Thursday, December 18, 2014

Swiss Central Bank Imposes Negative Deposit Rates!

The Keynesian euthanasia of the rentier policies of abolishing interest rates has been intensifying.

Today, the Swiss National Bank joins the ECB (June 2014) and Sweden (2009) to implement negative deposit rates supposedly intended to discourage capital flows.

From Bloomberg:
The Swiss National Bank (SNBN) imposed the country’s first negative deposit rate since the 1970s as the Russian financial crisis and the threat of further euro-zone stimulus heaped pressure on the franc.

A charge of 0.25 percent on sight deposits, the cash-like holdings of commercial banks at the central bank, will apply as of Jan. 22, the Zurich-based central bank said in a statement today. That’s the same day as the European Central Bank’s first decision of 2015.

The SNB move follows Russia’s surprise interest-rate increase this week and hints at the investment pressures that resulted after that decision failed to stem a run on the ruble. Swiss officials acted as the turmoil, along with the imminent threat of quantitative easing from the ECB, kept the franc too close to its 1.20 per euro ceiling for comfort.
As one would notice, the SNB’s has supposedly been responding to unintended consequences from previous interventions

And since every interventions create unintended economic and financial dislocations, these has prompted policymakers to apply even more interventions which furthers the imbalances. Thus one intervention begets another. The ramification of which is a massive accumulation of distortions, or malinvestments pillared on the destruction of savings or capital consumption that eventually results to a crisis

As great Austrian economist Ludwig von Mises warned in his magnum opus the Human Action (bold mine)
The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy. As has been mentioned already, the British Government has asserted that credit expansion has performed "the miracle...of turning a stone into bread." A Chairman of the Federal Reserve Bank of New York has declared that "final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity." Many governments, universities, and institutes of economic research lavishly subsidize publications whose main purpose is to praise the blessings of unbridled credit expansion and to slander all opponents as illintentioned advocates of the selfish interests of usurers.

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
And why does it seem that we are in a crisis for central banks to resort to unprecedented emergency measures?

Naturally Wall Street love such invisible transfers—policies which confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some—as they are one of the key beneficiaries.

And so today’s continuing party.



Wednesday, December 17, 2014

Phisix Crushed as Yields of Short Term Philippine Treasuries Soar!

Readers of this post has repeatedly been warned: market crashes and magnified volatility has been occurring real time. And this has been a global phenomenon which appears to be spreading and intensifying.

The consensus G-R-O-W-T-H theme seems in SERIOUS jeopardy. They are in BIG trouble not because the local stock markets slumped BIG today. They are in BIG trouble because today’s spike in short term yields in the domestic bond markets which adds to last week’s surge, may have more than been indicative of tightening liquidity or a mad dash for cash, they are in BIG trouble because today’s spike looks like manifestations of embryonic signs of a developing CREDIT CRUNCH!

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Yields of 1 month, 3 month, 6 month and 1 year have substantially jumped today as shown above.

Yields of these short term domestic treasuries have either vaulted to past June “taper tantrum” highs in 2013 or have reached such levels. Remember that the June “taper tantrum” sent the Phisix into bear market levels.

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Yields of 10 year treasuries climbed too. But the uptick has been less than the short term yields. This indicates of a dramatic flattening of the yield curve.

I wrote about this last week:
From this perspective I offer a different explanation. The two week spike in short term yields represents a scramble for liquidity!

The short term rates 3 month, 6 month and 1 year have all reached June 2013 highs. To recall, June 2013 was when the taper tantrum PLUS BoJ’s QE 1.0 triggered turbulence in global financial markets, so the spike in short term rates then has been consistent with concerns over liquidity. 

There have been little signs of turmoil (yet). The peso has been nearly unchanged for the year even as the neighboring currencies have been severely buffeted on likely heavy interventions by the BSP. The Phisix remains above 7,000. Despite failing to meet consensus expectations, statistical growth remains above 5%. In addition, media and experts continue to serenade economic hallelujahs even as neighboring financial markets have been roiling from weak currencies.

So this, in my view, may have been about debt IN debt OUT that may have reached proportions whereby demand for short term loans have become greater than long term loans, thus the spiraling demand equates to the public willing to pay for higher short term rates. And demand for such short term loans may have been reflected on the yields of short term treasuries.

And demand may have originated from cash constrained borrowers who may be competing to secure funds to oversee the completion of their capital intensive based projects on mostly bubble sectors, and or from highly levered asset speculators (real estate and stock markets) who may be jostling to acquire short term funds in order to settle existing liabilities as returns have not been sufficient to cover levered positions. Could this be the reason behind the obsession over managing of the stock market index?

The sharply expanding bank credit growth in the light of steeply decelerating money supply growth as statistical economic growth slows seems to dovetail with the greater demand for short term funds; the highly levered sectors of the economy haven’t been generating enough cash from a growth slowdown and from untenable debt levels so the dash for loans from the banking system to pay existing debt even at higher rates. 

It remains to be seen if the current developments represent an aberration or if my suspicions are right where short term yields have been about emergent signs of liquidity strains.

But if my suspicions are correct, where short term rates continue to climb, this will affect many businesses via higher financing costs. There will be a cut back in expansions as losses will mount.

And if the rise in short-term yields engenders an inverted yield curve–where short term rates are higher than longer term rates—then the consensus will even be more startled because inverted yield curves have mostly been reliable indicators of recessions! 
An inversion will likely occur when a credit crunch has become evident. 

I asked in the above “Could this be the reason behind the obsession over managing of the stock market index?”

In support of the index, market manipulators have been buying stocks at either record highs or near record highs, so with the market’s recent declines, losses have been mounting.

If taxpayer money has been used, then political agencies will soon see losses and deficits. Losses will also hound private institutions even if they used only surplus/reserve cash for stock market speculation. 

Yet the more important factor is leverage. If the market manipulator/s pumped up stocks with credit, then current losses will render them, not only losses, but with inadequate funds to pay the existing debt. The lack of funds will compel levered institutions to scramble to borrow short term money even at higher rates.

I think this applies also to heavily geared ‘bubble’ institutions (real estate, shopping malls, hotel and financial intermediaries) or levered firms that have not been generating enough cash flows.

So these cash flow deficient heavily leveraged firms may have been desperately competing to borrow money to cover the funding gaps that has sent yields to the present 2013 taper tantrum levels!

If my suspicions are right, then not only will stock market manipulators have impaired balance sheets, but they will be NET sellers of stocks (at vastly lower prices)!

The same liquidations will be resorted to by cash strapped bubble industries (keep an eye on casinos, and the property industry)

So the populist G-R-O-W-T-H theme will transmogrify into LOSSES and eventual LIQUIDATIONS.

Yet the feedback loop between accruing losses and increasing credit strains will extrapolate to higher demand for short term loans which should drive short term yields to even higher levels relative to the longer end.

If such dynamic is sustained then this will eventually lead to a yield curve inversion. The inversion will now signal a recession, if not a crisis!

The consensus better supplicate from the Almighty that these short term rates be immediately tempered or pacified soon otherwise hell may break loose.

It’s also important to emphasize that magnified volatility won’t merely signify as contagion from external events but also in response from internal imbalances generated by credit fueled artificial booms from financial repression policies channeled through zero bound rates.

Perhaps foreigners smells something fishy with current conditions, thus today’s stock market plunge.

The Phisix got crushed by 2.71%! 

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Apparently stock market operators seems to have lost control. They had been repelled yesterday, where the Phisix tanked 1.58% and today. And for the second successive day stock market operators had been treated with a dose of their own medicine. Or might I say karma.

Attempts to shield the Phisix from reality by rigging the index seem to have only worsen the profit taking activities or the market slump. 

This index management had been most evident when the domestic market surged higher in the face of a regional and global selloff.

The portrayal that domestic stocks would be immune to global events has been demolished by the actions of the last two days.

The two day loss, which accrues to 4.29%, sends the Phisix to about the October lows. A breakdown from October lows will trigger the bearish portent from the double top formation.

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The intense selloff today had been broad based. All sectors except the mining industry suffered losses of 1.8% and above. Peso volume at Php 10.99 billion was heavier compared to the days of the index pumping. Total volume inclusive of block sales reached Php 11.37 billion.

Today’s stock market bloodbath comes with heavy foreign selling which amounted to P 2.035 billion. This marks the third day of heavy (Php 1 billion above) net foreign selling. Again, are foreigners sensing the trouble from the sharp increases in short term yields and from the drastically flattening yield curve?

Again this isn’t just about contagion but also about domestic imbalances that are about to unravel.

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Misery loves company. The Phisix today has been accompanied by another rout in Vietnam’s equity market. The freefalling Ho Chi Minh Index sank 3.16% and may be the first regional equity benchmark to reach a bear market having been down 19% since the September highs.

As a final note, the Philippine Stock Exchange announced the imposition of a maintenance fee of 50,000 pesos a month on all inactive trading participants which will commence in January 2015.

Given that the shorting facilities have hardly been functional but mostly symbolical, this leaves trading participants to rely on bullmarkets to become "active". 

Yet such ruling assumes stock markets only go up! That’s because in bear markets volume usually dries up. So trading participants will have to either sell false (bull market) premises just to induce "active" trading or pay fines. 

No wonder the principal-agent problem that beleaguers the industry.

Macau’s Casino Stocks Collapses Again!!!

Another day, another smash up of Macau’s blue chip casinos stocks! 

The last time these stocks had been devastated (by a milder degree) was during the 3rd of December.

Today’s sell down has been stunningly horrific...

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Sands China Ltd. (HK: 1928)

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Wynn Macau Ltd. (HK: 1128)

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SJM Holdings Ltd. (HK:880) owner of Grand Lisboa

The Chinese government reportedly will “launch a major crackdown on the multibillion-dollar flow of illicit funds through Macau casinos” says the Business Insider. So it is likely that the reported plans to tighten money flows (against the political opposition) has exacerbated current woes.

Today's carnage only deepens their respective bear markets.

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Meanwhile, Genting Malaysia (4715.KL) and Genting Singapore (G13.SI) closed up 2.78% and .97% respectively today. This reinforces the Chinese politics driven response on Macau's stocks.

But today’s bounce doesn’t neutralize the dominant downside actions for these non Macau Asian casino stocks.

The general weakness in Asia’s casino stocks have been symptomatic of the region’s economic conditions. Additionally, casino stocks may just function as the causa proxima or event risk that may trigger a contagion within the region.


Relentless Run in GCC’s Stock Markets and in Russian Financial Assets! Japan Import Growth Shrinks as Exports Slow

Last night, European crude benchmark Brent resumed its hemorrhage and was down 1.96% while the US counterpart the WTIC bounced .18%

And the incredible stampede out of GCC stock markets continues…

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(table from ASMAinfo.com)

Last night too, Saudi’s Tadawul and Dubai Financial crashed by another 7.27%. Qatar, Muscat and the Kuwait slumped by 3.51%, 2.92% and 2.08% respectively. All these adds to Sunday December 15th crash!

Once record high stocks is being dismantled at an astounding speed and stupefying rate of decline. The obverse side of every mania is a crash.

Oh by the way, Western banks have reportedly cut cash flows to Russian banks, as the Zero Hedge noted “FX brokers advised clients that any existing Ruble positions would be forcibly closed out because "western banks have stopped pricing USDRUB", over concerns of Russian capital controls.”

The article further quotes the Wall Street Journal "global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis."

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So along with plummeting oil prices and economic sanctions, the liquidity squeeze exacerbates the stunning run on Russian financial instruments. At the rate of the evolving Russian financial market turmoil, the odds of a default has been soaring as revealed by the skyrocketing CDS or the cost to insure debt as shown in the chart above.

“Curtailing the flow of cash” reveals how global liquidity is being drained. If risk assets are about liquidity, credit and confidence that the latter two generates, then the shriveling liquidity flows poses as increased structural headwinds on risk assets. If sustained then  asset inflation will turn into asset deflation.

My final note

Last November, Japan export growth year on year has underperformed consensus expectations despite the crashing yen.

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The USD-Yen has been up by  14.7% since the BoJ GPIF bailout of the stockmarket

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Export growth fell by 4.9% and has been in a decline since November.

This is another evidence which debunks the popular mercantilist “weak currency-strong export” myth peddled by the consensus.

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Also Japan’s import growth has collapsed again. It has CONTRACTED by 1.7% over the same period. The slump in imports reflects the demand conditions in the Japanese economy.

This represents the "wonders" of Abenomics--doing the same thing over and over again and expecting different results.

Additionally, Japan's imports are someone else’s exports. Japan represents the largest export market for the Philippines as of 2013. Contracting imports means marginal growth or even zero or reduced exports for the Philippines to Japan!

As I noted last weekend,
...one nation’s imports signify as some other nation’s exports. As noted above, Chinese import growth contracted in November (y-o-y), Germany’s import growth rate also CONTRACTED 3.1% month on month in October. For the Philippine bulls who sees virtually no risks, but all glory from credit fueled levitated assets, how will collapsing Chinese and German demand for imports, affect domestic exports? Do they know? In 2013, exports to China ranked third of Philippine exports with 12.4% share and Germany ranked sixth with a 4.1% share. Signs are already here, Philippine export growth rate collapsed to 2.9% in October from the stellar over 10% growth rate during the past four months, specifically 15.7% in September, 10.5% in August, 12.4% in July and 21.3% in June. Add these to the collapsing markets of the GCC, which places OFW remittances at risk. So where will demand come from? Domestic demand has already been constrained by credit overdose as revealed by investments on a downtrend, and by growth in credit and statistical economy that has been moving in opposite directions, and by consumers harassed by BSP’s invisible redistribution favoring the political and economic elites. So where will Philippine statistical growth come from? Statistical massaging? Or manna from heaven?
The world economy has been deteriorating, liquidity has been shrinking, yet domestic bulls are expecting G-R-O-W-T-H!

Pride goes before destruction, a haughty spirit before a fall (Proverbs 16:18)

Said differently, a fool and his money are soon parted.

Tuesday, December 16, 2014

Phisix: Marking the Close: A Dose of Own Medicine Redux; Emerging Asian Stocks Meltdown

Market manipulation has its natural limits.

Of the frequent attempts to manage the Phisix higher at the close, I have noted of two major instances were such attempt has failed, one in November 25 and another in December  4.

Today marks the third. 

The fundamental barrier will always be scarcity; whether this has been financed by taxpayer money, depositor money, treasury funds from corporations owned by plutocrats and from credit markets or a combination thereof. Other obstacles could be from regulations, access to liquidity, sentiment, sheer volume, et.al.

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Notice that such reversals or repulsions on market manipulations have come at a very close space. That’s a sign of the frequency of engagements by stock market operators. It’s also a sign how vulnerable they are ( chart from technistock)

Perhaps stock market operators met their match today. But it didn’t stop them from trying. There was an attempted “afternoon delight” or an afternoon pump, (green square) unfortunately bears retained control of the session especially during the closing moments and “dumped” stocks at the last minute. Stock market operators essentially got a dose of their own medicine…again. Now stocks which they bought at the highs (from previous operations) will signify as floating losses.

Perhaps too that the stock market operators exhausted themselves from the fantastic whole day operations last night.

Yet if operators used levered money for the pump, eventually they might become forced sellers too….when creditors makes a call on their loans.

As one would notice, it doesn't take legal actions to curtail these unscrupulous activities, the laws of economics will serve as their nemesis.


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The Phisix eventually succumbed to profit taking down 1.58% on heavier volume than the series of market “pumps”. Declining issues led advancing 108-66 (PSE quote) which has been consistent with today’s downturn.

Today’s domestic market slump has been coherent with the region’s stock market actions.
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Just look at the erstwhile sizzling hot record after record breaking Indian stocks. They have NOT decoupled from the meltdown. Both the Sensex and the Nifty were slammed 1.56% and 1.66% respectively today(quotes from Bloomberg). So last week’s breakdown by the SENSEX from the one year trendline seems to have been validated.

Malaysia and Thailand’s bleeding continued today. The KLSE sank 1.38% while the SET which suffered an incredible bout of an intraday crash yesterday closed 1.13% down. Yesterday, the SET collapsed by an astounding 9.2% before recovering to close at down 2.4%

Indonesia’s JKSE dropped 1.61% while Vietnam’s HCM Index plunged 2.33%. South Korean Kospi was clobbered .85% while recent outperformer Singapore’s STI was trounced 2.4%

What you are seeing have been symptoms of a regional meltdown. If these dynamics persist or worsens, then the 1997 scenario could be a model. In 1997, crashing stocks eventually exposed on, or manifested, the region’s economic excesses, which mutated into a crisis.

So unlike stock market operators who see ALL gains and NO risk from the illusions brought about by a credit boom, current dynamics suggests otherwise; a very risk fertile environment susceptible to a crisis.

Of course, no trend goes in a straight line, there will be interim bounces.

Remember, decoupling is a myth. If these are symptoms of deflationary bubble bust, then contagion will be the shared denominator.

As Philosopher George Santayana once warned, those who cannot remember the past are bound to repeat it

Yesterday, Thailand’s SET suffered from a Massive Convulsion! More signs of ASEAN's Deflating Bubbles

I was startled to see this…

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(chart from stockcharts.com)

I thought the above signified  a data error. I checked and found out that this has been accurate…Thailand’s SET suffered from a massive intraday CRASH! The SET collapsed by as much as a shocking 9.2% (!!!) before a late day recovery. The SET closed the session down by still a whopping 2.41% decline! 

Yesterday’s loss compounds on last week’s 5.18% slump!

From the Bloomberg:
Thailand’s benchmark stock index fell the most in 11 months as energy companies slumped on a rout in crude and investors speculated this year’s rally was excessive relative to earnings prospects.

The SET Index (SET) dropped 2.4 percent to 1,478.49 at the close, taking a five-day decline to 7.5 percent. The gauge briefly tumbled as much as 9.2 percent in afternoon trading before recovering most of its losses. PTT Exploration & Production Pcl (PTTEP) retreated for a seventh day, while its parent PTT Pcl (PTT), Thailand’s biggest energy company, tumbled 4.9 percent. The two stocks represent about 10 percent of the SET Index by weighting.

“Thai stocks have been hit by foreign selling as investors pull out from emerging markets,” said Mixo Das, an Asia ex-Japan equity strategist at Nomura Holdings Inc. in Singapore. “A large listed oil-and-gas sector and expensive valuations relative to history are adding more pressure.”
The report rationalizes that “this year’s rally was excessive relative to earnings prospects”. 

Well as I have been saying, stocks are driven by liquidity, credit and confidence. The latter of which is a product of the the former two.

Two weeks back I wrote,
To sum it up, since 2008, stocks have NOWHERE been about G-R-O-W-T-H, but about LIQUIDITY and CREDIT from which CONFIDENCE or MOMENTUM has been a product of. Expand liquidity and or credit, then financial assets (stocks, real estate, bonds etc…) booms, regardless of the direction of the economy.

Hounded by negative real rates via zero bound (financial repression), the public response to such policies have been to chase on yields even when they have been pillared from gross misperceptions.

Yet take away credit and liquidity, the illusion of CONFIDENCE and MOMENTUM evaporates.

The same factors can be seen in Thailand whose economy has been walking a tightrope between stagnation and recession but whose stocks, via the SET, like the Philippines (whose chart also has been replica of the Phisix) have been approaching milestone highs. The SET has been up 23% y-t-d as of Friday.
Take away credit and liquidity, the illusion of CONFIDENCE and MOMENTUM evaporates: "This year's rally was excessive" 

Clues had already been present, Thailand’s banking loan growth was reported to have registered a huge decline in 3Q 2014—a sign of diminishing liquidity. I wrote:
Despite the marked slowdown in the Thai economy, and the reported recent slowdown in bank lending, it is still surprising to see lofty levels in credit expansion in the private sector in 1H of 2014 (left), but money supply seems to have plateaued for the year
Again, the SET episode simply demonstrates that global and regional deflationary pressures have returned big time!

Oh by the way, I earlier posted that the Indonesian rupiah have reached at ALL time lows. 

I guess the pressures on the currency has spilled over to her stock markets as the JKSE at presently trades down by sizeable 1.8+%. The JKSE as I posted last week has a minor head and shoulder formation: a break of around 4900 would extrapolate to a considerable downside if the chart's portent should be validated. 

Deja vu 1997?

Update: The Thai SET opens today's session with a big 3% decline!



Global Stock Market Rout Continues, Russian Government Hikes Rates from 10.5% to 17%!

European stocks started strong, but ended the day in another carnage as oil prices continued its free fall. European Brent oil sunk 1.03% as US WTIC collapsed 3.62%!

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The table from Bloomberg says it all

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UK’s FTSE now at October levels, the French CAC just a few points away from the same area, the German and the European Stoxx600 likewise in a steep fall.

Interestingly, in order to stem capital flight and the collapse of her currency the ruble Russia’s central bank stunningly hikes official policy rates from 10.5% to 17%!

From the Bloomberg:
Russia’s central bank raised its benchmark interest rate the most since the nation’s 1998 default, making the announcement in the middle of the night in Moscow as policy makers seek to douse investor panic and stem a ruble rout.

The central bank increased the key rate to 17 percent from 10.5 percent effective today, it said in a statement on its website. Policy makers gathered for an unscheduled meeting after a one-point increase on Dec. 11.

“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the bank said in the statement.

Russia’s central bank raised interest rates for the sixth time in 2014 after more than $80 billion spent from its reserves failed to stop a 49 percent selloff of the ruble, the world’s worst-performing currency this year. President Vladimir Putin, whose incursion into Ukraine’s Crimea peninsula in March prompted the U.S. and its allies to strike back with sanctions, this month called for “harsh” measures to deter currency speculators.

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The chart above of the USD Russian (RUB) gives an idea of how the ruble has recently been smashed from collapsing oil prices exacerbated by economic sanctions imposed against Russia  by Western political economies.

The stunning rate hikes will hurt domestic debt holders!

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Oh by the way, speaking of crashing currencies, neighboring Indonesia’s currency the rupiah has now reached record lows. Or alternatively said the USD- Indonesia IDR is at record highs!
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The USD Malaysian ringgit (MYR) seems headed that way too!

Financial pressures have reared their ugly heads in ASEAN financial markets

Meanwhile US stocks was partly affected by the European stock selloff…

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Oh don’t worry be happy. Philippine stocks will rise forever!

Middle East employers of OFWs will NOT be affected by the current financial market crash. Shrinking global trade will NOT impact demand for local goods. Slowing GDP has been an ANOMALY which means harried consumers (from BSP's inflationism), declining investments and slowing output have signified as aberrations or temporary dislocations. Debt can perpetually rise WITHOUT consequence of impairing balance sheets of the consumer and mostly of the highly levered supply side firms (mostly owned by domestic plutocrats). Falling peso and regional currencies will hardly will affect decisions of foreigners on their portfolio holdings of Philippine stocks, bonds, properties and currency, or simply stated, profits and losses or economic calculation have now been VANQUISHED! BSP actions of two interest rates and, SDA hikes and requirements to raise bank capital plus the ongoing depletion of GIRs (combined with the other flows that didn’t appear in the GIRs) to defend the Peso will have NO impact on liquidity conditions. Property prices can only rise forever WITHOUT real economic dislocation where the law of demand has been REPEALED!


Don’t you see we have reached economic nirvana! No amount of global meltdown will stop the domestic stock market boom. That’s what stock market operators, who has been rigging the markets with impunity, wanted to show!

Monday, December 15, 2014

Phisix: Another Panic Buying Day Amidst Global Meltdown; December 15 edition

I am supposed to be having my vacation break, but seeing today's activities I can't help but comment.

They did it again! The last time they did this was in October 16

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As I said corrections are now impermissible, Philippine stocks can only go up forever!

Following Friday’s global stock market rout. ASEAN stocks had been toast today.  Thailand SET slumped 2.41%, Malaysia’s KLSE plunged 2.06%, Indonesia’s JKSE tumbled 1.08%, Vietnam’s Ho Chi Minh index dropped 1.08%, Singapore STI slipped .9% and the Korean KOSPI was marginally down by .07%. (Table from Bloomberg)

Team OPLAN 7,400 would have none of this for the Phisix.

Why should there be a panic buying when global markets had been selling off?

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Well the likely answer is that team OPLAN 7,400 wanted to project G-R-O-W-T-H by painting the Phisix as immune to global developments. So the stage managed recovery had been conducted from the starting bell to the close. (charts from technistock and colfinancial). Compared to October 16th, today's strain has been more elaborate.

The benefits from higher Phisix should be popular approval ratings, inflated wealth (via inflated asset prices) for the majority owners of listed firms and inflated balance sheets of financial institutions. So motives provide clues of the possible parties involved.

Just look at the fantastic 198 points swing from the open to the close: That’s about a 2.7% move! The Phisix opened down 2% (!!!) and stormed all the way back to end the day with a .71% gain!!! Fantastic!

Yet a full 60.68% of the day’s gains had been through MARKING THE CLOSE! The charts depressed the contributions of “marking the close”” because of the humongous intraday volatility!

Gosh, team OPLAN 7,400 must be so desperate to see their targets met, perhaps by the yearend.

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The incredible manipulation of the index has most likely been channeled through 6 issues as shown above.

Peso volume was low at Php 7.6 billion but because of cross trade from mostly Marc, this has swelled to Php 10.794 billion.

Ironically market breadth was in favor of  declining issues which edged out advancing issues by 94-81. Again a manifestation that markets wanted to correct. (PSE Quote)

The remarkable rigging of the domestic stock market means that the market’s price discovery mechanism has been severely mangled, thus the gross mispricing of equity securities and demonstrates of the delusions of grandeur and invincibility by stock market operators.




All these confirm or attest to the manic phase of Philippine stock market bubble.

Yet history tell us that the obverse side of every mania (and its attendant manipulations) is a crash.

The Carnage of Middle East Stock Markets Continues…

Last night I wrote: The US West Texas Intermediate (WTI) closed down 2.81% while the European Brent bellwether tanked 2.87% which for the week translates to 12.4% and 10.4% losses respectively. Since GCC bourses are closed on Fridays and re-opens on Sundays, the bloodletting of their stock markets can be expected to be carried over the coming week. 

The bloodletting had indeed been carried over… (all charts from asmainfo.com)
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To illustrate how the recent crashes has maimed GCC stock markets, here are the charts of…

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Saudi’s Tadawul

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Dubai Financial

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Kuwait Stock Exchange

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Oman’s Muscat

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Qatar Exchange 

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Bahrain Bourse

Most of these benchmarks recently carved record highs, except for Bahrain, now all have been crashing at an incredible rate.

The above represents a shining example of my adage: The obverse side of every mania is a crash.

Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima?

What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.—Ludwig von Mises

In this issue

Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima?

-Real Time Market Crashes: GCC and Oil Producing Nations!
-Core to Periphery Transmission: Market Tremors Slams America and Europe!
-Tremblors Rattles Asian Markets!
-Market Meltdown In The Face of BOJ, ECB, PBOC Stimulus
-Sanitized Alarm Bells from Bank of Canada and from the Hungarian Central Bank
-Philippine Yield Curve Flattens On Soaring Short Term Rates: Signs of Scramble for Liquidity?
-Phisix and Typhoon Ruby: The Mythical Link
-Will the Domestic Casino Industry function as the Causa Proxima to a Credit Event?

Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima?

They are back! Market crashes and heightened volatility has returned with a stunning vengeance. They are back BIG time because for many critical bourses, last week’s volatility compounds on the tensions of October. This translates to a grizzly bear market.

Real Time Market Crashes: GCC and Oil Producing Nations!


The left window represents the December 11 performance of the benchmarks of Gulf Cooperation Council (GCC) [chart from ASMAinfo.com]. The right window exhibits their performance for the week. 

Take for instance United Arab Emirates or UAE’s Dubai Financial (DFM) which plummeted 7.42% Thursday. Over the week the same benchmark was down a by shocking 13.81%! Curiously, despite the 33% collapse from the record high of May or 30% crash from the second peak last September, as of Friday, the DFM still has posted a positive 6.68% year to date returns! In numbers, the DFM was up 39.68% in May or 36.68% in September before the crash. The swiftness and severity of the meltdown signifies a vivid demonstration of how perceptions and confidence can radically get altered or how greed morphs into fear, or how manias mutate into panics.

You can blame it on crashing oil prices, you can impute this to the strong US dollar or the ISIS or to escalating Middle East tensions, but surely there will be financial-economic and domestic, regional and global political ramifications from these.

Since current oil prices have presently been way below the welfare cost per barrel of many of these states, fiscal deficits for many oil producing states are likely to balloon. Additionally, forex reserves will be used to finance these gaps. The reduction of foreign reserves would translate to the draining of liquidity thereby providing a feedback mechanism to these economies dependent on loose liquidity. Market tightening thus, will put into spotlight the massive liabilities acquired to finance unproductive endeavors. Such malinvestments will soon be revealed via the several channels: the emergence of excess capacity in the system, more asset liquidations and repricing, and a surge in Non-performing loans.

So depressed oil prices PLUS liquidity constraints will serve as a 1-2 punch that will send these economies to the gutter.

Yet if oil prices remain at below the cost to maintain the GCC’s and oil producing welfare states which may end up with the cutting of social services, how far before Arab Springs or popular revolts emerge?

And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.

Oh oil prices plunged anew last Friday. The US West Texas Intermediate (WTI) closed down 2.81% while the European Brent bellwether tanked 2.87% which for the week translates to 12.4% and 10.4% losses respectively. Since GCC bourses are closed on Fridays and re-opens on Sundays, the bloodletting of their stock markets can be expected to be carried over the coming week.

Core to Periphery Transmission: Market Tremors Slams America and Europe!


This week’s magnified volatility has even percolated to the "core" or to developed economies.

First, yields of 10 year US Treasuries closed at 2.103% this Friday which has fast been approaching the October low of 2.09%. In October, when stock markets had been under pressure, investors took USTs as a safehaven play. Recently, divergences occurred, as US stocks soared to record levels, bond investors bought into USTs. So this can be construed as bond investors seemingly unconvinced of the sustainability of the record stock market rally. 

Bulls even arrogantly claimed that “this time is different!” as shown by the Barrons magazine cover last December 8. Manias eventually exhaust themselves and underwrite their own demise.

This week, the losses of US benchmarks Dow Industrials (-3.78%), S&P 500 (-3.52%), and Nasdaq (-2.66%) has expunged the aggregate 5 week gains of the Dow and S&P (from November 7 to December 4). Still, given the recent record run, US benchmarks are way off the October lows.

But neighbors of the US have not been as lucky. (see right window). Brazil’s Bovespa crashed 7.7% this week, along with Canadian TSX (5.13%) while Mexico and Chile’s benchmarks exhibited selling pressures too.

Given this week’s meltdown, the Bovespa have now been way below the October level, the Bovespa has been joined by Mexico’s Bolsa IPC while Canada’s TSX and Chile’s IPSA has reverted to the depths of October.

I didn’t include Argentina’s Merval -13.71% and Venezuela’s Caracas +26.05% as both have been afflicted by a different disease: hyperinflation rather than boom-bust cycles. Nonetheless not only has Venezuela been suffering from economic crisis and civil unrest, Wall Street has heavily been betting of a looming debt default for the embattled socialist nation.

See, an October déjà vu.

But the tiara for the biggest collapse this week belongs to Greece.

Greece’s ATG stock market benchmark crashed an incredible 20.18% this week! This week’s stunning devastation of Greek equities more than wiped out all the gains accrued from the October lows. Incredibly even Greek yields of 10 year bonds soared by 192 bps to 9.15%! The run in the Greek markets has been due to the intensifying political miasma where the Greek PM announced ‘snap’ elections this month due to his failure to muster a consensus. Markets have been anxious over the growing popular appeal by the anti-establishment leftist (anti-business) political party which offers free lunches on anything.

As I recently wrote[1]:
The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy. So market’s response has been rational.

Interesting to see how a revival of the Greek crisis will impact a vulnerable Europe, in the face of a Japanese recession, a highly fragile Chinese economy and a slowdown in Emerging markets, aside from heightened geopolitical tensions.
So these forces have combined to brutalize Europe’s financial markets which suffered from an October syndrome. Oh, UK’s FTSE 100 is just about 100 points or 1.5% away from October lows. Interestingly Portugal’s PSI and Norway’s Oslo All Shares have closed below October levels. Italy’s MIBTEL closed just marginally away from the October abyss. While there has been a big slump this week (right window) for most of European equities, the recent rally stoked by the ECB’s QE gave them some distance from the October threshold.

Tremblors Rattles Asian Markets!

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This leads us to Asia. This week, Thailand and Vietnam experienced quasi-crashes down by 5.18% and 4.29% respectively. I depicted on the actions of Asian charts (ex-Japan and China) here.

India’s record breaking SENSEX suffered a 3.89% selling tantrum which broke the one year uptrend.

Thailand’s SET, whose chart mirrors that of the Philippine Phisix, also broke below the October support levels that paves way for the ominous ‘double top’ formation which also haunts the Phisix.

The SET’s October breakdown has been shared by Malaysia’s KLSE where a massive foreboding ‘head and shoulders’ formation seems in progress.

Basically, the Korean KOSPI, Australian All Ordinaries and the Hong Kong’s Hang Seng have presently been testing the October support.

Like the Sensex the record breaking Pakistan’s Karachi and the former sizzling hot Sri Lanka’s Colombo have revealed recent strains, and so as with the Laos LSXC and Mongolia’s SE

It’s only the New Zealand’s NZ50 and the Indonesian JKSE which drifts at record highs, but the latter has also manifested minor head and shoulder formation. Yet this comes as the USD Indonesian rupiah has topped the 2008 highs! Remember when the USD rupiah reached this level, this had been accompanied by a collapsing JKSE.

Meanwhile the Singapore STI has fully recovered from the October lows. But her currency the Singapore dollar remains elevated at 2011 levels.

The Philippine Phisix wanted to correct, but again retrenchment here is not permitted, so index managers manically scooped up severely overvalued stocks on Friday to bring them to more expensive levels. The manic pump essentially erased the week’s losses. About 33% or a third of Friday’s low volume 2.15% pump were from the marking the close! The peso closed the week unchanged.

The above demonstrates of the deteriorating market breadth of Asian financial assets in the face of a firming US dollar, which has been validating my thesis.

As I previously noted[2]: It’s interesting to see the developing interplay between external developments and internal structural frailties. Nonetheless internal or domestic fragilities renders Asia vulnerable to capital flight which may either trigger or aggravate on the unwinding of domestic bubbles.

In short, a firming US dollar is a manifestation of shrinking of regional liquidity now being ventilated by deflationary forces (bubble bust) gaining momentum.

As for Japan, the Nikkei stumbled 3.06% as Yen rallied 2.23%. Japan as of this writing is holding a snap election where PM Abe attempts to portray of the public’s approval of his policies.

Given PM Abe’s stranglehold of the Japan’s political machinery, the time squeeze gives no room for the opposition to mount a viable campaign against his regime. So the PM Abe’s snap election really represents a devious ploy intended to exhibit false measure of confidence on Abenomics. It shows how elections are about egregious manipulation of the public[3].

Yet if the yen continues to rally global stocks will remain under pressure (partly from the unwinding of yen based debt financed carry trades), and if the yen falls further, the strong US dollar will add to the worsening conditions of emerging markets.

The 2013 experience is being replayed today where BoJ’s Kuroda’s QE has triggered or has been accompanied by a global financial earthquake[4].

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Emerging markets thus has been caught in US dollar based debt trap: damned if you do, damned if you don’t.

According to Bank for International Settlements’ Hyun Song Shin, Offshore dollar credit to non-banks now exceeds 9 trillion dollars[5]

Telegraph’s Ambrose Evans-Pritchard has the numbers[6]: The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.

Much of these loans have been concealed by accounting practices, particularly loans from offshore affiliates or intra-firm financing thereby reducing statistics of US dollar debt exposure.

So actions by the BoJ and ECB which has been ventilated via the currency markets has only magnified the vulnerabilities of emerging markets to US dollar based debt. So the ongoing emerging market turmoil serves as an expression of the debt deflation process in motion.

Market Meltdown In The Face of BOJ, ECB, PBOC Stimulus

Oh, unlike in October where the global financial markets had been “saved” by the BoJ-GPIF, the ECB, the Bullard Put, and the China’s PBoC, it’s a wonder what will be used to mitigate current circumstances.

The ECB has already laid down her cards: despite opposition from the Germans, sovereign debt QE has been proposed this January.

European banks soaked up only €130 billion of second tranche of TLTRO from the ECB last week for a total of €210 billion from the two tranches out of the €400bn program. The sluggish response implies that ECB Draghi’s “do whatever it takes” hasn’t been generating “traction”.

Meanwhile, Italian banks reportedly increased the amount of sovereign debt held (by €18.4 billion or $22 billion) on their portfolio to a record €414.3 billion last October. Perhaps Italian banks have been preparing for the ECB’s QE. This implies a transfer of risk from banks to taxpayers channeled through the ECB. But what if the Greek political crisis unravels into a regional debt crisis? The likely answer is that both Italy’s banks and the government will be broke.

On the other hand, assets by the Bank of Japan reportedly soared to 300 trillion yen or about 60% of the GDP which has almost doubled from the about 165 trillion yen, or about 30% of GDP at end of March 2013. Such monstrous Abe-Kuroda experiment will end badly.

And aside from cutting interest rates, China’s People’s Bank of China has been desperately attempting to re-ignite a credit bubble from an already debt burdened economy.

The PBoC has reportedly targeted 10 trillion yuan ($1.62 trillion) in total loans for 2014. This by loosening of government lending quotas in October, aside from taking on lax enforcement of loan-to-deposit ratios

November’s credit numbers have been staggering. According to Dow Jones Business News[7]: Chinese banks issued 852.7 billion yuan ($137.5 billion) of new yuan loans in November, up from 548.3 billion yuan in October, the PBOC said Friday…In November, total social financing, a broad measure of credit in the economy, came to 1.15 trillion yuan, up from 662.7 billion yuan in October. And M2, the broadest measure of money supply, was up 12.3% at the end of November from a year earlier, lower than the 12.6% increase at the end of October, according to the central bank. The figure was below the median 12.5% increase forecast by economists.

Bank loans skyrocketed 55% month on month, wow! Where has all these loans been channeled to?

Chinese industrial production has been decelerating fast where November growth rate has slowed to 7.2% from 7.7% in October and from 1990 average of 13%. Two figures while marginally beating consensus expectations, Fixed investments (15.8%) and retail sales (11.7%) have been on a steady downtrend.
Strikingly, year on year import growth rates CONTRACTED 6.7% as export growth rates fell sharply to 4.7% last November from 11.6% a month ago. China’s export and import growth speaks loudly of global economic health conditions*.



In short, if I were to assume that the statistics has anywhere been accurate, there have been little signs that such explosion of loan growth has been used in the real economy. So have most of these loans been funneled to the stock market?

The fantastic Viagra like spike in China’s stocks has been driven by a surge in volume and by broker margin trade (left) and by a stampede to open accounts by retail punters (middle) as the banking system’s Non-Performing loans (right) have likewise spiked in 3Q 2014.

Could such explosion of margin trades have been funded by loans from banks to brokerage houses? Could those jump banking loans supposedly used for industry have been diverted to stocks?

As one would notice, the Chinese government’s solution to her debt problem has been to extend more debt. This short term based “kick the can down the road” policy represents: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

In other words, the Chinese government has been buying time from a total credit market collapse. Yet by extending more credit, the Chinese government nurtures more imbalances that eventually will be met by real economic forces. With global markets under pressure, and with the Chinese currency, the yuan (CNY), showing recent symptoms of weakness amidst huge dollar based loans, how long before the unraveling?

The point of the above is that the world has been undergoing injections of massive stimulus from central banks of China, Japan and Europe designed to expand liquidity and credit. But in spite of these interventions, markets continue to emit signs of strains! Collapses are happening real time! This is a spectacular sign of policy failure.

If market tremors continue to spread and intensify, will the US be forced to join the easing bandwagon again? Or will this be initiated by another Bullard Put?

The Bank for International Settlements via chief economist Claudio Borio has recently warned on this[8]
And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed.
*as a side note, one nation’s imports signify as some other nation’s exports. As noted above, Chinese import growth contracted in November (y-o-y), Germany’s import growth rate also CONTRACTED 3.1% month on month in October. For the Philippine bulls who sees virtually no risks, but all glory from credit fueled levitated assets, how will collapsing Chinese and German demand for imports, affect domestic exports? Do they know? In 2013, exports to China ranked third of Philippine exports with 12.4% share and Germany ranked sixth with a 4.1% share. Signs are already here, Philippine export growth rate collapsed to 2.9% in October from the stellar over 10% growth rate during the past four months, specifically 15.7% in September, 10.5% in August, 12.4% in July and 21.3% in June. Add these to the collapsing markets of the GCC, which places OFW remittances at risk. So where will demand come from? Domestic demand has already been constrained by credit overdose as revealed by investments on a downtrend, and by growth in credit and statistical economy that has been moving in opposite directions, and by consumers harassed by BSP’s invisible redistribution favoring the political and economic elites. So where will Philippine statistical growth come from? Statistical massaging? Or manna from heaven?

Sanitized Alarm Bells from Bank of Canada and from the Hungarian Central Bank

At the beginning of the year, I have warned of the possibility of Black Swans afflicting the global markets and the economy. But the properties of a Black Swan event have been its rarity, extreme impact and ‘retrospective predictability’. In short, a black swan event requires blindness by the mainstream.

I can’t say that this can be applicable to current conditions since as almost every week one or two political authorities have aired concerns of risks from bubbles either on a domestic or from global-regional perspective. Of course the degree of warnings has been variable, with the BIS, IMF, and OECD tackling on the severity of the risks directly as against domestic central banks who typically spouts what I call as sanitized alarm bells.

Alarm bells have been sounded by two political agencies this week.

First, Canada’s central bank, the Bank of Canada, sees domestic housing as 30% overvalued but sees a “soft landing” for the industry.

From the Bank of Canada[9]: Risks to Canada’s financial system have not increased in the past six months, but high consumer debt loads and imbalances in the housing market remain a concern, the Bank of Canada said today in its biannual Financial System Review (FSR).

Admit to the problem but downplay the risk. Good luck to them.

The second report seems more interesting; the Hungarian central bank has warned against a speculative “external attack” on her currency the forint, due to the weakness in the euro zone's economy. The USD-Hungarian forint (USD-HUF) has climbed to March 2009 highs or the forint has been battered to 2009 crisis level lows.

What makes the report especially interesting hasn’t been about the “external attacks” which obviously has signified a bogeyman, but about the premises from which the warning emanates.

From Reuters[10] (bold added): "The central bank's forecast shows that the third recession of the European Union can be a further difficulty in 2015," Governor Gyorgy Matolcsy said…Tuesday's remarks by Matolcsy chimed with comments by Economy Minister Mihaly Varga. He said last month the forint may weaken in 2015, when banks will have to convert billions of euros of foreign-currency mortgages to forints at a fixed rate of 309 per euro.

Two important insights: One, despite current actions by the ECB, the Hungarian central bank projects the Eurozone to fall into a “third” recession in 2015!!! How about that: a cynical neighboring central bank implicitly questioning the efficacy of ECB Draghi’s policies??!!

Two, the Hungarian central bank admits to have been plagued by foreign exchange loans or “euros of foreign-currency mortgages”! So “external attacks” serve as convenient scapegoat or camouflage for what has been an internal problem: excessive foreign currency denominated debts as warned by the BIS above.

Sanitized alarm bells means that global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality[11]

Philippine Yield Curve Flattens On Soaring Short Term Rates: Signs of Scramble for Liquidity?

It has been a fascinating spectacle to see the mindless emotion-propelled manic bidding up of the domestic equity securities at the Philippine Stock Exchange.

Although I have been writing about economic issues, the stock market has hardly been about the real economy but about credit and liquidity expansion that temporarily boosts highly fickle confidence that incites people to indulge in speculative orgies.

The mainstream has used economic issues or statistical G-R-O-W-T-H to justify or rationalize the public’s speculative urges, so my discourses have been intended to provide a contrarian causal realist perspective.

Yet here is a recent development which the consensus has been blind to and may adversely impact stocks: Philippine yield curve has massively flattened over the past few weeks.


The left window serves as a summary of the right window which represents the entire yield curve of Philippine domestic bonds (based on weekly Friday quotes). Both windows reveal of how short term yields (3 and 6 months, and 1 year) has been intensively climbing relative to the marginally easing yields at the farther end of curve.

From the mainstream viewpoint, a flattening of the yield curve can be interpreted as falling expectations for future inflation, anticipation of slower economic growth and expectations that the central bank will raise rates as reflected by a rise in short term rates[12].

I don’t think that the above explanation is complete.

It has been true that increases in short term yields did reflect on expectations to tighten by the central bank, as short term yields rose in 1Q 2014 when consumer price inflation became a headline concern (see charts below).

But short term yields hardly retrenched and remained rangebound even as money supply growth has stumbled from the remarkable 9 month of 30++% rates.

Now that statistical inflation has dropped to 3.7% last October[13] this has prompted the Philippine central bank, the Bangko Sentral ng Pilipinas, to keep policy rates unchanged this week[14]. The BSP action has been in line with previous policy communications.

The point is short terms rates have surged despite signals and actions by the BSP to keep rates at present levels. The question is WHY the two week spike in short term rates? This seems hardly been about expectations on policies.

As a side note, for all the warnings by the BSP chief, like their peers I guess that they would tolerate more inflating of bubbles rather than to have the system cleansed or reformed: short term priorities over long term consequence. Nevertheless economic forces will dominate. Perhaps the yield curve has been indicating on these.



Yet this seems hardly been about seasonality. In 4Q 2012 until 1Q 2013 yields exhibited declines across the 1 year and below spectrum.

From this perspective I offer a different explanation. The two week spike in short term yields represents a scramble for liquidity!

The short term rates 3 month, 6 month and 1 year have all reached June 2013 highs. To recall, June 2013 was when the taper tantrum PLUS BoJ’s QE 1.0 triggered turbulence in global financial markets, so the spike in short term rates then has been consistent with concerns over liquidity.

There have been little signs of turmoil (yet). The peso has been nearly unchanged for the year even as the neighboring currencies have been severely buffeted on likely heavy interventions by the BSP. The Phisix remains above 7,000. Despite failing to meet consensus expectations, statistical growth remains above 5%. In addition, media and experts continue to serenade economic hallelujahs even as neighboring financial markets have been roiling from weak currencies.

So this, in my view, may have been about debt IN debt OUT that may have reached proportions whereby demand for short term loans have become greater than long term loans, thus the spiraling demand equates to the public willing to pay for higher short term rates. And demand for such short term loans may have been reflected on the yields of short term treasuries.

And demand may have originated from cash constrained borrowers who may be competing to secure funds to oversee the completion of their capital intensive based projects on mostly bubble sectors, and or from highly levered asset speculators (real estate and stock markets) who may be jostling to acquire short term funds in order to settle existing liabilities as returns have not been sufficient to cover levered positions. Could this be the reason behind the obsession over managing of the stock market index?

The sharply expanding bank credit growth in the light of steeply decelerating money supply growth as statistical economic growth slows seems to dovetail with the greater demand for short term funds; the highly levered sectors of the economy haven’t been generating enough cash from a growth slowdown and from untenable debt levels so the dash for loans from the banking system to pay existing debt even at higher rates.

It remains to be seen if the current developments represent an aberration or if my suspicions are right where short term yields have been about emergent signs of liquidity strains.

But if my suspicions are correct, where short term rates continue to climb, this will affect many businesses via higher financing costs. There will be a cut back in expansions as losses will mount.

And if the rise in short-term yields engenders an inverted yield curve–where short term rates are higher than longer term rates—then the consensus will even be more startled because inverted yield curves have mostly been reliable indicators of recessions!

At any rate, look at how the mainstream interprets flattening yield curve: slower economic growth. So even if the yield curve doesn’t invert, but remains flat or continues to flatten, the consensus will be flabbergasted with statistical GDP falling below their sky high expectations.

And finally if financial and the real estate markets are driven by liquidity and if the flattening of the yield curve have indeed been about liquidity constrains then this might be the calm before the economic storm.

Phisix and Typhoon Ruby: The Mythical Link

And speaking of storms, one of the most absurd arguments peddled by media and by their coterie of highly paid experts has been to impute recent weakness in domestic stocks to Typhoon Ruby.

As I noted before, this is nothing but a myth.

The deadliest and the costliest Typhoons ever to hit the Philippines have been back to back, Typhoon Yolanda (2013) and Typhoon Pablo (2012).

Typhoon One week Two Weeks One month
Yolanda (Nov 3-11 2013) -3.5% -3.6% -6.16%
Pablo (Nov 25-Dec 9 2012) +1.6% +4.3% +5.05%

Looking at the the performance of Phisix in different timeframes reveal of the immateriality of such claims. Typhoon Yolanda has been accompanied by negative returns after 1 week, 2 weeks, and 1 month after the destruction. Typhoon Pablo, on the other hand, produced the opposite—positive returns over the same period.

Perhaps one may suggest because Typhoon Yolanda holds the reign as the most destructive and costliest, thus the decline? Nope. Destruction is destruction, so having the adjective “most” doesn’t logically justify distinguishing one for the other.


As I wrote in the aftermath of Typhoon Yolanda[15]:
The flow of stock price movements during post-Typhoon episodes largely reflected on the pre-established interim and general trend of the Phisix…

This means that natural disasters have mostly been a non-event, especially today when stock price movement have become highly sensitive to central bank policies.
Typhoon Yolanda’s negative returns came as the Phisix had been battered by the taper tantrum and by BoJ’s QE 1.0 in May 2013 (upmost window). On the other hand, Typhoon Pablo sailed on the tailwinds of a booming Phisix (lowest window). So the flow of stock price movements during post-Typhoon episodes had indeed largely reflected on the pre-established interim and general trend of the Phisix, as I predicted then.

As further proof that Typhoon Yolanda has been nothing more than a post hoc fallacy, I placed the Thailand SET on the middle and labeled “Yolanda hits the Philippines”. The chart of BOTH the Phisix and the SET resembles one another. Do I now say that Typhoon Yolanda smacked Thailand stocks too? Look at the charts of Singapore’s STI and Indonesia’s JKSE covering the same period, all three reveals of the same actions—late October top which came with selling pressures that produced a December bottom. So Singapore’s STI and JKSE had likewise been victims of Typhoon Yolanda? 

How about this week’s quasi crash by the SET and by Vietnam’s Ho Chi Minh index, they too had smashed by Typhoon Ruby? 

And such post hoc fallacy has been qualified as expert opinion?

It may be convenient and popular to tell the public about how recent events (available bias) have caused actions in the stock markets in the same way G-R-O-W-T-H has been peddled to rationalize frenzied bidding up of ridiculously expensive stocks, but is it the truth?

Will the Domestic Casino Industry function as the Causa Proxima to a Credit Event?

Casino stocks have been pummeled violently to severely oversold levels which prompted for an equally violent rebound last Friday. 

The oversold plight of the casino stocks had been used by the bulls to incite a frenzied Friday rally that culminated with another stunning episode of marking the close.

Bloomberry’s 4.09% Friday jump regained only half of Thursday’s losses and remains significantly down by 7.9% this week. Melco Crown soared 7.44% on Friday to more than recover yesterday’s 4.92% crash. But two days won’t do justice to Melco’s predicament. The MCP has been sold down by a shocking 17.98% over the past 5 days! Since no trend goes in a straight line, the violent selling translated to an equally volatile rebound. Yet Melco remains down 4.46% over the week.

Melco partner PLC jumped 5.58%. Because of the absence of foreign participation, PLC posted a 1.96% advance over the week.

Lastly, Resorts World developer Travellers International only inched up .4% from Thursday’s 3.74% drubbing. Travellers closed the week down by 1.96%.

The crash of domestic casino stocks should have been anticipated even if we omitted the Macau-Singapore-US link.


Since the listing of Resorts World developer Travellers International [PSE:RWM], the first casino resort to open in Metro Manila, its stock has been on a downhill. As of Friday, RWM has lost 33.5% from its IPO price which means the stock has been in a bear market and has been mostly absent from the recent rally.

RWM supposedly should have the first mover advantage given that operations has commenced on 2009. RWM has reportedly taken a 95% ownership of Resorts World Bayshore whose construction has started this month and has been slated to open in 2018. The company supposedly will raise funding of the Bayshore project via debt market. The company has also grand plans for the two other phases of Resorts World Manila.

A quick glimpse of RWM 1Q financials show that net profits have been up even when gross and net revenues as well as gross profits have declined. On the other hand, debt levels has improved from Php 20.6 billion in 2010 to Php 17.7 billion in 2013. In 1Q 2014 debt has already been pegged at Php 13.4 billion.

So much grand plans to be financed by debt pillared on the perception of sustained easy money environment and from demand based on G-R-O-W-T-H anchored on the same easy money landscape. There seems no margin of safety from errors.

Yet 1Q 2014 RWM top line figures seem to have already hit a growth barrier.

If we add three of the major domestic casinos, debt will total accrue to around Php 50 billion in a race to build tremendous capacity to compete with the region.

Macau’s existing casinos reportedly had 10 mega projects in the pipeline until 2017. Considering the mounting financial losses of Macau’s casinos I doubt if all these will be realized.

Demand from the major prospective customer, the Chinese gambler, has been down mainly because their economy has been teetering towards a crisis, the domestic and the regional economy has also been slowing which leaves a very limited domestic market from which the big three with huge capacities will be competing with. Lastly and most importantly the excess capacity has been financed mostly by credit—how will these be repaid?

What will be the conditions of these Philippine casinos when their delusions of grandeur will be met by reality of competition, slowing growth, excess capacity and more importantly by the emergence of tight money?

Yet if domestic markets have been unimpressed by RWM then why the enthusiasm for the newcomers? Because the new casinos tickle the imagination more than the first mover? Or has this been because of better PR image packaging?

The stock market reaction to the three casino stocks looks like the boiling frog syndrome. There was hardly a crash in RWM because the RWM frog had been boiled alive slowly (bearmarket)! The crash in Bloom and Melco has been like frogs that leapt out of the boiling water.

RWM already gave a clue. Yet no one dared to listen.

Historian Charles Kindleberger talked about causa proxima or event risk that triggers a snap in the confidence of a highly levered system. If there should be any lesson from the past two weeks, it is that the casino industry looks like the prime candidate for event risk.

That two week selloff in casino stocks coincides with the two week spike in short term yields, has there been a connection?

In the movie Rocky 3, the antagonist challenger to the world title held by protagonist Rocky Balboa, Mr. T had been asked by media to predict the outcome of the fight. His curt answer: “Pain”
___

That’s how I see financial markets in 2015.

For what it is worth, there will always be opportunities or there’s always a bullmarket somewhere.

Enjoy the Holidays.








[5] Hyun Song Shin Financial stability risks: old and new Brookings Institute-Bank for International Settlements December 4, 2014

[6] Ambrose Evans-Pritchard Dollar surge endangers global debt edifice, warns BIS, The Telegaph December 7, 2014

[7] Dow Jones Business News China Banks Increased Lending Faster Than Expected in November December 12, 2014 Nasdaq.com






[13] Bangko Sentral ng Pilipinas November Inflation Decelerates Further to 3.7 Percent December 5, 2014

[14] Bangko Sentral ng Pilipinas Monetary Board Keeps Policy Settings Unchanged December 11, 2014

[15] See Typhoon Yolanda and the Phisix November 11, 2013