Underperformance of the Top 5 Shows Why PSEi Still Trades Below April 2015 Highs

Underperformance of the Top 5 Shows Why PSEi Still Trades Below April 2015 Highs

We will not have any more crashes in our time.

- John Maynard Keynes in 1927

There will be no interruption of our permanent prosperity.

- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."

- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."

- Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

Quotes from Gold-Eagle.com

As Asia’s markets tumbled over the week to reflect on global developments, only two bourses were left unscathed. Aside from Pakistan (+4.97%), the Philippine benchmark, the PSEi, even shined by advancing 1.5%.

The Sauve Qui Peut Pump and Reversion to the Mean

Given the breathtaking 1% marking the close pump last Monday, designed to project the PSEi’s exceptionalism, which was backed by another .36% end session push on Tuesday, it’s easy to construe that price fixing has mainly been responsible for this week’s outcome. Note 1.36% marking the close returns relative to the weekly 1.5% equals 91%.

The Manipulator’s contemporary creed: the PSEi must always rise and must not be permitted to go down! We have reached NIRVANA! So again, they will do whatever it takes to pump the index back to the April 2015 record highs even if this should mean even wilder upside actions.

Since the banks, Ayala Land and URC have weighed on the PSEi’s thrust to a new record (based on chart trends), this week’s runup was primarily focused on them! The banking trio, BDO (+5.02%), BPI (+2.32%) and MBT (+1.81%) PLUS Ayala Land (+3.37%) along with URC (+7.2%) were responsible for the gist of this week’s gains!

BDO 

BPI

URC

ALI

And as one would notice, vertical price actions have essentially shifted to these issues. (see charts above)

It’s truly depressing, if not revolting, to see how Philippine capital markets have been totally debauched in order for some segments of the society to continue to benefit from the invisible redistribution process channeled through negative real rates policies of the BSP.

Nevertheless, such represents one of the very essential traits of the boom-bust cycles which economic historian Charles Kindleberger vehemently warned about. Mr Kindleberger admonished that many resort to cheating or swindling in order to sustain the status quo premised on the motto of sauve qui peut (may he save himself, whoever can).

So to negate the effects of the recent crash, the frantic vertical pumping of the PSEi appears emblematic of such progressing malady. 

Even with the massive distortions brought about by actions directed at sauve qui peut, the history price actions indicates that all such collusive efforts will eventually be in vain. That’s because reversion to the mean has almost always prevailed. And reversion to the mean won’t happen only unless ‘this time is different’. Well is it?

As shown in the above chart, parabolic price spirals or vertical liftoffs in all four issues over the three years have all FALTERED.

And the common repercussion from forcible price escalations had been the Newton’s Third Law of Motion where “For every action, there is an equal and opposite reaction”. Or to paraphrase Newton: For every hysteric price pumps, there has been an almost equal and opposite reaction via price dumps! The obverse side of every mania is a crash.

PSEi 7,600: Top 5 Relative Underperformance

Let me further expand this thought with a discussion of relative performance between PSEi in 2015 and 2016.

First some notes.

As of Friday’s close, at 7,622.07 the PSEi remains 6.21% OFF the April 10 2015 high of 8.127.48.

The PSEi rose to April 2015’s record high in an incremental mode while today’s action has been from violent price surges. 

The current 5 month string of price spikes came in reaction to the 2016’s or New Year’s three week crash.

 

 

The ratio of returns of PSEi issues simply illustrates of the relative performance of PSEi issues, as of Friday, compared to the runup to the record high of 8,127.48 in 2015. 

Further note: The above are calculated from a year to specific week baseline—weekly close of April 10 2015 as against the weekly close as of June 17, 2016. A ratio of 1 means equal performance. A ratio of less than 1 equates to underperformance by the issue in 2016 relative to 2015. Whereas the ratio of over 1 means outperformance.

Five issues of the top 15 have massively outperformed in 2016, namely JGS, AEV, BPI, JFC and MPI. These are the issues that have mainly catapulted the headline index to the current levels.

With the exception of JGS, because these issues have mostly been from the latter half of the top 15 PSEi weighting scale, the impact of their record high prices have been insufficient to have pushed the headline index to a new high.

In the meantime, 5 issues have significant deficits (<.6%) but still positive returns, specifically GTCAP, BDO, MBT, ALI and SM. One issue has had a negative ratio: PLDT (which showed of negative returns for 2016).

Considering that the biggest two market cap issues have underperformed, this explains the gist of the distance between April 2016 record highs and the current levels.

Yet the biggest drag has been the fifth rank PLDT, which so far has delivered a negative year to date return (despite a three week 22.34% ramp!)

So the subpar comparative results of 3 of the 5 biggest market caps has contributed to the below record Phisix. This comes even if SM has reached record highs last May 2016.

 

This can be expanded when viewed from the aggregates

The scorecard of returns of the top 5, as of Friday’s close, at 10.44% relative to their returns in 2015 at 15.196% or the difference of 4.8% again reveals why the PSEi has still been below the April 2015 record.

Note that the top 5 issues carry a cumulative market weight of 38.41% as of Friday.

Considering that the biggest outperformance comes from the below the top 5 ranking but still within the top 15, the relative returns for the top 10 and 15 has narrowed—when seen from 2015 and today.

Yet in spite of the towering gains by SMC, PCOR and BLOOM, the average gains of the lower 15 of the PSEi index has been marginally inferior today at 9.48% relative to 9.66% in 2015. That’s because such biggest surplus returns, which came from the lowest rung, has only a combined weighting of only 2.15%. Whereas the underperformance of bigger weight issues from the lower half of the PSEi index, as EDC, ICT, MEG, AGI and DMC, has neutralized those gains.

Nonetheless, the market cap weight of the last 15 issues have accounted for only 19.06%. This tells why the performance of these issues has hardly contributed meaningfully to the overall conditions of the PSEi

Yet the PSEi average and weighted average returns has stark differences.

Seen on the average returns for the overall PSEi issues, there has been little difference (-.71%), at 10.52% year to last week (2016) relative to 11.232% in April 10 2015.

So if the PSEi climbs higher where average returns of the broader issues continue to escalate then average returns may exceed the 2015 highs returns even if PSEi remains below the watermark levels.

But seen from the market cap weighted returns of the PSEi based on year to the week ending April 10 2015 at 12.4% as against year to date of 9.64% (as of Friday) the underpeformance of the top 5, has become a lot more pronounced. Again that’s because of the top 5 subpar returns.

In short, the current seeming concerted thrust to violently inflate prices of TEL, ALI, the banks, and URC seems part of the covert exercise designed for the PSEi to forcibly reach its April 2015 record.

Yet as price pumps to bolster the headline index continues, the more prices have become dissociated or detached with reality. As one can see above, massive pumping has lifted PERs to 30,40 and even close to 50 levels!

As of Friday’s close, the average PER of the PSEi risen to 19 whereas the weighted PER was at 24.8%!

Who will be Right: Falling Peso Rising PSEi?

 

Finally the sauve qui peut pump has led to a bizarre convergence of the usually divergent USD php and the PSEi.

Gains accrued by the peso the other week was neutralized when the USD Php advanced .7% this week to Php 46.445

The USDphp usually moves in the opposite direction relative to the PSEi. Again the latter’s peculiar convergence must have likely been from the concerted pumping on the PSEi. Or has previous divergence now transformed into a convergence? From what grounds?

Now who would be wrong, the PSEi or the USD php?

Again Newton’s Law: The obverse side of every mania is a crash!

As China and Japanese Stocks Sink, PSEi Magicians Goes on An Exhibition!

“Brexit” and the faltering yuan have also put pressure on Asian stocks.

Chinese stocks via the Shanghai index submerged 3.21% to retreat back to the 2,800 levels.

Meanwhile Japan’s Nikkei crumbled by a significant 3.5%. 

Post trading hours, the Fitch cut Japan’s Credit Outlook to Negative.

And it has been more than just China and Japan, almost the entire Asia was in the red today.

That’s with the exception of the Philippines

Reason? Because the Philippines has been said to be IMMUNE to external developments! And the reason for such imperviousness has been “domestic demand”.

And the above should signify a demonstration of “domestic demand”!

Domestic demand channelled to brazen price fixing at the PSE.

Since 4Q 2014, almost every time global markets took a beating, one would notice panic buying sessions at the PSE.  Such orchestrated collusive activities appear to be designed to project “resiliency” of Philippine equities from exogenous shocks.

And the operation usually starts after the benchmark hits the early session lows. And such panic buying episodes accelerates during post lunch recess session (which I call the afternoon delight) and culminates with “marking the close”.

It's been no different for today. Down 1.3%, index managers went into action through the session end. At the last second of the regular trade, the PSEi was just down by .41%

Yet in today’s magnificent 'marking the close', the PSEi soared by a HUGE 1%!!! So not only has the PSEi’s pre market intervention phase losses of .41% been reversed, the headline index zoomed by an eye popping .59%!!!! 

And that would mean a one day 1.89% price swing! Awesome!

It is as if the index managers have been in trepidation of a return below 7,500. So to borrow from ECB’s Mario Draghi “do whatever it takes” they did everything in order to keep the index afloat.

As I have been saying, these are coordinated actions. Today, 3 industries benefited from this massive index pump, the financials, holding and property.

And essentially 5 issues delivered the meat of the pump.

To cite some examples. Metrobank soared from a .6% deficit to close up by 2.34% through a staggering 2.94% marking the close pump!

95% of BPI’s 2.63% end of the day gains were through the market intervention phase's 2.5% pump!

As you can see, the PSE doesn’t need to operate on a daily 5 hour basis. Since price fixing has been almost the order of the day, trading sessions should just be trimmed down to 30 minutes: 10 minutes runoff, 6 minutes market intervention phase and 14 minutes for opening and regular trading session. This should mean lot of savings for brokers since prices are the consideration rather than the volume.

And only in the Philippines can one see such fantastic price fixing activities!

In China where the government openly intervenes, all pumping sessions have only accrued to eventual losses. The SAFE (State Administration of Foreign Exchange) or the administrative arm of China’s central Bank the PBoC (People’s Bank of China) have been reported to have increased ownership in 13 listed companies last April. So aside from State Owned Enterprises and private stock brokers under the behest of the Xi regime, after all the massive interventions since the crash in July 2015, Chinese stocks have remained in doldrums and close to the bottom. Today's quasi-crash is a reminder of the impotence of market manipulations

Perhaps the PBoC should seek the services of our index managers!

Yet if market pressures from tightening conditions should escalate, which may find pretext from Brexit-Yuan dynamic duo, we shall see how truly immune the Philippines will be.

Instead of reforming the Philippine capital markets so it can improve to better serve the populace through the efficient transformation of savings into investments, such manipulations will only mean a setback or even a throwback of progress.

Bubbles.

China Yuan Weakens as BIS Says Foreign Exchange Markets have Systematically Failed

Friday, overseas stocks got hammered. The popular reason was that with recent polls suggesting that UK’s Brexit was suddenly in a commanding 10 point lead against Bremain, markets have viewed this as a surge in uncertainty.

By sector, the decline in US stocks was led by the energy (XLE -2.16%) and the financial industry (XLF -1.24%). While the S&P 500 was down (-.92%, year to date), the S&P Bank Index ($BIX) was slammed 1.74% (-2.6% week on week and -9.3% year to date). The NYSE Broker Dealer ($XBD) was hit -2.11% -3.63% w-o-w, -10.73% y-t-d)

The Stoxx Europe 600 Bank index plummeted 3.7% (-4.8% wow, -23.48% ytd) to approach a two month low. Deutsche Bank crashed 5.8% (-7.74% wow, -35% ytd). The FTSE Italia All Share Bank Index plunged 5.03% (down 5.85% wow, 43% ytd) now nears the 2012 lows. Now even before the Brexit poll announcement, Japan’s Topix Bank ETF dropped 1.31% (-3.2% wow and -29.44% ytd)

So while it may be true that Brexit (political risk) could have been a factor, there must be something else that must have been affecting financial stocks.

That other major factor must have been the Chinese yuan.

Last May 28, I wrote that the USD-yuan was making strides to hit its previous highs. While the Chinese went into a 5 day holiday to celebrate the Golden Week Spring Festival and because of this, the onshore yuan CNY was last traded to reflect on a rebound mostly in reaction to the weak US payroll data of the other week, the offshore yuan got clobbered.

By Friday, the offshore yuan (CNH) suffered its biggest weakly decline since March (Bloomberg). Importantly, the CNH appears to have outpaced the CNY which like in August and January incited a global asset convulsion.

And if you haven’t noticed, the strains on the China’s yuan have appeared like clockwork—every SIX months.

And why shouldn’t this happen? The January yuan (deflationary) strain has prompted the Chinese government to unleash a staggering USD 1 Trillion of Total Social Financing (lowest window)! And the magnitude of credit expansion perked up domestic liquidity which subsequently caused food inflation even when the general measure of inflation the CPI barely budged.

From the supply side alone, the flood of credit by itself should be indicative that the yuan is southbound or headed lower! 

Additionally, with the inundation of credit, the public went into a speculative binge. They revved up speculations in commodities such as iron ore and steel rebars—which eventually collapsed. Moreover, Chinese property prices have gone berserk.

So it is likely that such developments may have prompted those in the know to escalate capital flight.

Chinese May imports reported a minimal .4%. But that’s most likely because imports from Hong Kong skyrocketed by a nosebleed 242%!!! Much of these imports have likely been about over-invoicing of imported goods which serves as a way to go around capital controls to send capital abroad.

China’s reserves have most likely been propped up by derivatives, (forex swaps and futures contracts). And with such derivative tools being short term in nature, borrowed dollars will again need to be paid back or rolled over. So the 6 months cycle could have signified expiring contracts.

So even when Chinese reserves dropped by only $28 billion in May to just $3.19 trillion to its lowest level since 2011, current pressures reveal that China’s “dollar” strain may have been vastly understated.

Again China’s currency ailment could be a symptom or a manifestation of the escalating pressure on the US dollar “shortages” through wholesale finance, in particular fx swaps and forward contracts.

In a recent speech by Bank for International Settlement’s, Economic Adviser and Head of Research, Hyun Song Shin, Mr Hyun opined that a critical measure of the foreign exchange markets have broken down or in his words a “widespread failure”.

Such systematic failure which has become pronounced in the last 18 months have been seen through the Covered Interest Rate Parity (CIP)

Covered Interest Rate Parity is “a condition where the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium” (Investopedia)

In short, the relationship between interest rates and currency values has been rendered dysfunctional.

For an overview. A currency’s forward rate and the current “spot” rate provides for the implied interest rate on the US dollar. Thus the difference between Libor and FX swap-implied dollar interest rate is called “cross-currency basis”

And when the implied interest rate from the fx dollar swap is above Libor, then the borrower of dollars will be paying more than the rates at the open market.

The systemic failure or breakdown occurs when cross currency basis have consistently been in negative, or when the fx swap dollar borrowers are, as noted above, paying above the market rates.

Negative cross currency basis occurred during the Great Recession. Today it has been happening for the 18 months even “during the period of relative calm”

But such correlational breakdown has been anchored on a strong US dollar which is a symptom of tighter credit conditions. 

Mr Hyun*

The breakdown of covered interest parity is a symptom of tighter dollar credit conditions putting a squeeze on accumulated dollar liabilities built up during the previous period of easy dollar credit 

*Hyun Song Shin Global liquidity and procyclicality World Bank conference, “The state of economics, the state of the world” Washington DC, 8 June 2016 Bank for International Settlements

Ironically, the CIP breakdown has not been seen only in emerging markets but in the yen, Swiss franc and the euro. Yes negative rates economies!

And these accumulated dollar liabilities or “ dollar shorts” emanate from three aspects of the US dollar’s currency reserve and cross border transaction role: namely, trade finance, invoicing currency and funding currency.

As trade finance currency, hedging activities are usually channeled through US denominated bank credit.

As invoicing currency, borrowing and lending occurs on the currency from which trade has been denominated in. For instance, exporters who trade in US dollars tend to borrow US dollars to finance operations and real assets.

As funding currency, globalization of financial markets means that a significant number of financial- institutions (such as pensions) or investors invest or take advantage of trade or speculative arbitrages around the world. In doing so, they convert foreign currency to domestic currency where investments are made. This leads to currency mismatches which these institutions or investors apply hedge positions. And the hedging counterparty is typically a bank. And as consequence, the bank will likely resort to mitigating its currency risk exposure by borrowing dollars. In this way, dollar claims are counterbalanced by dollar debts.

In other words, dollar liabilities built the period of easy dollar credit are equivalent to dollar "shorts".

So when credit conditions tighten, the race to meet dollar obligations are magnified, hence fx borrowers to pay above market rates to cover dollar “short” positions or dollar liabilities. This leads to the systemic CIP failure. Thus the recent rise of the US dollar, which has been accompanied by the negative cross currency basis, means that global conditions have been tightening.

I might add that such correlational breakdown have also been tied with ZIRP, NIRP and QE which provided the “period of easy dollar credit” and the incentives to hedge and leverage up in USD.

Aside from the above mentioned strains, China’s weakening currency could be in part,  brought about dollar shorts and also in part from a stampede to meet such obligations.

The BIS’ latest outlook on China’s external credit conditions provides some clues [Bank for International SettlementsHighlights of the BIS international statistics (June 6, 2016)] "Cross-border bank credit to emerging market economies (EMEs) was down by $159 billion during Q4 2015, or 8% in the year to end-December 2015 – the sharpest year-on-year contraction since 2009” And this was largely due to China where “ The $114 billion decline in cross-border lending to China was the second quarterly drop in a row, and it pushed the annual growth rate down to –25%.”

Furthermore, “The $114 billion decline in cross-border lending to China was the second quarterly drop in a row, and it pushed the annual growth rate down to –25%.”

And for potential supply of dollar shorts “New data published by China confirm that banks on the mainland are becoming an increasingly important source of international bank credit. They are an especially important source of US dollar credit: their cross-border dollar assets totalled $529 billion at end-December 2015."

So if there is anything, the bank selloffs and yuan’s weakening are symptoms of the ongoing tightening credit conditions around the world.

And tightening credit conditions should extrapolate to a weaker economy and narrowing access to credit. This subsequently implies greater credit risk which should transpose into greater systemic fragility.

Is it a wonder now why George Soros made a huge bet on a market crash and called for a sell on Asia?