In this issue
Signs of Historic Times? Online Broker Warns on Wild Speculative Punts!
-Online Broker Warns on Wild Speculative Punts!
-Broadening BW-SSO Price Dynamics and the Moral Hazard
-Retail Accounts as Unwitting Tools for Interest Groups
-The Mechanisms of the Greater Fool Dynamic
-Sound Long Term Economic Prospects? Surging Price Inflation!
-Market Timing is the Essence of Asset Price Arbitraging!
-The Myth of Long Term Investing in the Philippine Stock Market
Signs of Historic Times? Online Broker Warns of Wild Speculative Punts!
More signs of times?
Online Broker Warns on Wild Speculative Punts!
Interestingly, last week, one of the biggest domestic online brokers issued to their clients an advisory to warn against wanton speculation.
It noted that many neophytes have joined the hunt for free money through hysteric speculative punts. Newbies have engaged in something, which according to the broker, have hardly any knowledge of. Adrenalin has substituted for the mundane or the supposed absence of fundamentals in investing. And the lack of fundamentals has represented the key reason why the public suffer losses. Consequently, such losses lead to the eventual diminishing of faith to invest in the stock market.
The lesson of investing, according to the broker, has not been about market timing, but rather the length of exposure in the markets, or its long term prospects. Of course, long term, for the broker, remains bullish.
Such word of caution by a bigwig from the sellside should be much appreciated. This is rare especially for the industry that has been captured and mesmerized by easy money.
More importantly, from my end, it is a sign of time.
Although this should be a nice gesture, of course, it is not enough. And it is not enough because such have been incomplete, somewhat self-contradictory and selective.
Yet such developments essentially uphold my observations of the critical shift of activities to extreme episodes of speculations in the second and third tiers.
I wrote about this just last week.
Broadening BW-SSO Price Dynamics and the Moral Hazard
And to back the numerous accounts of issue specific gamut of vertiginous price spirals, an indicator—the average daily traded—should serve as circumstantial proof of such transition (see upper window at chart below)
The number of traded issues serves as a key indicator to the broader market’s risk appetite. The higher the number of daily traded issues, the greater the activities in third tier or largely less liquid or fringe issues.
The same barometer, which hit a record high in the 3Q of 2016, appears to signal another attempt for a breakout from its 5 week consolidation phase.
A breakout could mean a renewed thrust at the 2016 record.
To recall, 3Q of 2016 was when the PSEi reached 8,100. 8,100 was backed by vertical price actions by many of key index issues.
TWELVE PSEi issues hit a record over the same period. Ten or 83.33% emerged from the top 15 biggest market cap.
The question now hinges on whether the broadmarket speculative fever should spillover to the PSEi or if this should presage the short circuited end of the cycle.
If the PSEi reciprocates, then present course of action by fringe issues may be sustained for a while
As noted last week, human actions are interrelated, entwined and connected.
These growing incidences of vertical price movements have not been isolated from the progressing entropic developments at the PSEi as a result of massive manipulations.
Most will be rationalized from a demand shock—new information that alludes to G-R-O-W-T-H regardless of the validity of its premises.
In reality, both market manipulation and vertical prices are symptoms of the mortal sins of unabated credit expansion or currency debasement.
For the week, upside ‘mark the close’ pumps accounted for 46.99 points or .65% of the previous week’s PSEi close. Dumps registered 19.34 points or .27%, again, of the PSEi’s February 10th close. Combined (66.33 points), pumps and dumps accounted for an incredible .92% of the PSEi’s weekly activities.
That’s how distorted prices of securities at the PSE have been. And price distortions are presently being vented on the sharp price fluctuations or via price dislocations (instability).
When the public has come to believe that prices will be supported by “whatever it takes” then such would feed into the public’s gambling instinct.
Such assumption of permanently higher prices (or the stock market has become a political right) has served as incentives for mass speculations.
Retail Accounts as Unwitting Tools for Interest Groups
Yet retail accounts have hardly constituted a significant factor in either pumps and dumps or vertical price spirals at the PSE.
Retail accounts enrolled at the PSE have been a measly 712,549 in 2015, which was up 11.2% 640,665 in 2014, based on the PSE’s 2016 report. In gross terms, PSE accounts grew by only 71,884! [I am not aware how the PSE has treated multiple accounts held by individuals at different brokers or of family accounts—multiple named accounts but handled by a single person]
The bulk of the growth had been in online accounts (35.6%). Online accounts at 236,669 have accounted for 33.21% of total retail accounts.
In 2015, PSEi ended at 6,952.08 for a -3.85% return. But that’s after the 1Q rampage which prompted the PSEi to hit its first 8,127.48 in April 10. I suspect that the gist of the 2015 retail accounts growth came when the PSEi was cavorting at the top.
Nevertheless, the population remains severely underexposed to Philippine stocks (which should be a blessing under the current conditions)
According to Worldometers, the Philippine population was at 100,699,395 in 2015 that’s up from 99,138,690 in 2014. In perspective, this means PSE (direct) accounts constituted an insignificant .71% share of the population.
I suspect that indirect UITFs, Mutual funds and other fiduciary accounts would hardly exceed 3-4% of the population.
In addition, while indicated population growth rate was at 1.57%, or that the population grew by 1.561 million in terms of head count, the additional 71,884 accounts in 2015 represented only 4.6% of population growth.
So no matter the boisterous assertions by media and their favored experts have been about the stock market, such has been of little significance to the general population. This likewise shows how media has been biased towards reporting of the concerns of the moneyed class (their audience).
…40.9 percent of retail accounts are held by retail investors whose annual income is less than P500 thousand. Retail investors with an income of over P1 million accounted for 32.3 percent of total retail investors while the remaining 26.8 percent of investors have an annual income of P500 thousand to P1 million.
In terms of employment, 51.0 percent of the retail investors are locally employed, 29.0 percent are self-employed, and 13.3 percent are retired. Overseas Filipino Workers account for 2.6 percent of retail investors, 2.4 percent are students, and the remaining 1.7 percent are unemployed.
Retail investors are mostly based in the Philippines, making up 96.1 percent of the count while 3.9 percent of investors are based in other countries. Of the accounts in the Philippines, 72.7 percent are from Metro Manila, 15.0 percent are from Luzon, 5.6 percent are from Visayas, and 2.8 percent are from Mindanao.
Such numbers provide further insight or evidence that retail accounts have only served as the proverbial pigs being led to the slaughterhouses by insiders/vested interest groups that control a vast majority of trading activities at the PSE.
It’s unfortunate that despite the statistics in front of them, PSE and SEC officials remain blind to the systematic assault on the market process. Worst, the illicit transfer of resources through vertical price actions (pumps and dumps)
Of course, all these have been enabled by no less than the BSP’s easy money policies.
Again the great Henry Hazlitt*, [bold mine]
Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It isharmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.
The Mechanisms of the Greater Fool Dynamic
I have already shown you last week how credit inflation has supported the activities in the PSE.
Such reveals to us the ROOTs of frenzied speculations.
Monetary policies, which has effectively been reducing people’s time horizons (or increases time preferences), have impelled for such febrile speculations, which redound to gambling, as well as, to employ market manipulations.
People’s actions do not exist out of a vacuum. Instead they have been subtly or indirectly induced to do so from social policies.
Or when the cost to speculate, to gamble and to price fix or game the system have been lowered due to the BSP's negativereal rates policies and backed by sleeping at the wheels by the market regulatory agencies, then there will be more of rabid speculation, gambling and price fixing!
We can apply a makeshift pump and dump scenario.
Flushed with money or access to money, insiders/vested interest groups contrive plans to bolster specific issue/s. First, they accumulate silently. When they reach significant positions, they use current events or spread (mis)information that will be accompanied by price pumps from their designated jockey/s. Forums and brokers pick this up, disseminate the information, sees rising prices to feed the confirmation bias, and subsequently, join the pump.
The public, being suckers for dopamine stimulated instant gratification, come to believe that prices can only move higher. Or that someone at the other end will keep on buying. Such feeds on the frenzied bidding process. Hence, the herding effect runs in full throttle. Eventually, insiders/vested interest groups unload. And the poor suckers will be left holding the empty bag!
And this exactly is what the “greater fool” translates to. Retail accounts become the equivalent of the political jargon known as Lenin’s supposed “useful idiots” or sacrificial lambs for politicians. Useful idiots here are the sacrificial lambs for insiders/vested interest groups where profits get transferred from price chasing retail accounts to insiders/vested interest groups.
Furthermore, the failure to distinguish credit booms with real or authentic economic booms buttresses greater fool activities.
Aside from the misleading incentives provided by price fixing, dominant mainstream literatures that justify higher stock market prices EQUALS G-R-O-W-T-H deepens the public misperceptions about risk benefit tradeoffs from the stock market.
Since the public have been hardwired to see G-R-O-W-T-H as a perpetual dynamic, they have developed Pavlovian expectations or have been programmed to chase prices regardless of “fundamentals”.
Like in the awesome 2013 movie, Now You See Me, several deliberately hypnotized people from the audience scramble or charge into the stage to defend the protagonist magicians from authorities, when the trigger word “freeze” was ironically uttered by an official. This link shows the featured scene. For the Philippine version, G-R-O-W-T-H is the equivalent trigger word for panic buying.
To recall, in 2016, the PSEi flew by a shocking 33.17% to 8,100 in July from January’s 6,084, which was mostly from the BSP’s force feeding of credit into the economy.
It was a feat accomplished in just SIX months or LESS THAN HALF the time required its predecessor (14 months or full year 2014 to 1Q 2015)!
As noted above, such were mainly from vertical pumps in 12 of the 30 issues, mostly from the top 15, which hit record highs then.
Had there been anyone from the mainstream who screamed “STOP or BEWARE this is gambling!”— because share prices have bolted way past their respective fundamentals????
Or has the public’s panic buying been an exclusive right reserved for PSEi issues???
Ironically, when share prices came tumbling down, the PSEi has been labeled by international media as “the most expensive in Asia”.
Never has it been asked how such conditions have actually emerged!
In the mainstream’s world, causes exist in a void.
Sound Long Term Economic Prospects? Surging Price Inflation!
Just take a look at how strong the supposed G-R-O-W-T-H environment should be.
There have been growing disparities between the government’s policy sensitive barometer of consumer prices—as determined by surveyed prices at the consumer purchase level—or the CPI, as against consumer prices declared at retail outlets—or the General Retail Price Index (GRPI) which I have repeatedly been pointing out
Now my suspicion has been confirmed: policy sensitive CPI has turned out to be the odd man out. Reason? Even general wholesale prices have run berserk!
The Philippine Statistics Authority noted that its General Wholesale Prices for December 2016 was at 5.5% (upper right). The price change from latter semester of 2016 has been stunningly vertical, in specific, August +.8%, September +1.9%, October +3.0%, November +3.1% and December +5.5%!!! December’s price growth has rocketed to 2014 highs!!!
The PSA’s discussion for the price surge in the intermediary stage of consumer product distribution: “Higher annual increment was recorded in crude materials, inedible except fuels index at 25.5 percent; mineral fuels, lubricants and related materials index, 19.0 percent; and manufactured goods classified chiefly by materials index, 0.8 percent. Slower annual gains were, however, noticed in the indices of the following commodity groups: food, 2.2 percent; beverages and tobacco, 1.4 percent; chemicals including animals and vegetable oils and fats, 9.7 percent; and miscellaneous manufactured articles, 1.8 percent. That for machinery and transport equipment index remained at its previous month’s rate of 0.2 percent”
You see, spiraling growth rates of GRPI and now GWPI has matched! Both are now either past 2014 or at 2014 growth rates. As a refresher, 2014’s surge in prices reflected on 10 consecutive months of 30+++%%% m3 growth rate! Present M3 growth has been in low teens.
And price surges have not been confined to the consumer level, construction prices have also run amuck at both wholesale and retail levels for January 2017!!!
Construction inflation rates have zoomed to FOUR year highs for retail and to FIVE year highs for wholesale!
January’s construction wholesale dynamics according to the PSA: “The Construction Materials Wholesale Price Index (CMWPI) in the National Capital Region (NCR) continued to climb as it recorded a higher annual growth of 3.6 percent in January 2017. It picked up by 3.1 percent in December 2016 and 0.8 percent in January 2016. The annual growth of fuels and lubricants index further moved upward by 18.9 percent. Moreover, higher annual mark-ups were posted in the indices of hardware at 1.2 percent and PVC pipes, 0.7 percent. From negative annual rates in the previous month, the indices of lumber and structural steel both went up by 1.3 percent; tileworks, 0.6 percent; and painting works, 0.9 percent. On the other hand, slower annual increases were seen in the indices of sand and gravel at 2.5 percent; concrete products, 1.8 percent; cement, 1.7 percent; reinforcing steel, 5.2 percent; and plumbing fixtures and accessories/waterworks, 0.3 percent. Annual declines were registered in the indices of plywood at -0.2 percent; doors, jambs, and steel casement, -0.3 percent; and electrical works, -0.7 percent. Other commodity groups had zero growth”
January’s construction retail dynamics according to the PSA: “Its annual growth in December 2016 was pegged at 1.8 percent while in January 2016, it went down by 0.9 percent. Higher annual increments were observed in the indices of electrical materials at 2.0 percent; masonry materials, 3.7 percent; painting materials and related compounds, 1.3 percent; plumbing materials, 3.0 percent; and tinsmithry materials, 1.7 percent. On the other hand, annual increases in the indices of carpentry materials and miscellaneous construction materials decelerated to 1.5 percent and 5.5 percent, respectively”
And if there’s anything from the above, it shows that the process of profit squeezes and loss of consumer purchasing power has not only been in motion but have been hastening!
And this comes in the face of a continued race to build supply!!!!!
Of course, all these depend on the trustworthiness of government’s statistics.
Yet understand that CPI has departed from the above!
By the way, January CPI was reported only by the BSP at 2.7%!
Aside from CPI, has the money supply growth data been deliberately subdued?
The enlarging deviance in statistics exhibits signs of likely intent to purposely suppress information.
It’s easy to simplify the above price inflation as having been influenced mainly by changes in oil prices.
While oil prices did play a role, it’s not the core of the story.
It’s only in the 4Q of 2016 where import prices picked up.
It’s also in this quarter where the USD php rose to 2008 highs.
Also. oil prices both seen in the European BRENT and the US WTI have largely been range bound over the past two years, this includes most of the 4Q prices (green rectangle lower pane).
Oil prices have plunged only in late 2015 (December) to 1Q 2016. This means that the transmission mechanism from the 1Q oil price crash in 2015 and the oil price surge of 2017 should only be felt now (1Q 2017).
Yet again, except for general wholesale prices, all three, namely GRPI, construction wholesale and retail prices have been rocketing for the entire 2016!
And if the general prices in the real economy will continue with its upside streak, this more than presages the coming of stagflation (stagnating economy under high inflation), such environment augurs for higher interest rates!
And monetary tightening will definitely have an adverse impact on foundations dependent on credit expansion for the GDP and for corporate earnings performance.
The free lunch from credit fueled GDP and earnings have been coming home to roost. And yet buy for the long term????
Market Timing is the Essence of Asset Price Arbitraging!
Another major misimpression by the mainstream has been about “timing the markets”.
The financial market has been about price arbitrages. People take positions with the expectations to profit from price changes from an underlying security ACROSS time.
Whether 1 second, 30 seconds, 60 seconds, 1 hour, 1 day, 1 month, 1 year, 10 years or other time variations, and whether such positions have been predicated, rationalized or justified from price momentum or price patterns or growth or value investing, or market cycles or behavioral mechanics or mere hearsay, time represents a sine qua non factor in price arbitrages.
Or market timing functions as a key building block to price arbitrages. In short, one cannot speculate, invest, hedge or gamble in the financial markets without timing the markets.
When people talk about avoiding market timing, they are most likely referring to momentum. They may be cautioning people from price chasing. This is a sensible thing.
Yet the irony here is that the sellside industry promotes tools like charting as a way to induce trade churning which represents their (our) bread and butter.
And chart reading has mostly been about momentum.
More importantly, when people refer to long term investments, it also involves timing. The difference is that earnings are expected to outgrow or eventually reflect on or justify entry price levels over time.
But in the current setting, where credit expansion interpreted as G-R-O-W-T-H has been rationalized with high prices, such can be very devastating in terms of portfolio management.
Buying at very expensive levels, whether they are blue chip issues or fringe issues, are a surefire way to a catastrophic portfolio.
The Myth of Long Term Investing in the Philippine Stock Market
In 2002 and 2008, I used to be the most avid bull for the PSE.
Today, I’m the mainstream’s worst nemesis. And yes, I feel the social cost of this. But this doesn’t matter as much as the advocacy and truth that I intend to represent.
Yet my premise has been simple. I am an acolyte or disciple of cycles, specifically the business cycle (Austrian Business Cycle Theory), stock market cycles (price and behavioral phases) and credit cycles which forms the central part of my understanding of investments.
Besides, life’s harsh lessons from my previous recklessness have taught me that self control is the most important discipline in the markets. And this I written through the years to share with no expectations of recompense.
As industrialist Jean Paul Getty rightly admonished*… (bold mine)
For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips… The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.
Yet it’s simply NOT true that long term investments have been tantamount to profitability as commonly perceived by the mainstream.
Historically, such hypothesis does not work for the Philippines.
That’s unless one operates under the assumption that “this time is different”.
But this time won’t be different, believe me.
For the recent secular cycle, the Phisix hit a high of 7,400 in May 2013.
It’s been almost four years since and yet the headline index has played jump the rope with 7,400.
Worst, in order to retain a semblance of robustness, market price manipulation has been employed with brazeness and with impunity.
In other words, current price levels have been artificial unsustainably propped up, not only by huge credit inflation, but also by gaming of the pricing system.
Yet there will be a significant price to pay for such abuse and resultant deformation of the markets.
While at it, in the face of a relatively limited exposure by the population to the formal banking system, systemic leveraging continues to mount or to intensify.
Loans at the banking system (industrial plus consumer) have grown by mid teens ever since the BSP shifted to a subsidy based domestic demand model growth in 2009. Surging loans have now been accompanied by a resurgent inflation.
In 2007-2008, the PSE crashed even without any structural economic and financial deficiencies. What makes the people think that today’s increasingly levered system will make the PSE invincible? Hubris?
Rewind back to the 1990s. One would realize that buying at the top (1994-1997) would not only see their portfolio thoroughly smashed (by about -70%) when the bear market usurped full control, it took a full 10 years for the Phisix to recover the levels it reached in 1997!
So losses haven’t been limited to asset pricing deficits but also incorporates implicit losses from inflation and from opportunity costs. Perhaps a sari-sari store would have made a better investment option than investing in stocks.
Flashback to the 1970s. From the secular cycle peak at 1979, the Phisix was crushed by staggering 81%! It had to endure a full 8 years for a complete convalescence.
This debunks the idea that long investing is a viable theme for Philippine stocks.
Contra popular perception, markets are a process. They evolve. They don’t exist out of a blackhole. They are products of human action.
The 7,400 jump the rope represents a major topping process. The longer it stays here, the more fragile it becomes as sins of commission and omission accumulate and or intensifies. The greater the fragility, the larger its potential losses.
Yet the current state of global markets has been almost entirely dependent on the collective debasement of money.
Said differently, since 2008, the world has survived based mainly upon the lifeline support from central banks. Yet these are no free lunches. The cost of these has not only been reflected on increased unsoundness or susceptibility of the global economic system mainly from economic misallocation and maladjustments as manifested by the deepening dependenceon debt, as well as, the proliferation of global asset bubbles, it has spawned a wave of political populism anchored on sociological short-termism or the superhero effects.
Any one of these salient vulnerable spots can serve as the proverbial prick to the current global bubble.
And the Philippines have just been part of such wave of transformations brought about by the transitional phases of sustained monetary debasement.
For now, warnings by some in the mainstream over speculative frenzies should serve as writing on the wall.
In the fullness of time, I’d be back as the most ferocious bull!
And who knows there might be wonderful opportunities similar to this: a shopping mall in the US was sold last January for ONE HUNDRED DOLLARS (USD $100) only!!!
From CNBC: A Pittsburgh mall sold at an auction for less than the retail price of an Amazon Echo. Attorney Nicholas Godfrey made the only bid at a foreclosure auction for the Pittsburgh Mills shopping center Wednesday, the Pittsburgh Tribune-Review reported. Godfrey, representing the mortgage holder Wells Fargo, bought the 1.1 million-square-foot mall for $100—despite the fact that it was once valued at nearly $200 million.
