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How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

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Dubious practices, fraud and embezzlement are common during financial bubbles, which are usually created by central banks’ loose monetary policies and by a poor supervision of the financial sector—Dr. Marc Faber


In this issue

How Market Manipulation in the Philippine PSE Magnifies the Risks of a “Black Swan” Event

I. BSP Chief: Black Swans from Risky Investments Based on the Rosy Scenario

II. Parabolic ICT as the Single Benefactor of the March 21st Massive End-Session Pumps!

III. The Rotational Pump from ICT to the Financial Sector

IV. How Market Manipulation Amplifies Systemic Fragility

V. January-February 2024: PSEi 30’s Returns Outperform as Volume Slumped!

VI. Negative Market Breadth, Rising Risks of a Black Swan Event from Sustained Capital Consumption


How Market Manipulation in the Philippine PSE Magnifies the Risks of a “Black Swan” Event


The BSP Chief recently warned about “Black Swan” events resulting from the market’s risky behavior. However, frequent pumps and dumps at the PSE could be examples of such events.


I. BSP Chief: Black Swans from Risky Investments Based on the Rosy Scenario


We’ll open with an excerpt from a recent speech of the BSP Governor covering the publication of the 2023 Financial Stability Report (FSR) [bold added],


You have heard of “black swans” indicating highly unlikely surprises or “the butterfly effect” to describe how small things can lead to far-reaching consequences. These are the things we worry about. Indeed, financial market participants often make risky investments based on rosy scenarios. The more widely shared the scenario, the more dangerous it is. When something goes wrong in these scenarios, it sometimes leads to mass panic. There is a rush for the exits, causing massive investments to collapse… We remember the crisis, but we often forget the rosy scenario that led to it.  (Eli Remolona, 2023)


The default or mechanical response of almost every political authority or expert is to blame economic volatility on the marketplace.  But they hardly reveal the source of funding and incentives of market participants that lead to such ‘market failures.’


Besides, abstract attributions like “make risky investments based on rosy scenarios” don’t cause boom-bust cycles.  


Instead, the fountainhead of increased economic and financial fragility stems from a deepening of the politicization of the economy, channeled through policies that lead to the excesses in the aggregation of many variables like systemic overindebtedness, a massive misallocation of resources, intensive mispricing of markets, and hyperbolizing economic and financial conditions via inflated statistics.


If so, have authorities not been a focal point in this “rosy scenario” that breeds “black swan” events?


II. Parabolic ICT as the Single Benefactor of the March 21st Massive End-Session Pumps!


Let us help in identifying one avenue for a potential “contagion.”


Though fragrantly evident to the public, the establishment remains remarkably taciturn to the relentless “rigging” of the Philippine equity benchmark, the PSEi 30.

Figure 1


An example is the dominance of pre-closing dumps and pumps (Marking the Close—MtC) in three of the week’s five trading sessions. (Figure 1, topmost graph)


The aggregate volatility from these MtCs totaled about 1.95% of the weekly close of March 15th.  That’s about double the .87% advance posted by the PSEi 30 this week (March 22nd).


To achieve their end-session target for the PSEi 30, the collaboration by index managers typically involves bidding up/selling down several top-tier issues (at least 5).


But Thursday (March 21st) signified a historical event.  The cabal of index managers directed their actions to the share prices of a single firm, ICTSI [PSE: ICT].


ICT segued into the 5-minute pre-closing float period up by 2.16%—only to reopen during the runoff-closing period with a shocking spike of 9.28%—a massive pump equivalent to 7.12%! (Figure 1, middle pane)


Ironically, there were only 119 trades conducted during the runoff period, with a single institutional broker accounting for 68% of the total!  Only about 16 brokers participated in the massive bid-up, some of which were retail. 


In short, a few participants “forced up” ICT share prices in the closing period!


Consequently, ICT’s free float share of the market cap stunningly flew to an all-time high (ATH) of 9.22% last Thursday!  ICT toppled SMPH for the third-largest PSEi 30 firm! (Figure 1, lowest chart)


Because of the intensity of the ICT’s advance, PSEi 30 resonated with it: it jumped by .9% to close the session by 1.55%! Incredible.


III. The Rotational Pump from ICT to the Financial Sector


The next day, though ICT gave up all Thursday’s MtC gain and more, index managers rotated their support of the PSEi 30 by propping the financial components, which cushioned the PSEi 30s decline to only 1.17%.

Figure 2


The financial index not only gained by 3.34% WoW, but the “full” market share of the big three PSEi 30 banks surged to an unprecedented 18.5% last Friday! (Figure 2, topmost and middle diagrams)


As of March 21st, the top 5 market cap heavyweights (SM, BDO, ICT, SMPH, and BPI) accounted for a staggering record 50.98% share! (Figure 2, lowest image)


When accounting for the next five largest market caps, their cumulative share of the market increases to 73%!


That’s right.  Only five to ten components drive the PSEi 30!


Beyond that, the mounting concentration of gains not only reflects the intention to artificially prop up the index, it also indicates INCREASED CONCENTRATION RISKS.


IV. How Market Manipulation Amplifies Systemic Fragility


Further, political policies fuel the distortive effects of market manipulation, as noted back in 2017: (bold original)


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. (Prudent Investor, 2017)


Because only a few issues have fueled the upside performance of the headline index, the sustained shortfall in volume points to the unsustainability of its momentum. 


Yet, without an increase in disposable incomes or “real” savings, this requires a sustained and intensified increase in inflows from foreign savers.


As fund manager John Hussman explained, (bold mine)


All securities are essentially a way to trade current saving for a claim on future output. The value of all the securities in the economy derives from the claim on future output that this stock of real and intellectual capital can generate over time. During speculative bubbles and periods of malinvestment, saving is invested in unproductive projects that essentially result in unintended consumption rather than accumulation of productive assets. This means that the stock of outstanding securities is essentially “backed” by a smaller stock of productive capital to service those securities over time. (John Hussman, 2015)

Figure 3


Volume spikes rather than sustained increases have characterized the PSEi 30′s race to 7,000. Ironically, the pesos’ mainboard volume remains below the Q3 levels! (Figure 3, upper chart)


Furthermore, market breadth has barely supported the .87% weekly advance by the PSEi 30 as the advance-decline distribution has been almost neutral for the PSE (490-491) and the PSEi components (15-14 and one unchanged).


Though the character of the ‘rosy scenario’ presented by the upswing of the PSEi 30 has been starkly different from a generalized boom phase of a full-fledged credit bubble as exemplified by India’s casethis imperative to force upon a bull market cosmetically and inorganically shares a similar outcome: capital consumption that leads to a bubble bust. (Figure 3, lower visuals)

To sum it up, the intensifying vertical price actions of a few PSEi 30 heavyweights, backed by rotational pumps, are likely indications of mounting desperation to foster a bull market.  However, its inability to sustain such momentum could indicate buyer exhaustion and a potential (secular) reversal.


V. January-February 2024: PSEi 30’s Returns Outperform as Volume Slumped!


To expand our insights on the local market structure, let’s analyze the first two months of PSE/PSEi 30′s performance in 2024.

Figure 4


Sure enough, it’s impressive that the PSEi 30 reached 6,900 in February, but the gross volume, which includes block trades and cross sales, tumbled to levels last seen in 2011!  (Figure 4, upper chart)


Put another way, while the PSEi 30 vaulted by 7.7% from end-December through February 2024 to shatter the decaying returns over the long term, this occurred in the face of sputtering volume.  That is, the PSE’s gross volume plummeted 26.4% YoY! Amazing! (Figure 4, lower graph)

Figure 5

That’s a measure of the general performance.  As a share of the total, the first two months saw a rebound in the volume of the holdings (2 years) and the property sector (from last year) compared to the slowing Financials (YoY).  (Figure 5, topmost diagram)


In contrast, the peso volume of industrials and services, which include the “Fly Me to the Moon” ICT, resumed their downward trek (in the last 2 and 3 years respectively).  Remarkable. (Figure 5, middle image)


The pecking order of peso volume by sector share in the first two months of 2024: Holdings, Industrials, Financials, Property, and Services. (Figure 5, lowest window)

Figure 6


Paradoxically, the financial index, which stormed towards its 2018 All-time high (ATH), saw its peso volume contract by 30.5% YoY! (Figure 6, upper chart)


Since the BSP’s unprecedented rescue of the banking system in 2020, Financials have outperformed.


Specifically, the PSEi 30 banks have been responsible for most of the gains in the Financial Index. Apart from the ICT sector, rotational pumps into PSEi banks have contributed significantly to the PSEi 30′s advances.


VI. Negative Market Breadth, Rising Risks of a Black Swan Event from Sustained Capital Consumption


It is not just volume but market breadth remains in stagnation.  Despite marginal improvements (from 2020), the advance-decline spread remained negative. (Figure 6, lower image)


The volume slump and poor market breadth reveal the lack of participation from the general public.


The genuine bull market climaxed or culminated in 2013, after which the rest of the index performance was primarily characterized by strategic maneuvers.

Figure 7


Let us unpack this.


The deficiency of the PSE’s trading volume didn’t emerge out of a vacuum. These can be traced back to the diminishing liquidity in the banking system (expressed by the cash-to-deposits downtrend), which has, in part, been exacerbated by the swelling of the government’s deficit spending.  (Figure 7, top and middle graphs)


Bluntly put, diminishing volume is a symptom of capital consumption.


In the end, what have the authorities done to decrease the odds of an outbreak of (future) economic volatility or a “black swan” event resulting from (today’s) market manipulation or “risky investments based on rosy scenarios?”


What will they do to diminish its impact?  


Do they even know? Have they been “asleep at the wheel?”


Or have ‘risky investments’ become too politically entrenched to perpetuate their refinancing and credit expansion to fund malinvestments, which have been peddled to the public under a statistically ‘rosy scenario’? (Figure 7, lowest chart)


“Market failure,” really?




Eli M Remolona, Governor of Bangko Sentral ng Pilipinas:  Message during the release of the 2023 Financial Stability Report13 February 2024, Bank of the International Settlements, March 22, 2024


Prudent Investor Newsletter, BW-SSO Price Actions and Market Manipulations Signify as Twin Symptoms of the Raging Credit Bubble! February 13, 2017


John P. Hussman, Ph.D Stock-Flow Accounting and the Coming $10 Trillion Loss in Paper Wealth Hussman Funds, April 6, 2015





This content provided courtesy of Prudent Investor Newsletter


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