4G is yet to exist here.

Moreover, because the competition of 4G will be the non-4G services brought about by the same owners of the 4G monopoly, in effect, TEL and GLO now functions as a cartel for non-4G services. 

But as I have pointed out yesterday, 4G does NOT necessarily equal GROWTH.  That’s because other factors come into play: price, income, monopoly and politics play important  roles 

My theory in practice:

From IGMENA.org

Algeria is at all times lagging behind in terms of Internet use, but this doesn’t necessarily mean that Algeria has an effective Internet situation. The Algerian Internet end-user knows better than anyone the extent of shortcomings in Internet services and broadband connectivity.

However, this reality is even more difficult to accept for citizens who realize that the poor and destitute grow everyday in Algeria in terms of utilizing IT services.

End-users in Algeria are in a catastrophic situation characterized by constant internet technical latency, high cost, frequent cuts of online Internet subscriptions.  

The situation of the Internet in Algeria is still alarming. It is worth mentioning that a growing number of Algerian end-users have suffered for decades from bad connections due to state technical monopoly over Internet ISPs….

Recently, Algeria Telecom completed 279 Multi-Service Access Node Sites (MSAN) in the province of Algiers. It offers its customers a comprehensive range of 200,000 new connections to high-speed Internet. Algeria has, despite the introduction 4G, a long way to reach a place among the countries where high-speed Internet can be easily accessed by end-users.

http://igmena.org/Internet-State-Monopoly-Algeria-Telecom

From BMI Research (a Fitch company)

BMI View: The Q1 2016 East Africa report analyses the latest industry, regulatory and macroeconomic developments within the telecommunications markets in Burundi, Ethiopia, Malawi, Rwanda, South Sudan and Sudan. These six markets are characterised by several challenging business dynamics, including low consumer spending power, high infrastructure costs, large rural populations with poor access and, some cases, politically volatile environments. Limited competition in several of these markets, along with unfavourable fiscal regimes, creates considerable downside risks to market growth. 3G and 4G subscriber penetration rates, as well as their share of total mobile subscriber bases, are expected to remain among the lowest in the world for the foreseeable future.

http://www.bmiresearch.com/ethiopia

Oh by the way, remember the movie Black Hawk Down?

The once stateless Somalia appears to have the cheapest and best telco services in Africa

From Wikipedia

After the start of the civil war, various new telecommunications companies began to spring up in the country and competed to provide missing infrastructure. Somalia now offers some of the most technologically advanced and competitively priced telecommunications and internet services in the world. Funded by Somali entrepreneurs and backed by expertise from China, Korea and Europe, these nascent telecommunications firms offer affordable mobile phone and internet services that are not available in many other parts of the continent. Customers can conduct money transfers (such as through the popular Dahabshiil) and other banking activities via mobile phones, as well as easily gain wireless Internet access. 

After forming partnerships with multinational corporations such as Sprint, ITT and Telenor, these firms now offer the cheapest and clearest phone calls in Africa. These Somali telecommunication companies also provide services to every city, town and hamlet in Somalia.There are presently around 25 mainlines per 1,000 persons, and the local availability of telephone lines (tele-density) is higher than in neighboring countries; three times greater than in adjacent Ethiopia. Prominent Somali telecommunications companies include Somtel Network, Golis Telecom Group, Hormuud Telecom, Somafone, Nationlink, Netco, Telcom and Somali Telecom Group. Hormuud Telecom alone grosses about $40 million a year. Despite their rivalry, several of these companies signed an interconnectivity deal in 2005 that allows them to set prices, maintain and expand their networks, and ensure that competition does not get out of control.

https://en.wikipedia.org/wiki/Communications_in_Somalia 

More 

From African Review

http://www.africareview.com/Special-Reports/For-cheapest-mobile-call-in-Africa-go-to-Somalia/-/979182/3073454/-/nfsx57z/-/index.html

In Mogadishu Somalia, the report says, the average cost is $2.53. This is the cheapest anyway in Africa, with Zimbabwean operating charging the highest rates at an average $20.08.

The formulae used to compute the rates is based on one developed for OECD countries to measure cost of mobile tariff, based on 30 outgoing calls a month (on and off-peak) in three minutes, plus 100 text messages. 

The factors at play in determining price differences between countries include: Degree of competition, regulation of the sector; taxes applied to telecom services in a country and the differences between on and off-net calls. The extent to which the the US dollar exchange rate in a particular country is an accurate reflection of the purchasing power parity, also a critical factor.

In Somalia that suffered over two decades of war, and currently undergoing some stabilisation, mobile services are in the hands of private operators, with very little regulation. That could explain the good rates, thanks to less government controls and charges plus the benefits of stiff competition as opposed to monopolies. 

Just to add Somalia just reestablished a transitional government in 2012 (Federal Government of Somalia) 

Somalia’s Telecom boom occurred at the new millennium. 

And presently, there are about 25 TELCO companies operating in the nation! 

That by the way is an example of free market competition!

Phisix 7,500: A Historical and Economic Perspective of Destablizing Speculations; Telecom Issues Joins the Manic Bidding Craze!

For the second week the Philippine benchmark rose by another big 1.38% to reach the 7,500 threshold. It’s the first weekly close at 7,500 since August 2015.  

But as I have pointing out here, it’s not the headline numbers that matters. Instead, it is the content or how 7,500 have been shaped. In short, the paramount concern should be the quality rather than the just quantity.

This week AEV and AC continued to set new record highs (upper window). Again it’s not milestone heights that matters but the price actions showcased by the phenomenal blowoff or vertical blast offs dynamic.  

AEV has carved out FOUR successive weeks of record setting action! AEV has returned by a shocking 19.86% in 4 weeks or an average of 4.96% a week! Talk about easy money huh!  

Meanwhile, AC has also had a fantastically volatile move. But this has been much less than AEV. AC racked up 14.9% or a four week average of 3.72%. But AC rose only 3 out of the last 4 weeks. The huge weekly average return was a result of mainly the post election weekly gain of 12.65%. This was followed by a 4.11% dump. But then the loss was more offset by another 4.66% and this week’s 1.68% pump!  

Stocks have been seen as not only bound for perpetual elevation, but more importantly they seem as destined for nirvana at the shortest possible time! All these yet the PSEi remain at 7,500.  

And because the parabolic action the led to new records in 9 of the 30 issues been inadequate to power the past Phisix 7,500, it required MORE participation. So other issues seem as being primed for a rotational pump.  

This week’s mega telco deal rationalized the permeation and intensification of PSEi’s vertical blowoff phenomenon. The telco’s were the main drivers of the service sector’s astounding 6.38% weekly returns! The service sector was responsible, which was seconded by the holding sector, for most the week’s 1.3% gains.  

And the telco giants TEL and GLO skyrocketed by a phenomenal 13.67% and 7.4% over the week! Because of the pump, TEL jumped from eight spot to reclaim the fifth spot in the PSEi ranking. Three notches in a week!  

TEL’s returns surpassed AC in just one week!  

And the vertical pump has not been limited to the telco’s, aside from the ongoing no-look-back-ever run on AEV and AC, such has spilled over to the LTG group. LTG soared by an amazing 10.24% this week!  

Again, NONE of the current features in anyway has resembled price movements in April 10, 2015’s landmark 8,127.48. Yet while current dynamic has similar traits with the runup towards May 2013 highs, as previously discussed, today’s activities appear to be flavored with sharper intensity, deepening hysteria and wanton desperation to reclaim April 2015 highs—with FORCE!  

For a lot of stocks current actions are unprecedented.  

But not for the PSEi and the sectoral performance.  

Mark Twain tells us that history rhymes. So history may provide us clues of the blueprint of the recent blastoff  moves.

The above chart illustrates on price actions of the Phisix (red), Banking (green) and Commercial-Industrial (red) during different eras, particularly today’s parabolic move, the tops of 2007-2008 and the 1996-1997.

The next chart exhibits on the other sectors, the holding sector (black), property (red) and services (blue) over the same time frames. 

As caveat, understand that the composition of issues for the indicated benchmark indices may have or must have been different during those variant time dimensions. For instance, the PSEi has had three major changes in the benchmark calculation. That’s from price weighted variable multiplier method (fixed weights at base date) in 1987 to full market capitalization-weighted in 1989 to free float market cap in 2005. So recent changes may not have fully incorporated data from erstwhile pre-free float regimes. Here’s is the PSE’s policy on index management dated May 2011 

Yet here are the numbers during blastoff phase of the above stated time periods. 

In 1996-97, incremental gains morphed into a parabolic phase where the Phisix soared by 11.6% in the final two months (December to February) of the bullmarket. The property sector scored 13.7%, banks 16.78% and commercial industrial 10%. There was no holding and service sectors then. 

In 2007-2008, in the almost two months, the Phisix went into an even more violent V-shape run that climaxed into a vertical blastoff phase. The bottom to peak returns as follows: Phisix 34.29%, Bank 25%, commercial industrial 22.7%, property 35.98%, holding 37.33% and services 40.14% 

The two month mania eventually turned into a crash, panic and depression in over one year. 

That’s even when the Philippines had no major fundamental problems! 

The 2016 strain has been signified a longer 4 month PLUS version. It’s also been a V-shape run that presently has morphed into a totally vertical blastoff phase. Again such dynamic has been punctuated in the performances of many of the top 15 market cap issues. This means heavy punting and pumping activities have been funneled to or concentrated at the majority of the top 15 biggest market cap index sensitive issues. 

As of Friday, PSEi scored 23.5% returns from January 21 trough. The banking sector 18.07%, commercial industrial 14.76%, property 35.6%, holding 32.35% and services 14.04%. Essentially the property sector has delivered the meat of the index gains. And the property sector’s outperformance has filtered into the parent holding firms. 

These numbers or the distribution of gains tells also why the PSEi remains at 7,500. The vertical moves of the property and holding sector have essentially delivered the bulk of the weightlifting for the Phisix. The returns of the property and holding sector resonate on the 2007 activities. 

On the other hand, actions by the underperformers mean that since they have participated less on the push, thus have signified a drag. The underperformance essentially echoes on 1997 activities. 

Nonetheless the ongoing attempt to spread all vertical actions to the rest of the field. And today’s actions has represented the fusion of traits of both 1997 and 2007 

So if history were to reveal of any significant lessons: it’s that blowoff activities will most likely end up very very very badly.   

Blowoff activities are associated with end of the trend cycle phases whether a major one or a minor one. And considering the sheer ferocity of the recent pumps, this most likely point to a critical inflection stage. 

Yet economics tell us why this is likely to happen. 

Higher prices encourage sellers (law of supply: an increase in price results in an increase in quantity supplied). So as prices increase, more sellers can be expected to come on stream to take profits. Eventually, there will reach a price level point where sheer selling volume by sellers would outstrip the buyer’s (demand) capacity to buy*. 

Remember, we are not talking about just incremental but abrupt price increases. So the faster the price increase, the more sellers are incited to sell. 

Furthermore, even excluding valuation effects, the price level itself will serve as a significant barrier to sustained vertical price increases. That’s because as prices increase, this means that the buyer’s capacity will be reduced. Or the purchasing power of the currency, the peso, relative to stocks shrinks.  Said differently, the higher the price levels, the lesser amount of stocks the peso can buy. This is known as the income effect. 

So when price levels hit a critical mass where sellers (supply) start to overwhelm buyers (demand), that’s when prices first plateau, and then, begin to fall. And when sellers recognize of the price level overreach and would tolerate selling at lower prices than of the original intent, then the competition to sell emerges. Subsequently, such competition intensifies. Trend following actions take command. Momentum swings from gradual to accelerated selling as buyers dissipate. Mania transforms into frenzied selling spree or a panic. Sharp downside actions will happen until certain price levels where buyers reappear. 

* all things being equal. Other factors have also been in play: perception of economic and political conditions, foreign participation, manipulation (see next message), access to credit (see next message) and etc… 

Of course from the financial dimensions, there is the valuation effects—the inverse correlation between valuations and returns. High valuations are most likely to produce lesser returns. So as price rise higher to reflect on the valuations’ multiple expansions, the lesser the prospects of long term gains. This exactly signified the message of 1997, 2007 and 2013 

As for valuations, the PSEi’s average PER as of Thursday was at 18.54 while the more accurate measure the market cap weighted PER was at a disturbing 24.39! 

So trading activities has merely reflected on the shift of focus to short term oriented price chasing punts. In short, stock markets have been transformed into a gambling casino den. 

Of course, the alternative explanation is that the Philippines have finally discovered the leprechaun’s fountain (instead of pot) of gold at the end of the rainbow. Or paradise has arrived, where law of economics (scarcity) will finally be suspended…permanently! 

However, in paradise, abundance means money, prices, exchange and production simply ceases to exist! 

No wonder the panic buying!