The Philippine PSEi 30’s Weekly Spike of 2.88%: an Oversold, Dead Cat’s Bounce?

 Never follow the crowd―Bernard Baruch 

The Philippine PSEi 30’s Weekly Spike of 2.88%: a Dead Cat’s Bounce

 

The consensus will attribute the GDP, inflation, and several earnings beats to the PSEi 30 weekly 2.88% spike.  In contrast, circumstantial evidence reveals that it was an organized and concentrated effort. 

 

I. PSEi 30 Outperformed Asia-Pacific 

 

Up 2.88% over the week, the principal benchmark of the Philippine equity, the PSEi 30, upstaged its regional peers.  Only Pakistan's Karachi 100’s 4.18% topped the PSEi.  

Figure 1 

 

Nonetheless, Asia-Pacific remains on a risk ON mood, with 15 of 19 national bourses closing higher, averaging a return of .8%.  South Asian benchmarks posted most of this week's gains, while ASEAN indices came second. (Figure 1) 

 

As previously noted, expectations of the Fed's "terminal rates" have fueled a frenzy in bidding up capital market assets.  Idiosyncratic factors in the domestic economy have been responsible for the asymmetric dispersion of gains. 

 

II. Risk ON: The Philippine Peso and Treasuries Rallied 

 

Nevertheless, it is necessary to analyze the market internals to discover if this week's "boom" has "legs." 

 

The Philippine peso rallied by .25%.  The USDPHP closed below 56 at 55.96 last Friday—a level last seen in August 2023.  The rallying peso dampens inflation expectations.   

Figure 2 

It was a mixed week for Philippine treasuries, with yields rising on BVAL T-bills and plunging on the notes (2-10) years.  Long-term yields also slipped. (Figure 2, upper window) 

 

These developments have led to a bull flattener—long-term rates falling faster than the short ones (compared to end-October).  It means the local treasury markets have partially shifted their concern from inflation to the coming rate cuts or "pause."  (Figure 2, lower graph) 

 

A bull flattener could help the stock market in the short run.  But declining rates and/or central bank rate cuts are usually in response to a substantially slowing economy or a recessionary environment.  And such an environment wouldn't be favorable to the stock market.  

 

III. PSEi 30: 64% of this Week’s Gains from End-Session Pumps; Economic Implications 

 

Beyond the headlines, one can interpret this week's outperformance by the PSEi 30 as an outcome of non-market forces.  Or, gains by the local benchmark had been forced and artificial.  

 

Figure 3 

This week's pre-closing pumps totaled about 110.39 points or 64% of the week's advance of 172.62 points or 2.88%.  Stunning. (Figure 3, upper graph) 

 

Since the stock market represents titles to capital, price pumps or dumps spur distortions or mispricing that send false signals to the economy.    

 

As such, the extended period of distortions results in the accumulation of misallocation of resources or a maladjusted (bubble) economy. 

 

It is also a bad sign for governance because it shows the biases of authorities in protecting vested interest groups rather than preserving the integrity of a market institution.   

 

Such developments also expose the inherent weakness of extant regulations, subjecting watchdogs to "regulatory capture," which means that if certain groups can "game" the market, why wouldn't they apply the same to their firms?   Doesn't this also reflect the surfacing of corporate aberrations, such as how and why one of the biggest telco firms, after it declared a 4-year "overbudget," got away clean?  

 

It also showcases the inflationary psychology expressed as the public's increasing high-time preference (or short-term orientation) of permitting these anomalous transactions—metastasizing these into a market norm. 

 

Yet, the growing popularity of top-down/centralization workaround of the financial economy erodes productivity and savings.  

 

So, the elites work on camouflaging these by inflating economic and financial statistics, "gaming" the financial markets, and imposing controls on "real" market prices (e.g., SRPs or price caps)—which at the day's end transforms into anti-competition moat.  

 

IV. More Circumstantial Evidence of Concentration and Organized Pumps: Volume of Top Brokers and Top Traded Issues 

 

In any case, this week's surge was, ironically, accompanied by volume stagnation.  The average daily mainboard volume (MBV) tanked by 14.33% to Php 3.075 billion--below the 2017 lows! (Figure 3, lowest chart)  

Figure 4 

 

An average of 61.3% of the daily MBV were from the top 10 brokers, where cross-trades from these accounted for about 12% (my estimates).  The decreasing volume has prompted a rise in the share of the top 10 brokers. (Figure 4, topmost chart) 

 

The top 3 largest market cap (Sy group of companies) accounted for an average of 29.9% of the MBV. The share of the three companies has been on a slo-mo uptrend since 2021. (Figure 4, middle window) 

 

The top 20 most actively traded issues represented had an average of 82.9% of the MBV.  It has the same uptrend dynamics as the top 3.  

 

Again, the slowing volume has resulted in the rise of trades in the elite group (mainly from the top 10 market cap issues). 

 

In the face of diminishing volume, the growing share of the elite brokers and top traded issues highlight the mounting concentration of transactional activities.   

 

V. Dead Cat’s Bounce: Divergent Advance-Decline Spread, Skewed Distribution of Market Cap Weights and Counteracting Role of Foreign Money 

 

Further, despite the headline spike, the advance-decline spread of the PSE was (believe it or not) a NEGATIVE 23 (416 advancers, 439 decliners, and 241 unchanged)!   

 

This data tells us that there was little diffusion into the broader market. (With that volume, why would it?) The data also suggest that retail was largely absent in the runup.  

Figure 5 

Members of the PSEi 30 benefited from last week's pump, with 22 of the 30 issues up.   But again, the top 10 market cap issues had the most gains this week.  (Figure 5, upper graph) 

 

Because of these, the skewed dissemination of gains only widened the differentials between the PSEi 30s largest market caps and the benchwarmers.   

 

As of November 10, the top 5 free float market cap issues command an incredible 47.2%, while the biggest 10 group holds 69.6% of the PSEi 30's free float weight distribution.  The PSEi 30s market cap share distribution mimics the "Power Law." (Figure 5, lowest chart) 

 

End-session pumps only highlight such organized and concentrated trades by the local version of China's "national team."  As a caveat, China's NT intervenes within the intraday session and barely at the closing bell.   

Figure 6 

 

Foreign money has typically counteracted these organized and coordinated pumps. (Figure 6, upper graph) 

 

But this week's net Php 86.9 million inflows suggest that foreign funds became their ephemeral ally.  

 

Unlike in the past, foreign flows represented non-resident funds.  In contemporary times, flows from resident-owned companies domiciled abroad or through some of their international partnerships could be categorized as "foreign."    

 

There you have it; last week's stock bidding ramp, backed by circumstantial evidence of concentrated and organized pumps in the face of decaying volume, barely brings about sustainable bullish signs. 

 

Seasonal factors may help, but unless there will be improvements in savings extrapolated into volume or market liquidity, this week's spike represents an oversold, dead cat's bounce.  (Figure 6, lowest graph) 

The “Surprise‟ Philippine 5.9% Q3 GDP Powered by Deficit-Spending and Bumped by a Statistical Facade

  

Christmas is a time when kids tell Santa what they want and adults pay for it. Deficits are when adults tell the government what they want and their kids pay for it—Richard Lamm 

 

In this issue 

 

The “Surprise‟ Philippine 5.9% Q3 GDP Powered by Deficit-Spending and Bumped by a Statistical Facade   

I. 5.9% Q3 GDP: A Statistical Façade   

II. An Across-the-Board Slump in the Expenditure Side GDP; Lowest Household Spending Since Q2 2021 

III. Government or Deficit Spending Dominated Q3 GDP  

IV. Industry GDP: Finance Flexes Muscles, Share of Transport, Food and Accommodation and Professional Services Increased 

V. Real Estate Q3 GDP Bounced as Economic and Financial Concentration Risk Mounts 

VI. Agriculture August Employment Boost Unraveled; 48% Self-Poverty Rate versus the 5.9% GDP: Cui Bono? 

 

The “Surprise‟ Philippine 5.9% Q3 GDP Powered by Deficit-Spending and Bumped by a Statistical Facade

 

The Philippine Q3 GDP “surprised‟ with a 5.9% beat from public spending and statistical sleight in the face of a sweeping downdraft in the broader economy. 

I. 5.9% Q3 GDP: A Statistical Façade 

 

All hail, the Q3 GDP! Not. 

 

Yahoo Bloomberg; November 9: The Philippine economy remained on track to post Southeast Asia’s quickest expansion this year after a stellar third-quarter performance, although doubts persist amid softer consumer spending and a decline in investment. Gross domestic product in the three months through September rose 5.9% from a year earlier, the Philippine Statistics Authority said Thursday. That’s the first acceleration since the 7.7% pace clocked in the year-ago quarter. It’s also faster than the 4.7% median estimate in a Bloomberg survey and 4.3% growth in the second quarter. (bold added) 

 

Figure 1 

 

Even this media report seems troubled in explaining the embedded incoherence of the 3Q GDP.  

 

And once again, the consensus has missed badly the pin-the-tail-on-the-donkey exercise of guessing on the GDP guess.   

 

Well, "Southeast Asia’s quickest expansion" rests on the foundations of a statistical charade.   

 

First, peso-based Q3 nominal (N)GDP and real GDP were lower than the Q2 GDP.  (Figure 1, topmost chart) 

 

Lower NGDP signified slower aggregate spending, but the impact of the plunge in Q3 CPI (inflation) via the implicit index (deflator) magnified the real GDP. (Figure 1, middle window) 

 

Second, that the Q3 GDP remained below the exponential trend line reinforced the second post-pandemic trend line or the path of lower GDP.  However, the "low" base effects amplified the % growth.  

 

There was NO outgrowth in the 3Q GDP based on the trend lines. 

 

Regardless of consensus opinion, the coming GDPs will likely bounce within the range of the second trendline marked by the ceiling (exponential trend) and the floor (trend support).  The percentage change will be a function of base effects. 

 

II. An Across-the-Board Slump in the Expenditure Side GDP; Lowest Household Spending Since Q2 2021 

 

Let us delve more into the statistical economy. 

 

From the expenditure perspective, it was an across-the-board slump in the 3Q GDP.  

 

Despite the surge in Construction GDP, Real capital formation contracted -1.6% in the 3Q.    Durable goods, which account for capital equipment, plummeted from 10.5% to 1.7%. (Figure 1, lowest graph) 

 

Exports slumped from 4.4% to 2.6%.  Imports also contracted by 1.3% in Q3. 

 

Services exports, which grew by 11.4%, cushioned the decline of the Export GDP.  Services imports, which expanded by 27.7%, also tempered the shrinkage of the Import GDP.    

 

Capital formation, Exports, and Imports GDP have been on a downtrend since the reopening bounce of Q2 2021.  

Figure 2 

 

In the meantime, government construction, which jumped by 27% in Q3, also moderated the decrease in Real capital formation.  (Figure 2, topmost chart)  

 

Since 2013, the government's share of the industry's output has been on an uptrend.  Or, the construction GDP tells us that more and more activities are being diverted towards political projects. 

 

There is more.  

 

For the consensus, household spending is the pillar of the GDP since it commands a majority. 

 

Sadly, Real Household consumption GDP moderated to 5.0%, which accounted for the slowest increase since Q2 2021!  And to reinforce this slowdown, the trade GDP grew by 5.0%, which likewise represented the slowest increase since Q2 2021! (Figure 2, middle graph) 

 

Why the decrease in consumption? 

 

The Universal-Commercial Bank’s consumer credit growth has been raging (as of August).  (We defer this discussion to another time since the BSP has yet to release the September data.) 

 

Yet, what happened to the "ribbon-cutting" or Foreign Direct Investments (FDI)?  

 

August FDI grew by .34% and contracted 12.9% YTD.  Or could it be the overstatement of the FDI because a significant majority has been in debt?  From January 2016 through August 2023, the average share of debt to the total FDIs was 69.9%. (Figure 2, lowest chart) 

 

Interestingly, a former economic official seems puzzled by the struggle "to break out of a long-running $10 billion a year ceiling on foreign direct investment (FDI)."   

 

In our humble opinion, this struggle represents a lack of competitiveness, a function of suffocating political barriers. 

 

Stagnation in investments means slower capital replacement and expansion over time.  In turn, slower expansion means reduced consumption.   

 

So, what will be the source of the GDP in the coming period (year/s)? 

 

III. Government or Deficit Spending Dominated Q3 GDP  

 

If all aspects of the expenditure GDP underperformed, what sector boosted the 3Q GDP? 

 

We suggested this last October: 

 

Remember, authorities promised to do something to recover from the 2nd Quarter GDP bombshell. 

… 

In 1H, Deficit-to-GDP remained at a lofty 4.8%.  Unless the GDP picks up materially (ironically, driven by these expenditures), this ratio could expand.  The increasing dependence on fiscal measures to boost the GDP translates to "fiscal dominance." (Prudent Investor, October 2023) 

 

Figure 3 

 

Briefly, government or deficit spending. 

 

Deficit-to-GDP rose from 4.8% in Q2 to 7.5% in Q3. It was 5.71% in nine months of 2023. (Figure 3, topmost chart) 

 

Deficit-to-GDP soared from public expenditure, whose share of the GDP spiked to 24.5%, the highest level since Q4 2021. (Figure 3, second to the top window) 

 

Is the economy in recession?  Why is the government exercising "fiscal dominance?" 

 

The government admitted to this. 

GMANews, November 9: In a statement, the Department of Budget and Management (DBM) said the faster state spending “contributed a significant 36% or 2.1 percentage points of the Philippines’ remarkable 5.9% GDP growth in the third quarter of 2023.” (bold mine) 

 

36%! That is direct spending alone, which discounts all private sector spending like PPPs or industries dependent on a political clientele base!  

 

So, what happens when the slowdown—or worse—a "double dip" recession emerges?   

 

Will the deficit-to-GDP explode to another unprecedented scale? 

 

And yet the mainstream believes that politically based consumption would boost household spending? 

 

Do they not realize that what the government spends is always taken from the public? 

 

As such, the more the government spends, the fewer resources available for the private sector: the crowding out effect.  

 

The household spending to government ratio has been in a long-term downtrend since 2005. (Figure 3 second to the lowest graph) 

 

Seen from a different angle, the rise in the share of public spending GDP has taken its toll on consumers—shown by the opposite direction of trends. (Figure 3, lowest chart) 

 

And since insufficient production would back this, rising prices (inflation) would be a natural consequence.   

Figure 4  

 

Further, imports would have to rise to cover this deficit, putting pressure on the Philippine peso (via current account). (Figure 4, topmost chart) 

 

Also, because financing of deficits translates to competition with non-financial firms and banks for savings of the households, this would put pressure on liquidity, which, therefore, should lead to higher rates as evidenced by the accelerating uptrend in public spending and debt. 

 

Moreover, this intense competition for savings will also affect the stock market volume and, therefore, the performance of the PSE. 

 

And celebrating a lower public debt-to-GDP exposes the travesty of inflating the GDP.  

 

Yet, the cost of deficit spending-fueled GDP:  Today's spending will have to be paid for by taxpayers and peso holders tomorrow or in the future. 

 

There is no such thing as a free lunch (forever). 

 

IV. Industry GDP: Finance Flexes Muscles, Share of Transport, Food and Accommodation and Professional Services Increased 

 

Figure 5 

 

From the industry side, aside from construction, the natural winners were the financial industry led by the banks.   

 

The financial industry has been a principal financier of public spending—via net claims on central government (NCoG). Such operations have helped push liquidity into the system and have financialized the economy. 

 

Finance GDP surged from 5.3% in Q2 to 9.5% in Q3, while its share rose from 10.2% to 10.4%. 

 

Though the GDP has slowed for the previously blazing transport sector, its share continues to recover lost ground.  The factors described the lesser food and accommodation sector.  The transport GDP moderated from 17.5% to 11.6%, while the food and accommodation GDP slid from 27.2% to 20%.  The share of transport GDP increased from 3.2% to 3.8%, whereas the share of food and accommodation GDP likewise inched up from 1.6% to 1.8%. 

Figure 6 

 

Professional and Business Services GDP also slipped from 6.7% to 6.6%, while its share rose from 6.7% to 6.9% in Q3.  Has the intensifying politicization or centralization of the economy promoted the business interest of the legal industry? (Figure 6, topmost chart) 

 

V. Real Estate Q3 GDP Bounced as Economic and Financial Concentration Risk Mounts 

 

Finally, the real estate sector, which GDP increased from 2.9% to 4.2%, was a surprise beneficiary of the Q3 GDP.   

 

The industry's share also bounced from 5.3% to 5.9%, reaching its highest since Q3 2022.   Nonetheless, real estate's contribution to the National Account remains on a long-term downtrend since 2004. (Figure 6, middle window) 

 

All that said, four sectors, namely finance, real estate, construction, and trade accounted for nearly half or 46.4% of the real GDP while Universal and Commercial bank lending to them represented 44.72% last August, exhibiting the mounting economic and financial concentration risks.   

 

So, embellishing the GDP only disguises such risks. 

VI. Agriculture August Employment Boost Unraveled; 48% Self-Poverty Rate versus the 5.9% GDP: Cui Bono? 

 

Two last aspects.  

 

Government data produces bizarre logic.    

 

We critiqued the August labor data that suggested that the substantial boost in employment rates came from the agricultural sector.   

 

This September, the same sector was one of the three biggest to shed jobs. 

 

ABSCBN News, November 8: PSA data showed that accommodation and food service activities added 608,000 jobs during the month; followed by administrative and support service activities which added 535,000; and construction which added 481,000. Manufacturing meanwhile led the sectors with the largest job losses at 888,000 jobs lost. It was followed by wholesale and retail trade, repair of motor vehicles and motorcycles which lost 722,000 jobs. Agriculture and forestry also lost 649,000 jobs. (bold mine) 

 

With a Real GDP of .9% in Q3, the agri sector barely grew.   It shows that the alleged improvement could have been inaccurate (so the retrenchment?) Incredible. 

 

Nonetheless, if correct, the September job gains in food and accommodation sector have occurred as its Q3 GDP has eased.  Should expected growth fail to materialize, these gains could be bound for a reversal.  

 

Job losses in the manufacturing sector and trade exhibit the slowdown in their respective GDPs. 

 

Lastly, how does this self-poverty survey square with the 5.9% GDP? 

 

Inquirer.net, November 1: According to the SWS, 48 percent of Filipinos rated themselves as poor as of September, an increase from the 45-percent self-poverty rate the SWS noted in June. “Compared to June 2023, the percentage of Poor families rose by 3 points from 45 percent, while Borderline families fell by 6 points from 33 percent, and Not Poor families rose by 3 points from 22 percent,” said the SWS in its report. (bold added) 

 

If nearly half of the population sees themselves as poor, who benefits from the GDP?   

 

Our humble two cents: this reflects the overstatement of the GDP.  It also exhibits the principal beneficiaries of political spending; viz., the political elites, the bureaucracy, the private sector attached to them, and/or the politically connected economic and financial elites (most of these demonstrated above). 

 

At the day's end, there's a steep price to pay for inflating the GDP to sustain the political boondoggles financed by cheap money. 

This closing quote comes from the legendary Ayn Rand:  

 

Inflation is not caused by the actions of private citizens, but by the government: by an artificial expansion of the money supply required to support deficit spending. No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments. (Rand, 1962) 

 

____ 

References:  

 

Prudent Investor BSP’s Off-Cycle/Emergency Hike was about Protecting Deficit Spending via the Philippine Peso October 29, 2023 

 

Ayn Rand, “Who Will Protect Us from Our Protectors?”  The Objectivist Newsletter, May 1962, 18 AynRandLexicon