Thursday, April 16, 2015

Chart(s) of the Day: Yields of Philippine 1 Month Treasury Bills Soar to 3 Year High!

Hasn’t it been portrayed by media and the establishment that the Philippine political economy have developed 'invincibility' and or 'immunity' to all sorts of risks? 

If so, then who from the establishment institution/s has been so desperate or frantic enough to raise short term liquidity by dumping 1 month bills on the marketplace to send yields of 1 month treasury to 3 year highs?! And why?? (charts from

Yet there have been repeated attempts at vehemently “massaging” yields as seen during the past few days. 

Unfortunately for the index managers, it appears that the developing 2 year uptrend has signified a powerful force to have kept manipulations at bay. 

Yet more signs of record stocks in the face of record imbalances at the precipice. 

Lady Protestor Disrupts ECB's Mario Draghi Speech, Shouts: “End ECB ‘dick-tatorship’”

Despite record setting stocks, central bankers seem as looking less popular these days. 

From the Guardian
Mario Draghi, the president of the European Central Bank, has been showered in confetti by a female protester who interrupted his monthly press conference in Frankfurt screaming: “End ECB ‘dick-tatorship’”. 

The woman, wearing a black T-shirt carrying the same slogan, clambered on top of the desk where Draghi was delivering his opening speech after the bank’s latest policy meeting. She threw a handful of papers at him, and sprinkled confetti into the air.

It was unclear what point the protester hoped to make, but copies of the leaflets she was throwing, which later emerged on Twitter, accused the ECB of exercising “arrogance” and “autocratic hegemony”. She was identified by the police as a 21-year-old from Hamburg.
More pictures

(above images from FT Alphaville

Perhaps this could have been related to the recent Blockupy anti-ECB violent protests during the ECB's official inauguration of its new headquarters at Frankfurt Germany last March. See pictures here. Then, several police cars were set ablaze that led to the arrest of the 350 dissenters.

Nonetheless, the lady assailant of Mr. Draghi, the 21 year old Ms. Josephine Witt had her tweets published at the Zero Hedge, which included her manifesto...

The above seem to signify symptoms of a developing phenomenon.

Here is my guess. Once the global crisis becomes a reality, protests against central banks will snowball and may even become more violent.

Tuesday, April 14, 2015

Indonesian Government Imposes Foreign Exchange Controls: Limits Use of Foreign Currencies in Domestic Transactions

I recently pointed out of the growing risks in the ASEAN region, particularly in Indonesia. 
The rupiah has been taking it to the chin and now has crashed to record levels. Question now is: To what extent will the current ‘capital buffers’ hold in the prospect of a sustained US dollar juggernaut vis-à-vis the rupiah??? Where is the breaking point for the system to snap?

If Indonesia’s system wilts and eventually cracks how will this affect the entire region? Do the big bosses of the BSP and their hordes of economists know?
(note: I made an error in my previous post where I mentioned Indonesia’s currency as ‘ringgit’ instead of the ‘rupiah’. Changes had been made above)

Well, in the face of crashing rupiah and record high stocks, the Indonesian government just imposed foreign exchange controls

The Nikkei Asia reports: (April 13; bold mine)
Bank Indonesia, the country's central bank, will require all companies to use the rupiah for domestic transactions starting July 1 to bolster the currency.

In recent months, domestic transactions using foreign currencies, mostly the dollar, have been running around $6 billion a month. Manufacturers, particularly, frequently engage in this sort of trading.

The central bank will impose sanctions on those using foreign currency in domestic cash and noncash transactions, with some exceptions for the government budget and financing of strategic infrastructure projects, with central bank approval. The restrictions were introduced in 2011, but had little effect since there were no clear penalties for breaking the rules.

Eko Yuliantoro, acting head of the central bank's Department of Currency Management, said Thursday the bank will impose penalties on companies or individuals that do not comply with the rules. Violations are punishable by imprisonment up to one year and a fine of up to 1 billion rupiah ($77 million). The bank has formed a task force with the ministries of Finance, Trade, Home Affairs, Tourism and other authorities to oversee implementation of the rules.

Bank Indonesia Gov. Agus Martowardojo said Friday that as of April 7, the rupiah had fallen 4.85% since Jan. 1 and that the trend may continue through the rest of the year. He said it would be difficult to reverse the bearish trend in the rupiah through market intervention. "To address the vulnerability in the national economy, a disciplined monetary policy will be required," Martowardojo added.

According to the central bank, the total foreign debts of Indonesian companies, including state-owned enterprises, has reached $163 billion and only 26.5% of that is hedged. As the U.S Federal Reserve is expected to raise interest rates in the future, a move that could trigger further appreciation of dollar, he will ask all companies in Indonesia to improve their foreign fund management and hedge their dollar exposures.
For the Indonesian government to drastically impose foreign exchange controls appears to highlight signs of desperation from the sustained downside volatility of her currency.

The exchange controls had actually been announced last week, April 9, based on a report from Reuters.
Yet the USD-rupiah has been rising despite the proposed imposition of capital controls this coming July.

The currency markets may have seen or interpreted the government’s actions as potentially contributing to the weakening of Indonesia’s economic conditions or has read through the government's seeming panic, or has downplayed on the purported effects of such capital controls.

The weak rupiah appears to have temporarily benefited the Indonesian economy in terms of record FDI’s in 2014 (see chart here). But this appears as being neutralized by resident capital flight. The upsurge in dollar based transactions—“running around $6 billion a month”—have likely been symptomatic of this.

And in recognition of the risks from the vagaries of capital flows, the Indonesian government dangles tax incentives to foreign firms to stem the risks of capital flight.

From the Wall Street Journal (April 10)
Indonesia will start offering foreign investors a lower tax bill if they reinvest profits here, a measure that could stem capital flight as the U.S. prepares to raise interest rates and buffer the economy from “uncomfortable” rupiah weakness, the finance minister says.

Starting later this month, companies that reinvest dividends will receive a 30% deduction on their taxable income over six years, Finance Minister Bambang Brodjonegoro said in an interview. Those businesses also will be able to use losses to offset profits for up to 10 years, compared with five currently. Other incentives include lengthening tax holidays for certain industries, including the petrochemical sector, which is the biggest recipient of foreign investment in the country.

The tax incentives would be aimed at keeping foreign capital within Indonesia’s borders, a move Mr. Brodjonegoro hopes will stem an exodus of hot money if the U.S. Federal Reserve raises interest rates, as expected later this year. Foreign capital dominates markets in Southeast Asia’s largest economy, and hints of rising rates in 2013 sent both the rupiah and the local stark market into a nose dive.

Nevertheless, Indonesia’s record low rupiah has only caused external trade to plummet as both February exports and imports have crashed to 2008 levels!

February exports and imports plunged 16.02% and 16.24%, respectively according to Reuters.

The surge in currency volatility has apparently contributed to the immense distortion of the Indonesia’s entrepreneurs’ economic calculation and coordination process that has led to the trade collapse! Just how will entrepreneurs do their profit –cost analysis with such intense forex price fluctuations? 


The crash of her external trade has hardly improved her current account deficit. Capital flight could have also been a factor.


Even more, mounting government expenditures comes in the face of growing indications of economic weakness. Add to these the enormous $163 billion of foreign debts where only 26.5% has only been hedged.

So aside from potential shift in the Fed's ZIRP (zero bound policies), the rupiah's weakness has been structural--specifically, a product of domestic policies that has been transmitted to the economy via boom bust cycles.

Well, foreign exchange controls will have unintended consequences.

As Cato Institute’s monetary economist Steve Hanke explained in 1998 (bold mine)
When convertibility is restricted, risk increases, and so the risk-adjusted interest rate employed to value assets is higher than it would be with full convertibility. That’s because property is held hostage and subject to a potential ransom through expropriation. As a result, investors are willing to pay less for each dollar of prospective income and the value of property is less than it would be with full convertibility.

This, incidentally, is the case even when convertibility is allowed for profit remittances. With less than full convertibility, there is still a danger the government will confiscate property without compensation. This explains why foreign investors are less willing to invest new money in a country with such controls, even with guarantees on profit remittances.

So investors become justifiably nervous when it seems a government is considering imposition of exchange controls. At that point, settled money becomes “hot” and capital flight occurs. Asset owners liquidate their property and get out while the getting is good. Contrary to popular wisdom, restrictions on convertibility do not retard capital flight, they promote it.
While the prospective implementation of forex restrictions has been directed at domestic transactions by local enterprises and individuals, it won’t be far fetched where capital controls may spread to foreigners.  Failed interventions beget more interventions

So despite the record setting stocks via the JKSE , I expect the current capital flight dynamics in Indonesia to intensify. And such would magnify the risk of a regional contagion.

How Regulations Suffocate the Economy and Restricts Freedom

Sovereign Man’s Simon Black on the deleterious effects of soaring regulations (bold mine)
On March 16, 1936, the government of the United States published the very first edition of the Federal Register.

President Roosevelt had been taking a lot of heat over the previous year; under his New Deal program, dozens of government agencies were passing new rules, regulations, and codes at an absolutely feverish pace.

It became impossible for anyone to keep track of them—even the other agencies within the government.

So in the summer of 1935 they created a new law requiring every executive agency to publish a daily, official record of their activities.

This official record was called the Federal Register. And it would contain a complete set of every rule, regulation, code, and proposal issued by each of the executive agencies.

The first edition was published on March 16, 1936. It was sixteen pages.

Every single work day since then, without fail, the government has published the Federal Register.

Its first full year (1937) contained a total of 3,450 pages. By 1942, the Federal Register had grown to over 10,000 pages.

It passed 20,000 for the first time in 1967. More than 30,000 in 1973. And more than 40,000 the following year in 1974.

The Federal Register exploded during the 1970s, in fact, touching nearly 90,000 pages by the end of the Carter administration.

During Reagan’s time, the publication shrank to under 50,000, only to rise again under subsequent presidents.

The longest edition ever published was logged at 6,653 pages in a single day, during the administration of Bush II.

President Obama has averaged nearly 80,000 pages per year, far and away the highest of any President in US history.

This morning’s edition, in fact, is a whopping 358 pages full of new rules, regulations, and proposals.

Did you read it? Neither did I. But as the old saying goes, ignorance of the law is not an excuse.


This is absurd. Every single one of those regulations makes people less free.

They criminalize the most innocent behavior and make it impossible for the average person to know what’s legal and what’s not as if we all have some some civic duty to read and memorize 80,000 pages per year of government regulation.

4,500 criminal statutes now exist under US Code. That’s 1,500 times more than the three crimes outlined in the Constitution– piracy, treason, and counterfeiting.

(Ironically, the Federal Reserve and commercial banks commit the latter on a daily basis…)

We’ve seen this theme countless times throughout history.

Under Diocletian’s reign, the Roman Empire’s body of laws and regulations multiplied like rabbits.

He centralized all aspects of the economy, controlling wages, prices, commerce, and agricultural activity. Violations in many cases were subject to the death penalty.

And when people complained, he told them that the barbarians were at the gate, and that individual liberty needed to be sacrificed for the greater good of security.

By Diocletian’s time, Rome was already bankrupt. His regulations pushed the Empire over the edge.

It’s not much different today. Each and every one of these obscure regulations COSTS MONEY.

So it’s not surprising that as the number of pages in the Federal Register has increased, so has the US federal debt.

In order to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.
Let me add graphics of…

…the US government budget (deficit spending), and the...

...US federal debt. Both charts have been sourced from the Heritage Foundation

Yet the link between regulation and debt.

Every enacted regulation needs enforcement. Enforcement entails spending. And spending requires financing. Government financing are sourced from taxes, debt and inflation. Essentially, every increase in regulation entails higher taxes, debt or inflation. Hence, “Each and every one of these obscure regulations COSTS MONEY.”

And if the tax revenues can’t keep up with the pace of regulatory profligacy, thus the recourse towards deficit spending financed by debt: as “Federal Register has increased, so has the US federal debt.”

In addition, desperate governments will dragoon its citizens via innovative and increasingly repressive tax regimes, thereby “to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.”

Yet every government spending represents resources extracted from the private sector, and mostly, resources taken away from the productive agents of the economy. Hence, regulatory overload impedes economic activities, and consequently, spawns black markets.

In addition, there are costs (time, effort and resources) to comply with regulations.

Economist Robert Higgs on estimated compliance costs endured by the US economy:
According to Wayne Crews, who makes an annual estimate of the cost of compliance with federal regulations alone, “Costs for Americans to comply with federal regulations reached $1.863 trillion in 2013”—which is equivalent to more than 13 percent of national income. Compliance with state and local government regulations surely adds a large amount to Crews’s estimate for federal compliance alone. No one needs to tell Americans, however, how onerous and exasperating the entire mass of government regulations and related red tape has become. Virtually every part of economic and social life now bears these heavy burdens, and any truly meaningful appraisal of the size of government today must take them into consideration along with the amounts the various governments are spending.
Even more, increasing regulations drives a chasm between the economic (productive) class and the political (parasitical) class, making the former subservient to the latter.

In her classic novel Atlas Shrugged, the late Ayn Rand honed in such politically induced societal entropy...
Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion- When you see that in order to produce, you need to obtain permission from men who produce nothing- when you see that money is flowing to those who deal, not in goods, but in favors- when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you- when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.
Yet this is a universal phenomenon or applies to every government.
Regulating people’s lives means LESS freedom. 
Arbitrary regulations, not only "criminalize the most innocent behavior" for being ignorant of what's legal and what's not, instead they have frequently been used as instruments of repression based on political expediency and the advancement of power over the citizenry. 

Therefore, increasing enactments of arbitrary regulations signify a slippery slope path towards corruption and dictatorship.

As Roman lawyer, orator and senator Publius Tacitus wrote (Annals 117 Book III, 27) Corruptissima re publica plurimae leges (The more numerous the laws, the more corrupt the government.)

Monday, April 13, 2015

Quote of the Day: One of the most pervasive and dangerous myths of our time is that military spending benefits an economy

No, the real enemy is the taxpayer. The real enemy is the middle class and the productive sectors of the economy. We are the victims of this new runaway military spending. Every dollar or euro spent on a contrived threat is a dollar or euro taken out of the real economy and wasted on military Keynesianism. It is a dollar stolen from a small business owner that will not be invested in innovation, spent on research to combat disease, or even donated to charities that help the needy.

One of the most pervasive and dangerous myths of our time is that military spending benefits an economy. This could not be further from the truth. Such spending benefits a thin layer of well-connected and well-paid elites. It diverts scarce resources from meeting the needs and desires of a population and channels them into manufacturing tools of destruction. The costs may be hidden by the money-printing of the central banks, but they are eventually realized in the steady destruction of a currency.
This excerpt is from physician, former US Congressman, former presidential candidate and the great libertarian Ron Paul in his latest outlook: The New Militarism: Who Profits? at his website the Ron Paul Institute

Sunday, April 12, 2015

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Humans are not wired to take the road less traveled. They continually look for the safety and security that is provided by being a member of a larger group. Being part of the consensus crowd doesn’t mitigate the risk of loss or prevent failure, but it does go a long way to easing the mind and the wrath of clients, in the event of failure. Human beings tend to believe mistakes are valid if so many others make the same mistake. This herd mentality overrides rationality and common sense and changes the motives behind our decision making process. As investors demonstrate this phenomena, they end up harboring a greater concern of acting differently and lose focus of the risks they bear. The predominant difference on this occasion as compared with the two previous market bubbles (2000/2008) is the Federal Reserve’s role as an agent encouraging such reckless group-think.-- 720 Global Courage

In this issue:

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

-Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

-The Coming Surprise from the Sharp Flattening of the Yield Curve

-The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

-Bubble Risks Spreads into Mainstream Thinking

-Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights
A) Inequality of Returns
B) Inequality of Valuations via PERs

-Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment

Massive Interventions at the Short End of Philippine Treasury Markets Repulsed!

While everyone seems fixated on record Phisix 8,100, a tremendous earthshaking activity shook the Philippine treasury markets last week which mainstream or the consensus seems to have entirely missed out.

I have been saying here that the Philippine treasury have represented a tightly held or controlled market by the government and their agents the banking system.

To the point that they have been tightly controlled, I have long expected dramatic interventions to occur given the incipient signs of funding pressures and of the sustained and accelerated flattening of the yield curve since late last year.

April 7 Tuesday, my long held suspicion became a reality.

Faceless treasury bulls launched a broad based orchestrated strike against the bears to massively pull down yields of practically all of the short term yields—from 1 month to 2 years.

The scale of the price or yield change has been so intense where one can infer such phenomenon as a high sigma or a fat tail event! Yields have crashed by 97 bps for 1 month bills, 60 bps for 3 months, 75 bps for 1 year and 65 bps for 2 years!

There had been minor changes at the long end.

Such actions appear directed at fomenting a steepening of the yield curve and to project an image of easing of funding pressures.

Yet here are some reasons why I believe the tail event intervention took place.

First, the growth trend of banking loans continues to slump!   

February’s banking data from the BSP marked the sixth consecutive decline in the banking loans to the general economy (left) which peaked last July 2014. 

The growth rate of system wide banking loans has decelerated to December 2013 levels.

It’s a wonder, has activities in the trade sector picked up in 1Q 2015?

Wholesale and retail lending growth rate continues to plunge (right); they have now descended to January 2014 levels.

If loan conditions to the very popular sector have been retrenching then how will inventory restocking and retail spending be financed? Will consumers yank savings out of their pockets, jars or bank savings accounts? Or will they expand the use of bank credit? 

But bank credit has severely been limited to the few with access to the formal banking system? Besides growth in consumer loans appear to be plateauing. The thrust of consumer loans appear to have been funneled into auto loans which has been surging at a spectacular clip.

As an aside, has the surge in auto loans been due to the uber effect and other online taxi apps?

On the other hand, has the slump OFWs growth rate of remittances suddenly reversed and zoomed? Or has income growth been magnified to offset the decline in credit activities? But where will income growth come from?

Has the decline in loans to the trade industry also reflect on the surplus inventories racked up during 4Q 2014?

If loan conditions to the trade sector serve as indication of its health condition, then what does slumping credit activities mean…a growth revival or a sustained deepening slack?

As I will repeat here, the government can arbitrarily create numbers which they think would necessitate to paint whatever scenario they intend to exhibit for political purposes. But those numbers will not put food on the table or will not be representative of real economic developments.

Second, while the BSP noted that February domestic liquidity data produced an M3 rebound to 7.7% and a month on month gain of 1.4%, statistical inflation eased once again to 2.4% year on year last March.

On a month on month basis, BSP’s statistical inflation relapsed to negative .1%—DEFLATION!!! CPI deflation for the second time in six months (see right chart from!!

Given the continued weakness in banking loan growth, has the M3 performance of February represented a dead cat’s bounce?

I posted Austrian economist Frank Shostak’s explanation of the relationship between money supply, prices and economic activity to punctuate such development[1]: (bold mine)
While increases in the money supply result in a monetary surplus, a fall in the money supply for a given level of economic activity leads to a monetary deficit.

Individuals still demand the same amount of services from the medium of exchange. To accommodate this they will start selling goods, thus pushing their prices down.

At lower prices the demand for the services of the medium of exchange declines and this in turn works toward the elimination of the monetary deficit.

A change in liquidity, or the monetary surplus, can also take place in response to changes in economic activity and changes in prices.
Has record upon record Phisix been representative of the transition process towards the elimination of the residual ‘monetary surplus’ from the previous 30+% money supply growth through the asset pricing mechanism, while simultaneously signifying the emergence of declining in economic activity that eventually leads to a ‘monetary deficit’? 

In short, has current intertwined dynamics of money supply, prices, and economic activities been a manifestation of a major inflection point?

Besides hasn’t it been that the BSP chief remains transfixed with the risks of ‘deflation’ as revealed via his various recent speeches? So could the interventions at the Philippine treasury been the handiwork of the BSP?

If so, then whom has the BSP been attempting to bailout? Hmmm.

I thought that such interventions would hold on for awhile. Apparently my expectations would be frustrated.

The interventions seemed to have speedily been unwound. 

Friday, Treasury bears mounted a much profound counterstrike than the offensive earlier launched by the bulls.

The powerful counterattack has instead sent short term rates to milestone highs!!! The reversal comes with the exception of 6 month bills.

Yields of 1 and 3 month bills skyrocketed by an astounding 125 bps and 82 bps! Yields of 1 and 2 year treasuries also vaulted by an equally dazzling 134 bps and 73 bps!

Yields of the aforementioned treasuries have all cleared through the taper tantrum levels in May 2013! 

The intended effect of the intervention has been to force up or widen the spread of the yield curve as shown by the 10 and 20 year minus 6 months (right). 

However the unintended consequence had been a fantastic collapse in 10 and 20 year minus 1 year spreads! If we include the 1 and 3 months into the equation, the dramatic flattening would have been accentuated and widespread!

The yield disparity between the 10 and 20 year and 2 year has likewise flatten but at a tempered pace.

At the end of the day, the intervention resulted to what seems an anomaly. The unwinding of the intervention had missed out yield spread between 6 month and 10 and 20 years, though generally short term spreads against 10 and 20 year have all narrowed, with 1 year, 1 month and 3 months in what seems as a collapse mode.

The Coming Surprise from the Sharp Flattening of the Yield Curve

Stock market bulls, particularly the index manipulators, seem to have an enormous problem. 

They have been fiercely trying to prop up the index to show that the Philippine economy has been impregnable from risks whether internal or external.

However, actions at the bond markets which have been dominated by establishment financial institutions seem to have, behind the scenes, been vehemently pushing back. There are 18 accredited PDS Treasury (PDST) fixing banks responsible for domestic bond market transactions

In short, Philippine treasuries and domestic stocks continue to walk on opposite directions. Considering that the diametric flow from these financial assets will have influence to the real economy, eventually one of which will be proven wrong.

Yet those milestone highs of short term rates have most likely represented symptoms of intensifying short term funding pressures.

The accelerated flattening of the yield curve have also likely most evinced symptoms of liquidity tightening as a result from developing balance sheet impairments, presently and most likely being shielded through accounting flimflam. The declining banking loan growth trend appears to manifest such dynamics in motion.

Nevertheless magnified demand for short term funding seems as being reflected on the soaring yields of short term treasuries.

Also the flattening of the yield curve signifies as an “excellent indicator of a possible recession”.

The yield curve according to the New York Fed[2], “significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”

So while the government can churn out whatever statistics to broadcast what they intend the public to see, yet if the current hastening pace of the yield curve flattening continues, then the bulls will get a surprise of their lifetime.

To extend the quote of Austrian economist Frank Shostak from the same post who warned, (bold mine)
The effect of previously rising liquidity can continue to overshadow the effect of currently falling liquidity for some period of time. Hence the peak in the stock market emerges once declining liquidity starts to dominate the scene.
Rings a bell?

The Global Risk ON Moment as Financial Markets Diverge from Economies; The Incredible China Stock Market Bubble Goes Berserk!

Now back to the record Phisix

In context, it’s not just the Phisix, rather the world has been witnessing a renewed risk ON moment.

Numerous national benchmarks have recently reached various record or milestone highs. 

Hong Kong’s Hang Seng has spearheaded this week’s Asian stock market ramp. The Hang Seng index has been up by an astounding 7.9%, as Chinese mainlanders have reportedly been stampeding to bid up share prices not only of Chinese benchmarks, but likewise of stocks in Hong Kong.

Chinese stocks as measured by the Shanghai index also soared by 4.4%!

Yet valuations of Chinese stocks would make Philippine stocks “cheap” by comparison!

Chinese technology stocks reportedly posted PERs of 220 from reported profits to dwarf the US equivalent, the 1997-2000 US dotcom, where PERs had been priced at 156!!! The Nasdaq version of the Chinese stocks, the ChiNext, a benchmark which comprises a basket of technology and other small and medium scale businesses has an average PER of a fantastic 100 for member firms!!![3]

The broad based buying which has reported to include housewives and uneducated traders has even massively pumped Macau’s casino stocks which soared by 10% or more this week. Macau’s casinos stocks has surged even as March earnings continue with its horrific collapse!

Analyst from Deutsche Bank adds a comment on the deepening absurd valuations of Chinese stocks[4]
Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!
And more signs of insane levels of Chinese stocks; the median company forward PER for Shanghai has been at 30x and 39x for Shenzhen! 

To add, in Shenzhen, half of stocks have a forward PE above 50 while 18% of stocks have a forward PE above 100(analyst estimates)! In Shanghai, over a third of stocks have a forward PE above 50 (analyst estimates) while a tenth of stocks have a forward PE above 100!

Philippine index managers must be frothing over the prospects of China’s celestial valuation levels!

The government sponsored stock market mania has been attracting retail participants like a bee swarming over a beehive. 

Based on my compilation of data from the China Securities Depository and Clearing Corporation Limited (CSDC), there have been 4.3 million new accounts over the past 3 weeks, and 8.725 million neophyte punters from the start of the year. This year to date number is about to surpass the 9.028 million new accounts for the entire 2014!

In addition, the pace of which Chinese stocks has been drawing new participants seem to almost match the momentum of the growth rate of the Shanghai bubble which peaked in October 2007. The Chinese stock market bubble then inflated by about 5x before imploding. The ensuing bubble bust erased 66% of the gains from the peak! 

At 4,034, the Shanghai index has still been off by 31% from the October 2007 pinnacle. This is not to suggest that Shanghai index will reach the said levels.

But even with the deluge of enrollments on stocks, equity assets only account for 20% of financial assets of Chinese households compared with cash and bank deposits at 45% based on Charles Schwab survey released last January according to a report Bloomberg.

It would be a mistake to extrapolate that underexposure by Chinese population on stocks would equate to a free lunch for a stock market bubble. As 2007 and its ramification shows, people gravitate to stocks until a certain point where the levels of stocks and or the level credit exposure would weigh on bubble for it to implode on its own weight. Of course government policies like tightening can serve as a prick to any bubble.

Yet I believe that this represents the last straw which the Chinese government has been desperately clinging to. What they have done has been to replace one bubble after another.

The Chinese government seems to be hoping that the stock market boom may provide the economy an alternative of finance. They must be hoping that equity may replace credit as a source of financing for credit trouble firms, thus the stock market frantic pump matched by an avalanche of IPOs.

In addition, rising stocks could have been seen by the Chinese government as having the “wealth effect” enough to ameliorate the downturn in the property sector, spur consumer spending and create the impression that the Chinese economy has been recovering.

Little have they learned from their recent experience that the same credit bubble on the property sector has only incited for a huge imbalances. Huge imbalances that has to be paid for, which has been the reason for the recent downturn in the economy.

Yet once the Chinese stock market bubble crash, such will only aggravate and accelerate the ongoing downswing in the property bubble. 

The lesson is: Two wrongs don’t make a right.

Asia’s magnificent gains have actually been overshadowed by those in Europe’s, where the latter’s advances have made China’s Shanghai index year to date advance of 24.72% look only like a median. 

Week on Week, a big segment of European stocks basking from the ECBs QE has inflated by 3% or more. Year to date, gains of many European stocks has ranged from 18% to over 25%.

Curiously the Institute of International Finance, a trade association of global finance and banking institutions reckoned that the current market sanguinity has hardly been matched by the economic indicators.

They point out that Emerging Market (EM) coincident indicators fell to 1.8% in Q1, the “slowest quarterly growth rate since early 2009 and continues the slowdown of last year when growth fell to 3.6%q/q, saar in Q4 from 4.4% in Q3.”[5]

They also say that except for financial markets, overall growth trend has been disappointing, “trade data declined sharply across regions, industrial production was mixed but generally weak, and business sentiment took a big turn for the worse.”

In addition Manufacturing PMIs has fallen below the 50-threshold mark which means contraction. This has largely been due to “Sharp declines in Brazil, Russia, Turkey and Indonesia contributed to this decline and more than half of the countries we track now have PMI readings below 50”, with an exception of a supposed few bright spot which includes India and CEE (central or eastern Europe) economies.

Finally, the global stock market boom has been propagating euphoria to the extremes. Now publications have been wildly celebrating record breaking stocks. See the pictures here.

I am reminded by the late legendary investor, Sir John Templeton who once said
Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.
Those pictures seem portentous of things to come.

Bubble Risks Spreads into Mainstream Thinking

By the way, there seems to be growing recognition from the mainstream of the heightened risks of a global crisis.

JP Morgan’s Jaime Dimon predicts a coming crisis

Pimco’s former founder and now Allianz chief economic adviser, Mohamed El Erian likewise sees rampant bubbles everywhere from central bank policies which is why he says he is mostly into cash.

Finally, US President Obama’s major crony, the former value investor Warren Buffett, denies a US stock market bubble

Yet paradoxically his flagship Berkshire Hathaway has been amassing cash at the fastest rate since 2003. Also Mr. Buffett recently warned in his recent annual report that “Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets.” Curiously the US stock market has been afflicted by the immense absorption of borrowed money! Yet no bubble! Another progressive thinking characterized by "Do as I say, not as I do".

Phisix 8,100: A Story Of 10 of the 15 Biggest Market Cap Heavyweights
A) Inequality of Returns

At the local front, there’s more than meets the eye for the record-after-record Phisix.

Record Phisix 8,100 has really been more about headline number than representative of the whole market sentiment. 

To emphasize, headline numbers have usually been intended exhibit form or symbolism rather than of substance.

Let us go through the numbers.

Based on market cap weighted Phisix, the year to date return this week has been 12.4%.

Of the top 15 issues, 10 or two third has delivered 12.4% or more. 

Of the next 15 issues, only 5 or one third generated 12.4% or more.

Overall, one half of the issues delivered gains at par or more than 12.4% while the other half produced lower than the benchmark returns.

Let us dive deeper into the details.

Of the half that outperformed, the average returns had been a stunning 20.3%! Of the half that underperformed the average returns had been at a shocking only 1.96%! So the average returns for the 30 composite members of Phisix registered only 11.124% compared to the 12.4% market weighted returns

The huge disparity (20.3% vis-à-vis 1.96%) represents a sign of growing concentration of trading activities!!!

And for the 10 outperforming issues from the upper 15 bracket, returns have been at an average of 18.43%! The average returns of the top 15 Phisix members had been at 13.6% relative to the latter half of 8.7%.

This means that Phisix 8,100 has mostly been a story of the 10 issues from the 15 biggest market cap heavyweights!!! The other 5 issues at the lower half of the Phisix have merely played a complimentary role.

And for those with the impression that blindly investing in any of the Phisix members would generate returns equal to the Phisix will be up for a big disappointment; that’s because as the above shows “inequality” dominates the distribution of returns!

Despite 8,100, the rising tide has apparently not lifted all boats.

B) Inequality of Valuations via PERs

The distribution of Price Earning Ratios (PER) confirms on the huge tilt in trading activities and price actions towards the most popular issues.

The average PERs of the upper strata of the Phisix has been at a whopping 31.06 as against a still expensive 21.94 of the latter half!

The average PERs of the outperformers from the overall index has been at a staggering 30.59 as against the underperformers at which has been at a dear 22.44. (note I omitted in my calculation Bloombery due to negative PERs so denominator has been reduced to 14 for the latter half)

The average PERs of the 10 top performers from the upper level of the Phisix has been at a colossal 32.9! The distribution of which are as follows: 3 issues with PERs of 20+ (AGI, GTCAP and SM), 3 with 30+(SMPH, ICT and AC) and 4 with PERs at an incredible 45-50 (JGS, ALI, URC, JFC)!

Record Phisix and Market Internal Divergences Reveals More Signs of Index Rigging

Nonetheless, Phisix 8,100 appears to have been divergent from actions of general market activities.

For this year, there has only been one week where advancers took complete command of the stock markets. 

In general, of the 14 weeks through April 10, 2015, declining issues dominated 64% (9/14) weekly trading. 

From this perspective, record Phisix 8,100 implies less support from the broader market than has been conveyed by the headline numbers.

Also such signify as signs that the general market has been looking for a correction from which have been written off by the index managers.

Additionally, the serial record after record stocks has been accompanied by a material decline in peso volume trade (left). 

This week’s the average daily Peso volume has ranked the fourth lowest of the year considering that Friday Php 12.873 billion has helped pumped up this week’s numbers.

As you would notice, record highs have been accompanied by falling volume—this seems hardly signs of broad based optimism.

And I would suspect that the bulk of the daily peso volume may have been cornered by these elite issues.

If only I have time to get the total volume of the 10 issues relative to the overall market from 2014 to date. This would have likely shown the share weights and depict of the influence of these issues on the PSE.

And foreign buying has hardly been a factor in driving the serial record highs.

Based on my tabulation of daily PSE quotes, foreign net buying has been diminishing; specifically January Php 23.6 billion, February Php 16.4 billion and March Php 7.5 billion. As of April 10, net foreign buying posted only Php 940.4 million. In total, net foreign buying accounted for Php 48.444 billion, or a paltry 7.13% of the total peso volume of Php 679.263 billion. 

Also a big portion of foreign buying seems to signify special block sales than from regular board transactions.

So record 8,100 Phisix has been a story of mostly local investors pumping up select issues for the seeming purpose of symbolism.

Working alone gives me little time to delve or pry into more detailed data such as issues above or below 50-day moving averages or number of issues at record highs versus number of issues in bear markets or peso volume per issue relative to total volume. This perspective would surely have added depth to this insight.

Bottom line: Market breadth generally in favor of declining issues, peso volume on a seeming downtrend, measly foreign buying, the deepening concentration of trade activities towards popular issues comprising 10 of the 15 largest market cap which has been supported by increasingly grotesque valuations via PERs on mostly the same issues implies that Phisix 8,100 hardly seems about broad based optimism but about the consolidation of trading and price pumping activities from actions of the index managers.

And such increasing compression of trading activities towards popular issues underscores, matches, and partially affirms my earlier point that the popular perception about sustained generalized phenomenal earnings has been outrageously overrated or exaggerated and instead represents the representative bias, the survivorship bias and the fallacy of composition than from real developments.

Three of the four trading days this week had minor “marking the close” which again reveals of the rampancy of stock market rigging.

So while in the past the bullmarket had almost been a purely market phenomenon, today, record after record Phisix has accounted for the mutation of the Philippine stock market into brazen market manipulation.

[2] Arturo Estrella and Frederic S. Mishkin, The Yield Curve as a Predictor of U.S. Recessions Federal Reserve Bank of New York June 1996

[4] James MacKintosh This is *really* nuts. When’s the crash? FT Alphaville April 10, 2015