PSEi 30 6,950: Desperate Times Calls for Desperate ICT-SM Led SY Group Pump; The Quest for Better Absolute Returns

  

The problem is not people being uneducated. The problem is that people are educated just enough to believe what they have been taught, and not educated enough to question anything from what they have been taught—@ProfFeynman

 

PSEi 30 6,950: Desperate Times Calls for Desperate ICT-SM Led SY Group Pump; The Quest for Better Absolute Returns

 

An organized four-company pump pulled the Philippine PSEi 30 back to 6,950

 

The Philippine PSEi 30 closed the week up .33% to nearly recover the 6,950 levels, which slipped from profit-taking during the early innings of the week.

 

Through seven weeks of consecutive advances, the headline index's YTD returns swelled to 7.63% (as of March 8th) and 16.44% from troughs of October 2023.

 

Understanding the foundations of the recent rally is imperative for comprehending the stock market cycle.

 

1. Only a few issues have been responsible for most of the gains of the PSEi 30. 

Figure 1

For instance, ICT share prices have gone totally vertical!  Its % share of its free float market cap has also gone parabolic! 

 

Up by an astounding 9.4% this week, ICT etched a new all-time high last Friday as it toppled BPI for the fourth spot as the largest PSEi 30 company!   Its market cap share has gained 16%, while YTD returns delivered 25.5%!  

 

However, ICT's share prices have diverged from its 2023 financial performance. 

 

Although ICT may have contributed by about 15-18% of the PSEi 30's YTD gains, it couldn't do it alone.  

 

And so, a series of orchestrated and rotational price pumps have also incited an upside spiral of share prices of other market cap heavyweights—primarily financials.

 

But since financials were on a weekly recess, recovering the PSEi 30 to its early March levels required help from other PSEi 30 mainstays. 

 

And thus, the SM-led Sy group (the top 3 heavyweights) assisted.

Figure 2

It is no surprise that pre-closing (3) pumps and (2) dumps governed the outcome of the headline index. (charts from Technistock)

2. Market internals Diverge with the Headline Index

But the general market didn't seem to agree with the index managers.

Figure 3

Decliners dominated the PSEi 30 breadth (19 down and two unchanged).  (Figure 3, upper chart)

 

The average change was a 1.19% deficit.  It showed signs of exhaustion, but index managers wouldn't allow it.

 

The week's performance was a deviance from the overall market sentiment.

 

Decliners also prevailed over the broader market with a 507-414 in the former's favor.  

 

Though reportedly bolstered by an aggregate foreign buying of Php 1.73 billion, mainboard volume growth remained anemic, if not lethargic. 

 

Nonetheless, the easing of global financial conditions has intensified the leveraged speculative mania.

 

The Indonesian JKSE reached an all-time high (ATH) this week to join the ranks of the five national benchmarks in Asia-Pacific, which set a new milestone in 2024. (Figure 3, lower image)

Figure 4

3. Concentrated and Organized Pumps 

Circling back to the local market, mainboard volume remained outrageously remote from its predecessors (2021, 2022 and 2023). (Figure 4, topmost visuals)

 

Yet, an elite crop of (top 10) brokers (mainly institutional) dominated or continued to control a substantial share of mainboard volume. (Figure 4, middle window)

The trading volume of the Sy Group accounted for 24% of the main board volume.

The top 20 most active issues corralled 83% of the main board volume.

 

Evidence from UC bank loans exhibits that the lending growth to the financial industries appears to have resonated with the PSEi 30's performance. (Figure 4, lowest chart)

 

Does this indicate intra-industry margin trade?

4. The Impact of Market Distortions

 

This compilation of evidence suggests a "cartelized" market rather than an economically functional one. 

 

The degree of distortions could be symptomatic of massive skeletons in the closet in the balance sheets of mainstream companies. 

 

Think about the 4-year Php 48 billion "budget overrun" by one of the largest telco firms here.  

If the supervising authorities can't balance the order for the minority shareholders, the industry and the economy, why should we suppose that markets are pricing capital effectively?

 

If so, what are the repercussions of sustained and intensified distortions of capital market pricing and misallocations?  A bull market?  Or a bubble bust?

5. Quest for Better Absolute Returns 

Our goal as an independent analyst is to understand the genuine conditions of the marketplace so we can make prudent choices from the underlying risk conditions to generate better absolute returns.

 

We could have a broader scope of market forensics.  

Unfortunately, our access is limited to ungated (free) resources.  We could broaden our perspective to see monthly foreign participants and brokers per issue.  If available, the cumulative number of cross-trades and more. 

 

We could also see the depth of participation and general market sentiment via the aggregate number of issues (and components) above or below their 50-day, 100-day, or 200-day moving averages, the periodic price highs and lows, and more.

We certainly could use more data to expand our analytical horizons, which we can use in our assessment in the context of probabilities, behavioral finance, financial theories, and more.  

But then again, we are limited in resources and workforce (single analyst, data encoder, and agent/trader).

 

However, unlike the mainstream, this free subscription site aims for objective, value-free analysis, unconstrained by the agency problem (conflict of interest).  

We don't write to push for implicit sales goals or promote the interest of political or politically connected institutions—which is why there have been NO takers of the PSE's short selling (yet). 

Neither do we rely on confirmation bias themes to get "likes." 

Writing helps this free market acolyte learn more and work to improve on portfolio management, which I have been sharing with you for years.   

 

Anyway, thank you very much for listening.

 

Mark Ford: 5 Biggest Mistakes Investors Make

Mark Ford, creator of the Early To Rise website enumerates 5 common biggest mistakes investor make. It's a very practical and insightful list.

1.Being swept away by exciting stories.The business my boss got suckered into had an amazing story. A company in Central America was turning beach sand into gold. The company had “proof” of their success—in the form of audited financial statements, geologist reports, and endorsements from investment experts. My partner even went down there to see the operation. He saw the sand going in and the gold dust coming out. I didn’t invest because the story sounded so fantastic. I remember telling him, “This sounds like alchemy.” I didn’t know anything about geology or gold, but I didn’t need to. The story itself was just too crazy. When I hear stories like that nowadays, I’m totally turned off. One part of my brain might get excited, but the smarter part tells me, “Stay clear!”

My comment: In momentum trading, exciting stories are frequently rationalized to feed on a momentum dynamics. "Exciting" stories, which are attempts to reason from price changes, are therefore, based on fallacies (anchoring, survival bias and post hoc). 

Moreover, in order to exacerbate developing hysteria, establishment institutions capitalize on this by dishing out even more literatures to feed on the progressing rage. 

For the establishment, more churning more fees and commission. For the gullible audience, more excitement equals more risks.

Yet excitement and boring marks a crucial sentiment in investing success, as George Soros rightly points out,

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

2. Investing in businesses you don’t understand. My boss was a sophisticated investor. He had his own seat on the stock exchange when he was in his 20s and had been successfully investing since that time. But he knew nothing about gold mining. His ignorance allowed him to be duped by the reports and by the fraudulent factory tour. The scam was exposed by a few people in the mining business. They understood the industry and knew how to read reports with the sophistication of experience. If you don’t understand the business you’re investing in, you’re investing blind.

My comment: This is a very common  mistake especially applied to stock market retail participants (neophyte or even the veterans). 

These people read documents issued by the establishment whereby they come to perceive themselves as already "knowing" or "understanding" the business. In addition, as price movements coincide with their biases, the belief that they have acquired sufficient knowledge is reinforced. So with comfort zones established, this motivates them to stop learning.

In reality, related to or connected with "exciting stories", most of retail investors are provided with superficial information that has designed to encourage "momentum" and short term price chasing actions. Dominant institutional literatures hardly delve with the tradeoff between risk and return in the context of probability-payoff. For the consensus, emotion is equivalent to investment and prosperity.

 3. Allowing yourself to be bullied by good salespeople.I mentioned I made some bad investments early in my real estate career. They were due to a combination of the two mistakes I just enumerated. Plus, I buckled under pressure from a real estate broker who also happened to be my landlord and—I thought—my friend. I agreed to make the investments even though I had a hunch they wouldn’t work out. I ignored my instincts because she was so good at manipulating my emotions. Nowadays, whenever someone tries hard to sell me something, I take that hard selling to be a signal: Stay away!

My comment: Again, the agency problem or conflict of interest between industry people and their clients are pronounced in the financial industry. That's because of the incentives guiding industry people (fees and commissions) are different from the incentives by their clients (profit and loss from trade). Industry people use asymmetric information such as technical insights as sales pitches which they benefit from rather than their clients. Because the audience is usually overwhelmed by "technical gobbledygook" mostly founded on statistics, they buy such hokums.

The conversation in this video from a scene on the Wolf of Wall Street is very relevant. Mark Hanna mentor of Wolf of Wall Street Jordan Belfort talks about selling fugazi--fake world or selling hope to screw the clients

4. Investing in trends too late — when the only chance of making money is to find “the bigger fool.” I got into real estate investing at a good time, when prices were already going up but the values were still good. I made a lot of money as the market rose. When I could no longer buy properties at eight or 10 times yearly rentals, I realized the only way to profit was to ride the bubble to the top. But riding a bubble when the economics are bad is a fool’s game. Your only chance of winning is to find someone else willing to buy you out… someone who knows less about the market than you do. Insiders call this “the bigger fool theory.” You’d think anybody with common sense wouldn’t fall victim to this impulse. But millions of Americans (including bankers and brokers) did. There’s a time to get into a trend and a time to get out. Neither is that difficult… so long as you pay attention to the fundamental economics of the deal and ignore the excitement caused by the bubble.

My comment: all of the above four are interconnected, interrelated and or entwined. The bigger the mania, the more vociferous the establishment sales pitches and the more intense the belief of one way trades.

Here, taking an opposite position from mainstream beliefs can make one lose friends! That's how passionate convictions have become! Yet religion like fanaticism and dogmatism characterizes market inflection points!

 

5.Investing without a way to limit your losses.Sometimes, even if you use your common sense—and avoid the four mistakes I’ve already explained—you can lose money because something unpredictable happens. To avoid this, I have a rule: I never get into an investment unless I have a way out. When you’re investing in a business deal, that “way out” might be a buy/sell agreement. When you’re investing in real estate, the way out is the income you can get from renting it if you can’t sell it for any reason. When you’re investing in stocks for yearly gains or income, the way out is the trailing stop loss. There is always a way to limit your downside as long as you identify what that is before you make the investment—and stick to it. Even if you feel like you shouldn’t.

My comment. During manias, the greater the hope, the bigger the positions.  I have seen some who are fully invested at market tops. 

And most of these positions have been intended to maximize exposure from a perceived one way direction. Hence, such positioning translates to little or no margin of safety or cushion for error.  So when things get out of whack, participants become lost on how to deal with mounting losses. One way street thinking will lead to the utter destruction of a portfolio. Leverage will even amplify this.

Realize that it is not a problem to participate in a mania. This is for as long as the portfolio is designed for contingencies. Such would come in the form of asset distribution share of balance sheet allocation, position sizing and trailing stop losses. Yet these are just tools to attain an end. 

In short, self-discipline ultimately determines one's success and failure in surfing the market cycles.

Apply the opposite during depressions.

As a Wall Street saw goes, "Bulls Make Money, Bears Make Money, Pigs Get Slaughtered"