Friday, February 28, 2014

Phisix: What's so Special about February 28th? Two Successive Years of Marking the Close

In order to propel the Philippine benchmark, the Phisix, to a desired higher level, one trick is for a sustained intensive intraday push on one of the index heavyweight issue in order to send the index up, and then hope that such optimism will spread and create a "rising tide lifts all boats" effect. 

Well this has been much of the story for today, Friday February 28th, except that instead of one thruster, today's action has been mainly from two engines: a fantastic session end majestic upside nudge from what seems as “marking the close” on Ayala Land and Jollibee Foods.

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Two sectors played practically the leading role for today’s gains: the property (2.43%) and the industrials (1.6%).

Well here are the intraday charts...
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The property sector has been the dominant intraday leader. Led by Ayala Land, the property sector provided the inspiration and hope for the bulls with significant gains through the trading day.

However at the closing bell, what seems as a retracing property index reversed coursed and suddenly skyrocketed. The property index closed the trading day at session highs (charts from Colfinancials unless indicated)

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The more astounding performance came from the industrial sector.

The industrial sector had modest gains in the morning, picked up speed in the afternoon and exploded during the last minute. Given that JFC is the second most weighted issue in the industrial index after URC, the massive push on JFC spiked both the Industrial index and the Phisix

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The amazing feat by the property-industrial sectors prompted a breathtaking 25 point (.38%) end of the session swing in the Phisix.

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Of the most active issues traded today, aside from ALI and JFC, Robinsons Retail holdings also jumped by 4.95%. Unfortunately the latter hasn’t been part of the Phisix composite.

Obviously today’s run plays into what the public mistakenly sees as a consumption boom.

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Above is the stunning intraday chart of ALI. As noted above, ALI functioned as the index leader or driver for the PSE today.

At the day’s close ALI’s weightings relative to the Phisix basket has jumped to 8.03%,  third to leader PLDT and next to shopping mall giant SM.

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JFC conspicuously played the supporting role. JFC's chart exhibits an incredible last minute dash.

Today’s data (including data for the week) seem to fit into my latest observation where we seem to seeing an interim retail inspired euphoria

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What's so special about February 28th? 


As today, last year the Phisix shot to the moon during the close to score a 1.59% advance. But unlike today, last year's nick of the time rally covered a broader ground.

Yet both episodes are signs of a classic mania in progress. 

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In 2013, a week after the Feb 28th "mark the close", the Phisix endured a 6% correction before recovering to reach May record highs. Sadly, the 7,400 May honeymoon record highs was to be cut short by Abenomics-Taper.

Given the recent acceleration of gains I doubt if we won’t see any substantial retracement next week.

I will expound on this on the weekend.

Insider Trading Regulator Practicing Insider Trading?

A study cited by Bloomberg uncovers some fishy transactions by some personnel of the US SEC:
People working for the U.S. Securities and Exchange Commission who owned stock in companies under investigation were more likely to sell shares than other investors in the months before the agency announced it was taking enforcement actions, according to a new academic paper.

SEC employees holding shares of five firms including JPMorgan Chase & Co. and General Electric Co. (GE) in 2010 and 2011 sold stock in 62 percent of the trades they initiated, compared with 50 percent among all the investors who traded those shares in that period, Emory University accounting professor Shivaram Rajgopal reports in the paper.

Rajgopal, who plans to present the work today at a University of Virginia accounting seminar, said in a telephone interview that while the analysis doesn’t prove misconduct it points out a suspicious pattern.

“It does suggest it is likely, or probable, that something is going on,” he said.

The records, obtained from the SEC under a Freedom of Information Act request by Rajgopal and his co-author, Roger M. White, a doctoral student at Georgia State University, don’t identify individuals.

The limitation means the researchers couldn’t tell if an individual trader made or lost money in a transaction. They also couldn’t discern if those trading worked in jobs where they might have advance knowledge of actions that could push stock prices lower.
If true then this shows how regulators think they operate above the law, how they use their positions or even actions (via imposition, administration or enforcement of policies) for personal benefit, and or perhaps even coop with corporate insiders again for their personal benefit. 

Of course the SEC dwarfs the world’s biggest insider trader, the US Federal Reserve and her central banking peers, who manipulate the markets in order to boost the interests of the allies/cronies.

Wednesday, February 26, 2014

Egypt’s Booming Stocks are Symptoms of Runaway Inflation

In the understanding that most of Emerging Markets are suppose to have been under pressure, I was surprised to read of a sizzling boom in Egyptian stocks.

From the Bloomberg:
Egyptian stocks are showing all the signs that investors favor a return to a military-backed rule to end three years of political turmoil and revive an economy stuck in its worst slump in two decades.

Share volume is up 159 percent this year over 2013’s daily average, according to data compiled by Bloomberg, coinciding with voters’ approval of a new constitution and the military’s endorsement of Defense Minister Abdel-Fattah al-Seesi’s possible presidential bid. The benchmark EGX 30 Index rose 18 percent in 2014 as of 10:39 a.m. in Cairo, the fifth-best performance of more than 90 gauges tracked by Bloomberg, with all but one of its members in a rising trend as of yesterday, the data show.

Three years after protesters ended President Hosni Mubarak’s 29-year rule in a popular revolt that left hundreds dead and led to the slowest economic growth since 1992, local investors are piling back into Egyptian stocks amid speculation another military-backed ruler can restore order. The EGX 30 is trading near the highest since 2008, while volatility of the index fell last week to the lowest since before the start of the 2011 uprising.
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That’s the so-called turbocharged Egyptian stocks as seen via the equity benchmark, the CASE, which has been trading at a 5 year record high

But has it been true that investors have been favoring “a return to a military-backed rule” that has boosted the stock market?  

Let’s us check on the currency first.

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The USD-Egyptian dollar has made a significant upside move even prior to the 2013 Fed's 'taper'. This can be attributed to political troubles which led to the ouster of the Morsi government. Said differently, the Egyptian dollar has had some serious devaluation in 2013.

Devaluation is a symptom of monetary abuse. But we will tackle this later.

Now let us check on Egypt’s interest rates…

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Oooh, we find that, like anywhere else, the Egyptian government has adapted zero bound last year

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The result has been to lure Egyptians into a credit fueled spending binge as revealed by record loans to the private sector.

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Unfortunately soaring stocks pumped up by record loans has hardly translated to (statistical) economic growth as growth has been in a steady decline since 2012. This means that many of such loans may have likely been funneled into the stock market speculation.

Yet the massive loan growth can be seen expressed via an exploding M2. For 2013, Egypt’s M2 grew at a rate of 19.1% (!) according to Reuters. Such fantastic monetary growth rate has been way way way out of the league with the rate of economic growth.

So why the Zero bound rates?

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The answer is because of financial repression. Negative real rates has been adapted to finance an increasingly spendthrift government as revealed by the swelling budget deficits.

And part of the symptom has been that Net Consolidated General Government of Domestic Debt has ballooned by 2.5x from 475,895 (LE millions) in June 2009 to 1,190,608 as of June 2013, according to data from the Ministry of Finance.


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And it’s not just local debt, external debt has astoundingly exploded to the upside in 2013. Just think of how more devaluation in the face of slowing growth will impact her intractable external debt conditions.

In addition, Egypt has drained about 30% of her forex currency reserve reserves from the high of 2011. So Egypt's government will most probably deplete more of her reserves to keep her currency from sinking further...just to maintain zero bound rates.

And Egypt’s balance of trade and current account has been in huge deficits since 2008. These deficits are consequences of the credit spending spree by both the government and the private sector.

For the last quarter official inflation rates have ranged from a high of 12.97% to a low of 11.4%.

I believe that such figures may be understated. Why? 

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Because of the recent widening of the variance between the black market and the official currency rates.

Steve Hanke’s Cato’s troubled currencies project sees an alignment between implied and official inflation rates. But for me, since the chasm between the black markets and the official rates have gone to the distance similar to January 2013, where inflation rates hovered over 20%, I believe that Egypt’s inflation has reached the same levels or even more.

The bottom line is that media seems confused in interpreting  booming Egyptian stocks as a return of investor confidence based on current political developments.

What they didn’t say is that booming Egyptian stocks have been a product of runaway inflation and has become a bubble that is ripe for being pricked. 

Egypt's very fragile position makes her extremely senstive to a Black Swan event.

Quote of the Day: Authoritarianism: The common feature of socialists of both National and Leninist varieties

Marx’s error, Hitler believed, had been to foster class war instead of national unity – to set workers against industrialists instead of conscripting both groups into a corporatist order. His aim, he told his economic adviser, Otto Wagener, was to “convert the German Volk to socialism without simply killing off the old individualists” – by which he meant the bankers and factory owners who could, he thought, serve socialism better by generating revenue for the state. “What Marxism, Leninism and Stalinism failed to accomplish,” he told Wagener, “we shall be in a position to achieve.”...

In fact, authoritarianism was the common feature of socialists of both National and Leninist varieties, who rushed to stick each other in prison camps or before firing squads. Each faction loathed the other as heretical, but both scorned free-market individualists as beyond redemption. Their battle was all the fiercer, as Hayek pointed out in 1944, because it was a battle between brothers.

Authoritarianism – or, to give it a less loaded name, the belief that state compulsion is justified in pursuit of a higher goal, such as scientific progress or greater equality – was traditionally a characteristic of the social democrats as much as of the revolutionaries.
This is from UK journalist, author and politician Daniel Hannan at The Telegraph (hat tip Lew Rockwell)

Tuesday, February 25, 2014

China’s Shanghai Index drops 5% in 4 days as the Yuan sinks

For the fourth consecutive day China’s stocks has tumbled significantly.

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The Shanghai index, down by 2.04% today, posted the least degree of losses, relative to other national equity benchmarks.

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The bulk of today's losses occurred during the near end of the session.

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The successive 4 day retrenchment essentially wipes out about three quarters of the January-February’s gains accumulated in a span of about a month. Such has been signs of what I call “volatility in both directions with a downside bias” signifying how fear has greater amplitude than greed.

Recent equity market declines including that of today have been imputed to “speculation a weaker property market and falling yuan will curb corporate earnings”

Reports further say that the Chinese government via the PBOC has been 'guiding' the yuan lower according to both Wall Street Journal and the Bloomberg. Part of this guidance may have been executed via a reported draining of liquidity

This from Forextv.com
The People's Bank of China drained more cash from the banking system on Tuesday as rates continued to suggest that borrowers are having no trouble accessing liquidity.

The bank drained CNY100 billion via 14-day repos, following on from last week's net removal of CNY108 billion. The PBOC's CNY48 billion drain last Tuesday was the first in eight months and appeared to be in response to January's record CNY2.58 trillion in credit creation.

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The claim that borrowers are “having no trouble accessing liquidity” looks supported or confirmed by the collapsing 7 day repo rates and material drops in short term (overnight to one month) Shibor rates. 

[As a side note, it seems strange to see the 7 day repo rates fall to pre-June turmoil levels when other indicators have not been consistent with these as shown below]

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But concerns over credit issues seems little changed, when seen from the Shibor rates of 6 months and up which remains high.

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In addition, yields of 10 year Chinese treasuries has still been adrift at near recent highs
 
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The same concerns can be seen in 5 year CDS spreads, where despite the recent pullback seem to be ascending again.

So while PBoC action may have mollified the liquidity predicament of the credit markets, these seem as temporary.

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The USD-Chinese yuan has spiked during the last two weeks.

So I am doubtful of the claims that current developments has entirely been a PBoC engineered decline in the yuan that subsequently is being reflected on the stock markets.

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Last December, holdings of US Treasuries by Chinese entities, largely official and partly non-official, posted “the biggest one-month drop in two years” according to the CNN.

But since Chinese forex reserves swelled to a record $3.82 trillion last December it looks as if that these entities held on to the US dollar cash proceeds from the UST sales. Incidentally over the same period, the Chinese selling of USTs has coincided with yields of 10 year US notes climbing to the 3% level.

But what if the same entities, with particular emphasis to the government, continues to sell USTs, but instead of holding to US dollar cash proceeds, sold these to the markets? If so, then such actions will be revealed as declines in her record forex reserves for January and also these should effectively extrapolate into 'tightening'.

But where it gets interesting is, could it be that US dollars being supplied to the Chinese financial markets have been used to fund outflows?

In other words, I suspect that the drastic fall in stocks and the yuan and elevated concerns over credit risks may have been prompting for an 'unseen' incipient “capital flight”, where such activities could have been camouflaged by the PBoC’s reported draining.

And if my suspicion has validity, then it won’t be far fetched that such growing episodes of minor tremors could serve as prelude to a major eruption or the Black Swan event.

Quote of the Day: Why High Profits have a depressing effect on investment

Profit margins reflecting internal yields on US corporate assets have increased in the last few years. According to what Andrew Smithers disparagingly refers to as “stock broker economics”, high rates of profit are good for stocks. The Austrian economist Jesús Huerta de Soto makes an under-appreciated point about profit margins and stock prices. Pervasively high or increasing rates of profit may show that the rate of time preference is increasing, implying that the capital stock is shrinking. If not time preference, then the perception of risk may be increasing, which would have a similar depressing effect on investment.
(bold mine)

This is from Austrian economist Robert Blumen explaining the impact of Say’s Law on the stock market at the Ludwig von Mises Canada website.

So when the mainstream crow about high profits as justifying high valuations, beware the "curse" in disguise.

To Email Subscribers: Notice on Truncated Message

To valued email subscribers.

In order to avoid the Feed Burner size limits on publication, I have partly broken down what used to be one or two themed posts into many.

So for instance last Sunday instead of 2 posts, I decomposed them into 5. However, I discovered that Feed Burner only incorporated three out of 5 in the distribution of February 24th message containing the heading “Phisix: Scrutinizing the Property Inspired Rally”. 

Feed Burner has omitted the following:


So if you are interested in these. Kindly pls just click on the links.

There are some occasional kinks with Feed Burner which also affects RSS feeds. So for updates, the best would be to periodically visit this blog.

And lastly I would like to warmly welcome the many new email and RSS subscribers.

Thank you for your patronage

In liberty,

Benson

Monday, February 24, 2014

Phisix: Scrutinizing the Property Inspired Rally

We believe investors often confuse waves of capital inflows into emerging markets-when global monetary conditions are permissive and the consequent asset inflation and credit booms -with some fundamentally-driven intrinsic “growth” theme in emerging markets. There are many ebullient investment ideas we have hear d over the past 25 years: the massive infrastructure theme, the growing middle class, the nutrition/water idea, the urbanization meme, the emergence of this sub-region or the other. We remain skeptical and cynical. Eventually, these glossy investment views have run into tighter global monetary conditions, the inevitable crises, large capital losses and vows of “never again”. Until, of course, the next global monetary easing, when all is forgiven, and a fresh wave of investors wades in again. Ajay Singh Kapur, Ritesh Samadhiya,and Umesha de Silva

Bullish hopes had been rejuvenated this week as the Philippine equity benchmark, the Phisix, went into a melt up mode.

Powered by foreign buying, the Phisix leapt by 3.18%. Year to date gains suddenly tallied to 7.11% after last week’s 1.71% rally. The bulk of the annual gains had been built on from the late January surge. The advances during the last two weeks piggybacked on this despite the sporadic accounts of downside volatilities from late January.

Market Breadth Highlights Fragility of Recent Run Up

Stock market bulls have latched their hopes on a sustained “high” statistical economic growth, ignoring recent developments or facts (Aldous Huxley syndrome) that unemployment data has surged in late 2013 and of the deterioration of sentiment by recent surveys on the quality of life. They would most likely see the recent rally backed by foreign flows as signs of a return to “rational” assessment by foreigners of Philippine assets.

The technically speaking, the recent rally which broke beyond the January highs will be seen as “falsification” of the “descending” triangle that has haunted and encumbered the Phisix. Yet the fact is that the late January inspired rally represents the third major attempt to push the Phisix back into bullish territory where the previous two failed.

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The health of the recent rally can be measured by relative market breadth developments which are indicative of sentimental changes. 

While it has been true that foreign buying may have returned to their “senses” (putting on the hat of the bulls), previous patterns of foreign flows tell us, in 2013, a different story. In the past, spikes in foreign flows (in both directions) have been accompanied by major volatile periods marked by interim peaks and bottoms (left window/ blue circles). While the recent rally has not reached levels as those with May, July and September, yet if the recent rate of foreign inflows will continue in the coming week or so, this may portent of another major interim retracement. That’s in the condition where the past will rhyme.

In addition, it would be a mistake to read foreign flows as a static or linear based dynamic. In 2013, foreign flows have mostly been mercurial characterized by drastic and substantial reversals of sentiment, particularly from June onwards. I don’t think this dynamic would stabilize anytime soon for reasons I have long stated, and for reasons I will elaborate below.

Moreover, despite the very impressive 4.89% two week swing supported by a sudden turnaround in foreign sentiment, peso volume (weekly averaged or total peso volume for the week divided by the number of trading days) has materially lagged the earlier denial rallies of July and September (right window).

In other words, in the face of the nice numerical gains, it would seem that the bulls have hardly maintained a wholehearted conviction of a sustainable upside move, or that the bulls have remained reluctant. This seems in contrast to the bears whom has used the buy-up as opportunities to exit.

We then move from flows to trades.

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This week’s massive rally has been accompanied by a spike in the number of daily trades (averaged weekly or total weekly daily trades divided by number of trading days) as shown on the left diagram.

A sustained upsurge in daily trades has coincided once again with major interim tops (Feb 2013, May 2013 and July 2013). Sudden and dramatic increases in daily trades have been indicative of increases in trade churning. This implies more participation from retail participants who has bought into bullish “growth” story/spin.

Yet in every peak of stock market cycles, retail investors, who are usually the last movers into maturing runs, have usually been the last left holding the proverbial empty bag[1]. So if there should be another significant gush of churning activities in the coming week or so, then we should expect another major downside move soon. That’s again if the past will rhyme.

Such sentiment metric has hardly been any different with advance decline spread. The current run has been broad based. Weekly averaged advance decline spreads have reached levels where previous rallies has been abbreviated or accompanied by a big downside swing.

And such scale of climaxing bullish sentiment has translated into interim peaks which has been apparent in February 2013, May 2013, July 2013, October 2013 and the late January 2014 rally. So again if the past will rhyme, any sustained bullish breadth this coming week or so, would translate into a selling opportunity.

Despite the impressive gains during the past two weeks, four market breadth indicators (flow) peso volume and foreign money flux and (trade) daily trades and advance-decline spread have shown how fragile the current rally has been.

This means that while technically the declining triangle may have been invalidated (this depends really on reference points), bullish sentiment based on the above facts reveal of a largely uncommitted stance.

Excess Volatility, Market Tops and History Rhymes

Since we are into Mark Twain’s history doesn’t repeat but history rhymes, let me exhibit why I believe patterns reinforce their existence.

As a student of the business cycle and of economic history, I am convinced that this time will not be any different. Inflationism as evidenced by the symptoms—rising markets (expressive of overconfidence) driven by excessive speculation founded on rampant debt accumulation—is fundamentally unsustainable. This has been proven all throughout history and has even been documented by Harvard professors Carmen Reinhart and Kenneth Rogoff[2]. And rising rates in the face of such untenable conditions serve as the proverbial pin that eventually that leads to what I call as the Wile E. Coyote moment (a bubble bust).

I am not a fan of simplistic pattern based analysis for one simple reason: people’s social interactions and reaction with the environment will hardly ever be constant.

But there are reasons why patterns, which can be expressed as cycles, exist.

Despite technological advances and the permeation of education, people incur the same errors. And such errors have been induced by social policies. Unfortunately a majority of people, including the so-called intellectuals, can’t seem to comprehend that the impact of regulations or of social policies has never been neutral. Social policies affect people’s incentives and behavior to such extent that people have been lead to commit the same mistakes; thus such become cycles. So for instance, when central bankers dabble with money inflation, almost similar to the way Roman emperors debased their coins[3], eventually crises occurs and society degenerates.

I have noted that bubble cycles operate on a “periphery to the core” dynamic where the zenith of bubble cycles applied to the stock market can be seen via extreme volatility or what I say as volatility in both directions with a downside bias. 

I have previously demonstrated how “volatility in both directions with a downside bias” applies to the Philippine Phisix, based on the 20 years of history[4]

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Applied to the US we see the same volatility dynamic at work.

In hindsight all topping process in the S&P 500 has been accompanied by “volatility in both directions with a downside bias” whether in 2007-8, 2000 dotcom bust, 1973-1975 US recession and 1929 stock market crash that ushered in the Great Depression.

Like me, the source of the charts above except 2007, fund manager John Hussman who hasn’t been a fan of patterns too but notes on why patterns may become a self-fulfilling reality[5] “We would dismiss historical analogs like this if the recent market peak did not feature the “full catastrophe” of textbook speculative features – particularly the same syndrome of extreme overvalued, overbought, overbullish, rising-yield conditions observed (prior to the past year) only at major market peaks in 2007, 2000, 1987, 1972, and 1929.” 

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This brings us back to the Phisix in the context of a 1994-1997 top and today’s perhaps more truncated cycle. The numbers are not Elliott Wave counts, instead they are occasions when the Phisix suffered from bear market seizures.

So far, there seems to be a pattern or a resemblance between 1994-95 topping process and today’s cycles. The common denominator three bear market strikes (June, August, December 2013) and three bear market convulsions (1994-1995).

Yes I know the difference: today 5,800 has been the support, while in 1994-5 the decline has been a downside channel.

If the past should repeat then we should see a final blowoff phase rally prior to the capitulation.

Troubling Signs from Property Bubbles

One of the troubling indicators underscoring the “this time is different mentality” is from an article touting “Who’s afraid of interest spike?”[6] noting of the largest property developer thrust to finance a major expansion program by going into the debt markets.

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Last week’s rally has been inspired by the property sector largely premised on the supposed jump in the profits of Ayala Land in 2013. Company officials announced that past is the future so they will sustain a massive expansion program to be financed mostly by debt

I had wondered if truly the officials of the largest property developer expected an interest spike as the title of the article suggested.

Well it turned out to be a disappointment. The quoted official of developer said that “We have debt capacity we can utilize” and when asked how interest rates developments affected their plans the reply was “already built in to the plan”

Would a company acquire massive debts if faced with “spiking” interest rates that would jeopardize their profit position? From a rational economic position the answer would be NO. Instead the company will take on more debt because they foresee that profits will eclipse the cost of debt servicing.

So it is obvious that “built in to the plan” extrapolates to expectations for a negligible rise in interest rates. Obviously too that a “spike” in interest rates has hardly been a factor into the expectations of company’s officials in the context of demand for the company’s property products. Company officials seem to see that the finances of their customers are without limits.

The article even quotes the BSP governor who reportedly said “high liquidity in the banking system will help mitigate any increases at all.” When does “mitigate any increases” equal to “interest rate spike”?

So contra the headline of the article whose author may be impliedly sneering at cynics, the headlines represents an inaccurate and inconsistent depiction of the official stand of the property company. There hardly has been any trace of expected “spike” in interest rates.

Two reasons why these are troubling signs. The inaccurate representation of the company official’s position is a sign of media’s undiscerning promotion of bubbles. It is also a sign of illusion of superiority based on what seems as false knowledge or the Dunning–Kruger effect[7].

Two, the stock market players bidded up on property stocks based on past performance (last year’s profits) and based on the company’s optimism via a massive debt financed expansion. This means that stock market players practically threw “risk” under the bus and virtually agreed that “debt is growth”. Such signifies nauseating signs of overconfidence or reckless yield chasing speculation or both.

Where will Domestic Demand for Properties come from?

If the recent surge in unemployment rates have anywhere been accurate, and if this has been supported by deteriorating sentiment on the public’s perception in terms of quality of life standards (due to spreading price inflation), then demand for middle and lower class housing will begin to taper.

The adverse impact from inflation will also impact demand from remittance based finances or OFW dependent markets, a sector that previously contributed to an estimated one fourth of demand of the housing industry[8]. While it is true that devaluing peso means more pesos for every unit of foreign currency, such advantage will be offset by increases in domestic prices of other goods and services. As pointed before, Philippine households are mostly sensitive to changes in food, energy and housing as part of their consumption distribution basket. So a switch in spending to food and energy or even to rental would mean less money available for housing acquisition.

And if inflation intensifies and will get reflected on interest rates, there will be reduced demand for housing even to people with access to the banking system, since debt servicing will eat up a larger share of a shrinking income base, due to reduced purchasing power from an inflated peso.

This also means that any sustained boom in demand for property will largely depend now on a narrowing spectrum of markets, particularly the elite (perhaps funded via debt financed purchases) most likely for speculation (flipping) purposes, from foreigners (mostly for speculation), and from some property owners who benefited from the expansion undertaken by property developers by selling to the latter.

While it is true that high end properties may not even be price sensitive as they can perceived as “status symbol” products or Veblen Goods[9], demand for such goods will depend on the prestige behind the scarcity, and the available financing to acquire such products.

But the race to develop properties has been an industry wide phenomenon, not limited to the prime developers, so inventories have been rising faster relative to demand in almost all categories.

And rising rates from increasing signs of inflation will mean lesser availability of capital.

One demand for property boom comes from previous property owners who sold to the developers. Some may have bought into developer’s project while others may have joined the race in the snapping up of properties in the hope of flipping them again to developers. Both have contributed to higher property prices. Some have used the windfall for consumption.

Nonetheless, for such segment consumption and property speculation extrapolates to capital consumption. When developers see the light of a slowing demand, such beneficiaries will also feel the heat from financial losses once the excess from the supply side becomes apparent.

The Singapore Model for Foreign Demand of Philippine Properties?

The last dynamic driving housing demand comes from foreigners.

Experts from the housing industry said last year that new regulations and taxes in Hong Kong and Singapore in order “to curb speculation in their property markets”, drove demand for domestic properties since the Philippines have become a “more foreign-investor friendly destination”[10]

As a side note, I’d say that liberalization that led to a “foreign-investor friendly destination” has been mostly in the construction sector[11], and hardly the general economy. Like almost every government elsewhere today, the incumbent have used bubbles to spruce up statistical economic growth.

In short, what the report should have said was that speculative demand merely transferred from Hong Kong and Singapore to the Philippines.

Here is more of what they didn’t say.

Singapore’s property bubble fuelled by the Singaporean central bank’s easy money policies has essentially driven a stake into the hearts of the Singapore’s free market model[12].

The politically divisive easy money policies by Singapore’s monetary authority have made foreigners a lightning rod for politically correct populist inequality sloganeering that has raised nationalist sentiment[13]. As such, Singapore’s politics has ushered in statists leaders who has imposed welfarist programs[14], and has recently even imposed labor protectionism[15] by putting a law to prioritize on locals over foreigners. 

A few days ago we see Singapore’s descent deeper into a welfare state by the imposition of sin taxes[16]. Those low tax days appear to be numbered.

Would you believe that riots afflicted a developed economy like Singapore in late December[17]?

So what the report didn’t say was that the untoward political repercussions from Singapore and Hong Kong’s property bubbles would have been inherited by the Philippines. But that’s if the housing boom transmission persists.

The good news is that rising bond yields of 10 year treasuries of both in Singapore and Hong Kong will most likely stymie any foreign demand for Philippine properties for speculative purposes. So this should temper any political ramifications from massive inflow of foreign money on domestic properties. But this will be bad news for developers and for stock market investors who bought into the “debt is prosperity” spin.

And as I previously noted the property bubble will induce a change in the composition of ownership[18]
…the ongoing leveraging by players in the property sector whom has access to the banking system may be acquiring properties from the 68% of households and selling these projects to the same high end sector whom have been speculating both in stocks and in properties
As events in Singapore reveal, property bubbles has nasty political consequences.






[2] Carmen Reinhart and Kenneth Rogoff This Time is Different Princeton Press



[5] John P. Hussman Topping Patterns and the Proper Cause for Optimism, Hussman Funds, February 17, 2014




[9] Wikipedia.org Veblen Goods







[16] Wall Street Journal Singapore Ups Sin Taxes Amid Higher Social Spending February 22, 2014