The
PSE Jinx Indicator? The PSE Awakens From Hibernation to Declare
Boom’s Back!
-PSE
Wakes Up from Hibernation to Declare: Boom’s Back!
-It’s
Not G-R-O-W-T-H, But Bank Credit Conditions That Drives the PSEi!
-PSE’s
Double Standard, A Structurally Vulnerable Vertical Price Trend
-The
PSE Jinx Indicator?
The
PSE Jinx Indicator? The PSE Awakens From Hibernation to Declare
Boom’s Back!
This
week I observed of the intensifying convictions that Philippine
stocks have once again become a one way trade
Current
price actions essentially represent the deepening and intensifying
convictions of the one way street for Philippine stocks by the
participants.
And
such outlook has now moved beyond
just price actions.
The
mainstream has embraced present actions an indication
of accomplishment.
More importantly, this has now been construed as an entrenched
dynamic.
PSE
Wakes Up from Hibernation to Declare: Boom’s Back!
The
PSE index (PSEi) surged to its highest intraday level for the year at
7,980.75, up by 182.22 points or 2.34 percent from yesterday's
close.
"Many
markets appear to have recovered from the initial impact of the
Brexit but the Philippine market generated an additional impetus from
the historic transition to the Duterte Administration. We are hopeful
that we will have a strong second half supported by solid economic
fundamentals and expectations of further growth under the new
administration, said PSE President and CEO Hans B. Sicat.
In
the past, the PSE vociferously celebrated record highs. As of
Friday’s close, the PSEi remains off 3.65% from the April 10, 2015
watermark. Ironically, the surfacing of the reanimated PSE
disclosure.
Notice
too that the PSE dogmatically worshipped each “record high” which
it attributes to G-R-O-W-T-H or to economic conditions.
The
PSEi makes it appear that economic fundamentals reflect on such price
levels.
Yet
any serious thinker would realize that present price levels have
signified symptoms of massive mispricings. As of Thursday’s PER,
the average TTM PER of the PSEi has soared to 19.65 whereas the
market cap weighted average PER of the same index has spiked to an
dumbfounding 25.66!!!!!!!!!!! Yes folks, the market cap weighted PER
have now almost reached the 1996 levels.
The
series of vertical pump has only been pushing prices further and
further away from reality.
And
on the path to 8,127.48 in 2015, for the month of April, the PSEi
issued 4 press releases to glorify the string of record highs
Here
are the last two announcements:
April
6: Closing above the 8,000 level is significant as it reinforces
the favorable view that investors have on our market. We are
optimistic that the positive local developments and upbeat outlook on
listed firms will
provide more upside potential for the index,"
said PSE President and CEO Hans B. Sicat. Year-to-date, the PSEi has
established 25 record finishes and has posted a gain of 11.4 percent.
April
7: Interest
rates are expected to remain low with the benign inflation data
released today which augurs well for the equities market. We hope to
more see favorable
developments
in the coming months to help sustain the gains
and attract more participation from investors," PSE President
and CEO Hans B. Sicat noted. The PSEi has now had 26 record finishes
since the start of the year. Year-to-date, the index has gained 12.0
percent.
Yet
even after reaching the peak in April 10, the PSEi venerated the boom
as the handiwork of the former president
April
14: The
Philippine Stock Exchange (PSE) commended the leadership of President
Benigno S. Aquino III for helping increase investor confidence in the
economy and contribute to the rise of the PSEi to the 8,000 level…In
his welcome remarks during the event, PSE Chairman Jose T. Pardo
said, "At the 8,000 point level, the index is giving returns
just this year of already more than 10 percent. It is interesting to
note that the unprecedented ascent to 8,000 comes with other
remarkable market indicators." …This
can only mean one thing, confidence
in the economy under your leadership,
Mr. President", Mr. Pardo stated.
The
PSE issued a total of 17 press releases in 2015 (4 in April, 2 in
March, 4 in February and 7 in January) to eulogize on the stock
market bubble!
And
PSE officials had apparently been more enthusiastic at the top in
April 2015 rather than during the post senatorial elections in May of
2013
Then
the PSEi issued only a single statement in the month of May where the
PSEi hit its milestone height of 7,392.2 in May 15
May
3, 2013: The
Philippine Stock Exchange main index or the PSEi surged to a new
all-time high on Friday driven by the positive sentiment generated by
the Standard & Poor's Ratings Services (S&P) upgrade of the
Philippines' sovereign rating to investment grade status. The PSEi
closed at 7,215.35 points, up 121.93 points or 1.72 percent.
This breaches the previous all-time high at 7,120.48 points set on
April 22. Intraday,
the PSEi also hit a new high at 7,230.40 points surpassing the
previous record intra-day level of 7,120.48 points posted on April
22. "S&P's latest upgrade of the Philippines to investment
grade status has given investors renewed confidence in our market. We
are confident that this milestone will
encourage more people
to invest in the Philippines, and participate in the excitement on
the new opportunities that have been opened up arising from this
development," PSE President and Chief Executive Officer Mr. Hans
B. Sicat said.
So
after more than a week the PSEi stumbled to a bear market.
Yet
in four months going to the milestone high of May 15 2013, the PSE
praised record highs 14 times (2 in April, 2 in March and 9 in
February).
Recall
that the PSE made 17 statements in 2015 as against 15 in 2013 to
consecrate the inflationary stock market boom! This means that PSE
officials had become more engaged and more passionate about the April
2015 boom.
Yet
as one would realize, rationalizations such as “will
provide more upside potential for the index”, “favorable
developments in the coming months to help sustain the gains” and
“will
encourage more people to invest in the Philippines” turned out to
be a malarkey, or exaggerated statements, or even establishment
propaganda. Why? Because the PSEi crashed thenceforth!
In
an interview at CNN in 2012 Starbucks CEO Howard Schultz rightly
said,
I
really believe that you cannot use the stock market as a proxy for
the economy.
Yet
for all their repeated mistakes, PSE officials seem dense to the fact
that price levels alone do not establish the state of economic
conditions.
As
proof, the Phisix had a full bear market in 2008-2009 even when the
country had only a close brush with recession.
Reality
has never ever mattered. Feel good political statement does.
It’s
Not G-R-O-W-T-H, But Bank Credit Conditions That Drives the PSEi!
What
would seem as a more appropriate link would be the correlations
between bank credit growth with the PSEi. The BSP’s bank credit
growth seems to precede the actions of the PSEi. Or, bank credit ebbs
and flows eventually appear to get reflected on PSEi fluctuations.
As
it happens, the present boom seems to have been financed by bank
credit expansion in response to the BSP’s silent stimulus initiated
in 4Q 2015 to 1Q 2016.
Nonetheless,
when the PSEi vaulted back during the first crash in August 2015, for
the FIRST time the Philippine Stock Exchange rushed to defend a
fading boom.
August
27: The Philippine Stock Exchange's (PSE) benchmark index PSEi
continued its recovery after closing at 7,022.09 up 154.17 points or
2.24 percent in today's trading. This marks the third straight
day that the index closed higher following the sharp drop of the
market on Monday, when the PSEi followed the global decline of market
prices. "The rebound of the market is a welcome relief amidst
the uncertainties in the global markets. The second
quarter growth numbers highlight the resilience
of the economy despite challenges abroad and we hope that investors
continue to look at the Philippines as a viable investment," PSE
Chairman Jose T. Pardo said.
In
hindsight, the Phisix crashed anew to a low of 6,084 in January 21,
2016. So just what happened to “resilience”? Resilience should
have actually meant the absence of crashes.
The
fact that TWO major crashes occurred during the last three years
reveals that like 1994-1997, Philippine stocks have been nurturing
imbalances for it to be vulnerable to such risks.
And
a seeming déjà vu can be seen in the context of bank
lending rates today (2012-2016) which have resonated with the
pre-Asian crisis (1994-1997) levels. Bank lending rates have been at
the lowest level for their respective credit cycles!
Moreover,
the August crash, which was blamed on “global
decline of market prices”,
also proved that internal dynamics was vulnerable enough for external
events to influence them.
So
present “resilience” means the brazen use of market manipulation
to prove their point.
Last
week I
asked about the funding dynamics of the recent vertical pumping:
Who
financed this? And how was such stunning meltup been financed? Have
these been through bank credit?
The
BSP’s
data on bank credit may have lent credence or has validated on my
suspicion. Banking loans to the financial intermediary skyrocketed to
21.05% in May (lower window)!
So
even while banking loans have sharply risen for the general industry,
manufacturing loans have hardly accelerated (upper window). So
where’s the boom for the largest sector of the economy?
PSE’s
Double Standard, A Structurally Vulnerable Vertical Price Trend
Importantly,
while the PSE has been quick to revere the ‘PSEi high EQUALs
economic G-R-O-W-T-H’ meme, the
same officials seem to have forgotten to release the 4Q 2015, full
year 2015 and 1Q 2016 aggregate financial results of the PSE universe
in their PSE monthly.
Neither
has their monthly January to April 2016 reports nor their press
releases contained such valuable information. Why? Because
the numbers have failed to concur or validate on their proposed and
desired outcomes?
I
have noted here how the aggregate numbers of PSE listed firms have
been deteriorating since 2Q,
1H
and 3Q
2015.
And
just what has the PSE been cheerleading about?
The
path to 7,800 from 6,100 can be seen from and contrasted with the two
episodes of February 2014-February 2015 (1.08 years) and January 2016
to July 1, 2016 (5.5 months or .46 year). The similar price level
dynamic reveals of the average monthly return of 2.3% and 5.21%
respectively. This demonstrates of the present truncation of time
involved to hit the same level with that of 2014-15. And
consequently, such
showcases on the tenacity of the scale and pace of the current rally.
To
wit, the current rally (5.21% per month) has reached almost the same
intensity as with the November 2012-May 2013 level which had an
average monthly return of 6.1%!
So
the sheer vehemence of the rally exposes the trend as increasingly
vulnerable to a sharp reversal, whether this would be influenced by
external factors or not.
If 2.3% a month would be sensitive to a reversal, what more of a
higher rate at a shorter time? 2013’s 6.1% a month already proved
this point (even if this was blamed on the emerging market selloff).
And
it is interesting to note of the Newton’s Third law of motion
(equal and opposite reaction) that has afflicted the run up to the
April 2015 record.
6,100
signified as part of the base (5,800-6,200) which served as a
springboard for the 2014-2015 ramp. Yet April 2015’s record top
essentially almost
gave back everything
that has been built beyond the base.
In
short, the current vertical trend itself is structurally
unsustainable.
At
best, it would need to take some of the froth off through a lengthy
process of consolidation. From here, fundamentals should grow more
than enough to offset the recent price pumps.
At
the norm, it would suffer the same Newton’s Third Law of motion
dynamic as its 2013 and 2015 predecessors.
At
worst, the PSE would suffer from a crash that would be more than the
Newton’s law.
From
a risk reward tradeoff perspective, in three potential outcomes, the
best would be close to zero returns, the other two would constitute
varying degree of losses.
Let
me add that given the massive use of manipulation to fix the index,
aside from the BSP’s silent stimulus, it is not inconceivable that
the 8,127.48 would be met. But like in 1994-1997 and in 2007,
previous highs were temporarily breached before a final breakdown
emerged. Ultimately, record
stocks will not be about price levels but about a question of
sustainability between relationship of prices and fundamentals behind
these securities.
PSE’s
Principal Agent Problem
Of
course,
PSE’s romancing of the stock market bubble represents another
noteworthy example of principal agent problem. I
know that officials of the PSE recognize that present price levels
have borne the yoke of excessive valuations.
But still, they justify the pumping and pushing in the name of
G-R-O-W-T-H.
And
as shown above they keep doing this even when they have repeatedly
been proven wrong.
And
they continue to do this perhaps because this should benefit
the PSE over the short term
(anyway in the long run, as JMKeynes said,
we are all dead), which they may be hoping for more IPOs and
increases in fees from also a hoped for increase in trading volume;
it gives the PSE officials latitude
for their personal career advancement,
as well as, to
generate political capital
through enhanced connections with officials from both the government
and from publicly listed firms—beneficiaries of the BSP’s
invisible redistribution, and most importantly, because the PSE’s
institutional audiences have shared their interests (media, supply
and buy side industries).
Of
course, another critical factor has been retail participants and
spectators have so very short memories. Because they seem to have
amnesia, PSE official’s repeated mistakes has been easily be
forgotten. So the continued promotion of recklessness.
For
as long as stocks recover, the mainstream institutions will continue
to prance along with such hopium based riskless world, where they
will tell the public that positions on risk assets such as stocks,
can only go up!
Of
course, since there is no free lunch, there will be a price to be
paid for by the hapless and gullible consumers of mainstream agenda,
most of whom do not understand the incentives driving these people’s
actions.
All
these worshipping of stock market bubbles will eventually end in
tears, in a not so distance time (perhaps at the latter half this
year?)
The
PSE Jinx Indicator?
Yet
there is a nice message from the PSE’s (as well as the
establishment’s) all-out embrace or swooning over the vertical or
Viagra stimulated ramp at the PSE.
The
PSE’s message works almost like a
magazine cover indicator, a contrary indicator contrived by Legg
Mason’s late technical analyst Paul
Montgomery. The magazine indicator points to media’s highlight
of trends at its inflection points. Applied to markets, such
contrarian gauge essentially represents the crowded
trade.
Like
the PSE, such indicator shows of a deeply held popular conviction,
sharp price movements and expectations of continuing trend as signs
of a critical turning point.
Yet
all these are interrelated.
Expectations
(based on beliefs) influence prices through actions.
If a marginal segment of market participants believe that prices will
rise, and bid accordingly, more than seller’s beliefs that prices
will fall, then this will set in motion a gamut of ascending prices.
And
price
actions influence expectations (via reinforcement or falsification).
If the resultant price increases confirm on the marginal segment’s
initial expectations, then higher prices will tend to not only
reinforce such beliefs, but likely draw in more believers via
increased participation of marginal buyers more than marginal
sellers. Under such condition, price increases will then be
sustained.
Such
feedback
loop mechanism (Reflexivity theory) creates a crowd following
function that would be forged and nurtured as a trend.
And
when trend becomes deeply embedded where everyone’s beliefs have
converged, the dearth of sellers translates to a shortage of
liquidity. However, the shortage of liquidity creates an environment
where the same market participants will want to unwind their
positions. Doing so would mean justification for such actions. And
when such actions, based on new expectations, are undertaken such
would set into motion a series of price declines. And price declines
will then be reinforced by expectations, (and rationalizations) that
subsequently, influence actions that runs on the opposite direction.
Thus boom becomes bust.
So
when the PSE issued a statement last week to sanctify the recent
highs, it
basically reflected on a popular sentiment which,
in fact, has signified symptoms
of the crowded trade.
The
deepening of conviction predicated on G-R-O-W-T-H has been founded on
rising prices. And the vicious vertical price actions have only
worked to entrench such faith, although such avowal has actually been
pillared by misconception
(higher stock prices equals G-R-O-W-T-H). Nevertheless, since such
trend has been seen as firmly established, the popular expectations
would be for its continuity.
From
such premise, we can see that it has been no coincidence that the PSE
has opted to issue more press releases in April 2015 when the PSEi
was on the way to 8,127.48 more than disclosures in February and
March of the same year and compared to the record high of 7,392 in
the month of May in the year 2013.
PSE
officials have amplified their emotional investments in the
consecration of the one way street inflationary stock market boom!
It
has been no fluke that the PSE went to boldly defend the waning boom
to the public against the August 2015 crash.
It
has been no accident that the PSE decided to hibernate or take a
respite after being proven devastatingly wrong in 2015.
It
has been no chance that the confidence of PSE officials has been
reignited for them to issue last week’s exaltation of the
revitalized vertical stock market boom
And
it has been no happenstance too that the last two public disclosures
(August 2015 and last week) by the PSE on the inflationary stock
market boom has been more about its lionizing, which ironically, has
been bereft of record levels
Therefore,
it has been hardly fortuitous for me to discern that PSE officials
have been increasingly desperate
in search of a boom.
If
so, then such desperation should imply of a nearing inflection point.
This
implies that latest pronouncements by Philippine Stock Exchange to
uphold the boom have now become a Jinx Indicator.
