Phisix 7,100: More Statistical Mirages and An Eight Issue Powered Vertical Rally

Two dismal months for financial markets may give way in March to a relief rally for assets such as global equities, as some key central banks (the People’s Bank of China, the European Central Bank, and the Bank of Japan) ease more, while others (the Fed and the Bank of England) will remain on hold for longer. But repeated eruptions from some of the seven sources of global tail risk will make the rest of this year – unlike the previous seven – a bad one for risky assets and anemic for global growth.—Nouriel Roubini

In this issue

Phisix 7,100: More Statistical Mirages and An Eight Issue Powered Vertical Rally

-Similarities and Differences of 2015 and 2016

-January’s Industrial Production: Real Boom or Statistical Pump?

-Government’s Building Permit Data Shows of A Surprise: Stagnation in Construction Activities in 2015!!

-BSP’s Politically Correct FDI Report and the Foreign Exchange Inventory Spike in February GIR Data

-Unintended Consequence: ECB’s Bazooka Powered the Euro and Asian Currencies Higher!

-Phisix 7,100: EIGHT Issues Have Led the Vertical Rally

-Bidding Frenzy Amidst Decaying Fundamentals: Ayala Corp’s Topline Revenue Fumbles! AEV Posted Decline in 2015 Income Growth Rate!

Phisix 7,100: More Statistical Mirages and An Eight Issue Powered Vertical Rally

Similarities and Differences of 2015 and 2016

At the advent of 2015, the consensus predicted that the year was bound for not only for munificence but for economic nirvana. The statistical economy would continue to post growth rates in line with their elevated expectations such that corporate earnings growth for listed companies would soar to the mid teen levels. These had been used to justify a serial pump on prices of Philippine stocks.

In a little over three months, the headline index soared by 12.4% from the year’s start to hit an acme at 8,127.48 in April 10, 2015. Yet the race to landmark highs had been unaccompanied by the general market.

Within this period, clowns masquerading as economic ‘experts’ had been unabashedly shouting at the top of their lungs that the Philippines had attained newfound prosperity through a “this time is different” economy. Some went on to aggressively revise their forecasts growth projections for returns on Philippine assets upward. Also some believed that political efforts were responsible for such a feat. And because of the certitude of continuity, some ‘experts’ even implicitly heckled at those who thought otherwise.

Yet after the April breakthrough event, things began to turn murky. The Phisix started to lose ground with no apparent reason. The peso also exhibited signs of strains. The flattening yield curve seemed headed for inversion.

All these occurred even while economic and financial headlines remained mostly sanguine despite some instances of blemish. GDP numbers climbed. Media focused on corporate headlines which exhibited G-R-O-W-T-H. However, the Phisix continued to flounder.

Then the August crash came. Media and experts rushed to pin the blame on exogenous forces, in particular, China.

Automatically, bulls came out strongly to push the PSEi from 6,600 back to 7,000. The PSE even celebrated the return of the 7,000 to highlight the economy’s “resilience”. Yet the irony has been that despite the claims of “resiliency” , the PSE had to censor 2Q performance of listed firms, and eventually even the third quarter performance because souring numbers percolated!

Meanwhile, bizarrely mainstream media mounted a two week PR blitz to promote the real estate sector during the last quarter of 2015. As it turned out, the reason for such media campaign had been to shore up the sector which was palpably suffering from incipient weakness.

The headline have been seen critical to the ‘animal spirits’.

So the government has not only resorted to the inflation of the GDP by toying around with base numbers, the Bangko Sentral ng Pilipinas (BSP) had to even stunningly recast the two years of OFW remittance data set in order to skirt the issuance of reports which had BIG NEGATIVE numbers on it, specifically October and November’s monthly data.

At the close of 2015, contra the consensus, the Phisix closed with a 3.85% deficit.

Importantly, the year ended with establishment and the government vehemently denying all forms of deficiency by the embellishment and or expurgation of data which did not conform with the G-R-O-W-T-H agenda, the rampant of manipulation markets* and by the arrant misrepresentation of actual financial and economic conditions.

*This week’s buying binge included three fantastic sessions last minute Viagra Pump.

But the miseries of the Phisix didn’t stop there. Again despite the much touted economic “robustness”, the year 2016 was baptized with a crash! But this time the meltdown led the headline index straight into the bear markets.

Moreover, despite desperate attempts to camouflage fundamental shortcomings, infirmities have surfaced. For instance, PLDT reported a collapse in 4Q earnings which helped dragged down its 2015 performance by a third. In spite of the rhetorical legerdemain, the PSE’s largest firm SM Investments posted a ZERO net income growth for 2015 as topline growth fell hard!

But even with such revelation, the Phisix has rallied with vehemence to the upside. So what have been the similarities and differences between today and 2015? Or what justifies today’s panic bidding?

The similarities: The upswing in early 2015 and today have all been mainly anchored on rabid denial of any fundamental shortcomings. Importantly such has underpinned the casino’s impulse: HOPIUM.

The differences: The rally to record highs in 2015 came with sparse signs of fundamental deficiencies. Today’s rally has been transpired amidst signs of increased strains in fundamentals.

Another difference, the use of misinformation to support such denials appears to have become more pronounced in 2016.

January’s Industrial Production: Real Boom or Statistical Pump?

The Philippine government announced that January industrial production growth rates zoomed by a fantastic 26.5% year on year.

I question this data on three grounds: the market for production output, manufacturing input prices, and banking system’s manufacturing loan growth.

Here was the government report¹: (bold added) 1) Value of Production Index rebounds in January 2016: Value of Production Index (VaPI) for total manufacturing significantly rose to 26.5 percent in January 2016 compared with the negative 1.1 percent in January 2015, according to the preliminary results of the Monthly Integrated Survey of Selected Industries (MISSI). This was brought about by the three-digit growth experienced by chemical products (309.6%), particularly for drugs and medicine sub-sector. Other major sectors that pulled up the performance of VaPI were tobacco products (49.6%), food manufacturing (19.1%) and beverages (11.7%). 2) Volume of Production also exhibits two-digit growth Volume of Production Index (VoPI) likewise posted 34.3 percent increment in January 2016 compared with 2.6 percent during the same period last year. Chemical products contributed significantly to the growth with 312.4 percent, followed by major sectors that registered two-digit growth in VoPI, namely: tobacco products (49.4%), machinery except electrical (23.6%), food manufacturing (20.2%), electrical machinery (19.2%) and beverages (10.1%).

Intriguingly, despite the 26.5% G-R-O-W-T-H, only 6 out of the 20 sectors or 30% of the manufacturing subsectors posted positive while the rest suffered contraction.

The implication has been that only ‘some’ of the 6 sectors, accounted for the largest segment of the industrial production survey, to have overwhelmed the general conditions. To be specific, that some may in fact be a single industry, chemicals (drugs and medicine).

So just where have all such jump in production been directed at?

January’s export numbers reveals of a NEGATIVE 3.9% year-on-year growth. This implies that the export sector remains in a growth recession.

Nevertheless, the surge in January’s chemical production hardly seems to have found an export market. That’s because based on January’s numbers, chemical exports contracted by a staggering 34.6% (see bottom)! So perhaps part of January output will show up in February numbers. That’s an ‘if’.

So if the January’s production blitzkrieg has hardly been for exports then it must have been for local consumption.

But then why the sudden upsurge in chemical production (mainly for drugs and medicine)? Has there been an epidemic to have incited an explosion in the demand for domestically produced drugs? This can hardly be about the Zika virus. There is no treatment or vaccine available for the Zika virus. Besides, testing kits for the Zika virus has not been made commercial, so these are limited to research centers in the US.

Yet growth rates of chemical production during the last quarter were at October -2.1%, November 9.4% and December 10.5%. Meanwhile, the government’s health CPI stood at wow (!) an astounding constant 2.99% in January 2016, in December, November and October! In short, those constant CPI monthly numbers do not support a supposed explosion in demand for health products or services.

Heck, constant CPI Health numbers??? This exhibits evidence that the government’s numbers have not just been derived from fictitious surveys but numbers churned out from econometric models unrelated to the real world!

So it unlikely that the swelling of chemical production for January have been about a permanent substantial upswing in (consumer) demand.

The other possible factor could be about tobacco production. But changes in tobacco production had been “normally” volatile. For the last semester of 2015 the government’s monthly numbers were: August +25.2%, September +36.3%, October 131.3% November +54.1% and December -3.3%.

The gyration of production numbers somewhat resonates with the government’s measure of tobacco CPI. Tobacco CPI seems to have consistently sustained high rates of increases (year on year) as noted over the same period: August 4.4%, September 4.1%, October 4.3% November 4.9% and December 5.7%.

Curiously, such high rates of tobacco CPI occurred even when general CPI hit a low of .4% in September and .6% in August.

This implies that while tobacco production and CPI may have reflected on economic forces (surge in demand relative to supply, that spilled over to production), the other possible explanation for the sharp fluctuations could be from distortions impelled for by excise taxes. Excise taxes for tobacco products are increased 4% annually since 2013.

And yes, do note that the sharp growth oscillations in tobacco production such as in October and November which hardly boosted industrial production growth rates at NEGATIVE 9.2% and +1%, respectively.

So tobacco production was barely a factor to January’s surge. The other growth rates have been insubstantial enough to contribute to the abrupt boom in January production numbers. This most likely means that January’s industrial production data spike had been based on single industry: drugs and medicine!

So tweak one industry’s growth numbers to project a boom????!!! (looks like the PSEi)

Yet a colossal improvement in manufacturing activities should have eased on the prolonged deflationary pressures on producer prices or prices of manufacturing inputs.

But that didn’t just happen! The government’s measure of January’s producers’ prices shows of a -6.0% year on year and -1.5% month on month. Such hardly signifies any improvement from the previous rates at all (see left). In short, from the perspective of producers’ prices, there was barely a tinge of demand pick up in production activities.

Moreover, production activities need to be funded. Question is how was January’s industrial production boom financed?

Seen from the banking system, while the January’s loan growth to the manufacturing sector modestly improved to 5.49% year on year, this seems hardly the scale of funding required for the sharp upturn in industrial activities (see right). As example, the banking sector’s loan to the manufacturing industry posted an 8.5% growth rate in June 2015. But industrial growth rate over the same month was a NEGATIVE 7.3%!

So if the government’s numbers were a reflection of reality, then this means financing came from elsewhere. Perhaps it was derived from the pockets (savings) of the owners of the manufacturing outfits. Oddly, just how can this happen when in 8 out of 9 months (as of December) industrial output showed contraction, or when manufacturers must have incurred sustained financial losses?

Perhaps too that credit was provided by non-banks: credit from suppliers, buyers or other non bank entities.

You see, in the statisticians’ world, prices have little relevance on how resources are allocated. So they end up with numbers on causally related variables which are brazenly self-contradictory.

Government’s Building Permit Data Shows of A Surprise: Stagnation in Construction Activities in 2015!!

In today’s world, every headline with a PLUS sign on it has served as a Pavolvian conditioned stimulus to prompt the public to panic buy the stock market

The government declared that approved building permits construction activities expanded by 7.5% in Q4 2015². So media and their favorite experts used this as pretext to declare on how splendid construction activities had been.

Yet positive headlines are great to a crowd who do not bother to ask.

On a quarterly basis, year on year growth performance by ALL categories (with the exception of the number of residential permits), namely, number of approved permits, floor area and total value for residential and non-residential permits have been TRENDING DOWN for the last two years!!

The government’s data revealed that 4Q’s construction residential permit growth at 14.7% had primarily been driven by single-type houses (25.4%) and other types of residential constructions (69.6%), while duplex/quadruplex (-51.1%), residential condominiums (-34.8%) and apartment/accessoria (-5.6%) dragged down on government’s index.

Note of the pivotal shift in last quarter’s activities particularly from business residential construction to private, most likely household, construction.

Meanwhile, the 5.6% growth in non-residential construction permits were mostly from commercial buildings (12.6%) and other types of non-residential constructions (143.8%) as “ all other types of non-residential constructions showed decrements in number”.

Since the government uses the number of permits to discuss or report on the headline activities, it is easy to generate growth numbers (upper window). However, when seen from floor area and value those growth scenarios drastically changes.

Over the same period, in the context of floor area, residential growth shrank by .92% while non residential growth bulged by 7.75%. Total FA growth inched up by only 2.5%! (see middle pane)

Data of construction building permits from PSA can be seen here.

In terms of value, residential growth eked up by only 1.16%, while non-residential growth contracted by a huge 6.47%. Total value shriveled by an astounding 5.24%! (lower pane)

The significant DECREASE in floor area and the NEGATIVE value from government’s 4Q construction building permit activities points to a hefty reduction of big scale construction projects which had been partly offset by the G-R-O-W-T-H of mom and pop projects. This is aside from spending on private household construction.

In short, PSE companies have spent significantly LESS in securing construction permits during the 4Q! Awesome!

Moreover, 4Q construction activities, which was negative in value based on approved permits, has hardly reflected on government’s own metric for the industry’s official GDP.

When I aggregated the quarterly numbers to generate its annual performance, we get a bigger surprise: The total number of construction approved permits popped up by a puny 2.61% in 2015! Meanwhile, Floor Area declined by a marginal -.77% as Value plummeted by an awesome 10.8%! (see left)

Nice G-R-O-W-T-H numbers eh???

And it has been interesting to see how the rate of growth in the banking system’s construction loan portfolio has somewhat dovetailed with building permits. (see right)

The peculiar thing has been that despite the substantial decrease in construction activities (again based on building permit values), the banking sector’s portfolio to the construction industry continues to sizzle (28% January).

Just where has all those mountain of borrowed money been going?

On the other hand, has the jump in the banking system’s January real estate loans been about the financing of 4Q’s boom in single-type houses and other types residential (non-condo) projects?

The government’s approved building permits accounts for just one of the interesting self-contradictory statistics which they have used to inflate their imagery.

Yet the numbers above hardly has been a manifestation of a meaningful uptrend in G-R-O-W-T-H but in the contrary.

BSP’s Politically Correct FDI Report and the Foreign Exchange Inventory Spike in February GIR Data

Of course it has not just been permits.

The BSP reported FDI performance for the month of December and for the year 2015.

The public was told that FDI was about G-R-O-W-T-H.

From the BSP³: (bold mine) Foreign direct investments (FDI) stood at US$273 million in December 2015. This developed as investor sentiment remained positive amid the country’s favorable growth prospects.  More than half of the FDI net inflows during the month were investments in debt instruments, consisting largely of intercompany borrowing/lending between foreign direct investors and their subsidiaries/affiliates in the Philippines which amounted to US$140 million.  This level was seven times the US$20 million registered in December 2014.  The other FDI components also posted net inflows

The BSP selectively picked on areas that registered G-R-O-W-T-H and applied rationalization on these as reflecting 'positive sentiment'. But at the same time, they deliberately omitted on the overall performance. Of course, they understand that people are hooked to headlines and not on the details.

But the BSP hid the fact which from their own table reveals that December FDI crashed by 51.3%! Except for Debt instruments, which inflated by a titanic 617%, every category registered big declines (see above). So given the begging the question premise where positive data equals positive sentiment. Then from December perspective this means the opposite, investor sentiment was NEGATIVE.

On the other hand, the BSP reported that 2015 FDI was “steady” even when it was down by a marginal .3%.

As one would note, decline, loss, decrease and or negative numbers has represented a social taboo, so such numbers has to be sanitized in the context of G-R-O-W-T-H.

So negative is positive, low is high, few is many.

And such manipulation of the public’s mindset reinforces why the Philippine economy has been a bubble. Hardly anything of what one sees appears real!

And notice too that the bulk of FDI share has been on debt financing rather than from equity. Such underscores the increased leveraging of the system.

Meanwhile, the BSP also declared that Philippine GIRs increased to $81.3 billion in February⁴: “Preliminary data showed that the country’s gross international reserves (GIR) rose to US$81.30 billion as of end-February 2016, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. announced today. This level was higher by US$0.61 billion than the end-January 2016 GIR of US$80.69 billion due mainly to revaluation adjustments on the BSP’s foreign currency-denominated reserves and gold holdings resulting from the increase in the price of gold in the international market, net foreign currency deposits by the National Government (NG) as well as the BSP’s income from investments abroad. These were partially offset by the BSP’s foreign exchange operations and payments made by the NG for its maturing foreign exchange obligations.” 

 

Revaluation in gold prices had indeed accounted for $774.8 million increase in the BSP’s February GIR. But the increase in gold priced holdings has been more than neutralized by liquidations to the tune of $791.8 million in the GIR’s “foreign investments”.

This means that the bulk of the increases in February GIRs of $608 million have largely stemmed from the BSP’s foreign exchange holdings, which skyrocketed by an astounding $645 million to $1.47 billion!

Yet the foreign exchange stockpile, at again $1.47 billion, represents almost the same October and November 2013 levels at $1.35 billion and $1.5 billion respectively. (see top chart)

However, the spike in the foreign exchange stockpile in 2013 coincided with the peak of the USD Php in December 2013 at an average of 44.93. Likewise, these coincided with the 2013 peak in GIRs.

Considering the USD Php February zenith of Php 47.64, has the BSP aggressively intervened in the USD Php market by selling its USD hoard or reserves? Perhaps such has been the reason for the substantial liquidations in foreign investments? And in order to offset the USD inventory loss and maintain or preserve on the GIR accounting position, has the BSP been borrowing foreign exchange through the swap markets and simultaneously hedged such borrowings with currency forwards?

Philippine GIR were reported in October at $83.607 billion and in November at $83.572 billion in October and November 2013. In January 2014, reported GIR fell to $79.4 billion or a drop of about 5% from October and November levels.

Since the structure of foreign exchange swaps usually involves very short time frame, if the BSP had indeed used derivatives to enhance GIRs, will we see such GIR numbers drop in the coming months (in May or in June)?

The BSP seems lucky to see a return of the risk ON conditions. Otherwise they may have to increase its foreign exchange borrowing.

Unintended Consequence: ECB’s Bazooka Powered the Euro and Asian Currencies Higher!

And speaking of foreign exchange, like the Phisix, the peso roared back to reclaim year to date gains (+.92%).

The USD peso sunk by .7% as the region’s currency has rallied strongly. The Thai baht and the South Korean won rallied the most this week.

Yet it has interesting to see how the markets reacted to a desperate ECB which last week announced more “shock and awe”.

Last week’s financial market rescue package by the ECB included interest rate on main refinancing operations of the Eurosystem reduced to zero. Interest rate on marginal lending facility slashed by .5 bps to .25% effective March 16. Interest rate on deposit facility further decreased by 10 bps to -.4% effective March 16. QE will be increased by €20 billion to €80 billion which starts on April. Investment grade corporate bonds will be included in the asset purchase program, and “a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016”.

But instead of the weakening, the euro surged by an amazing 1.1%.

European and US stocks gave back its early gains last Thursday when ECB’s Super Mario suggested that “there would be no further cuts”.

But then perhaps stimulus addicts realized that “hey that’s what’s we’ve been waiting for” so the monumental push on Friday. But the risk ON rally hardly erased the euro’s gains.

Moreover, the ECB’s bazooka only furthered the weakness in USD Asia. This only reveals of more short covering of ex-USD currencies and assets

And of course, the weak USD translated to risk ON which means temporary license for panic buying.

Next week, the FED (March 16) and the BOJ (March 14) will hold their respective meeting. And this will further stimulate gambling addicts to drool over the possibility of more crisis resolution subsidies.

Phisix 7,100: EIGHT Issues Have Led the Vertical Rally

There has been no further proof than the intensifying conviction signifying the fear of missing out than the number of firms attaining record highs.

Yet it is one thing to see an increasing tolerance for risk. And it’s another thing when risks have been totally dismissed as inexistent. And the latter is what characterizes the Fear of Missing Out (FOMO): Emotions rule over reason.

Since most issues have emerged from, or have still been fighting off their respective bears, the yoke of the astounding vertical 16.7% climb of the headline index from the January 21 lows have been a few of its principal bearers. 

 

First, a short description of this week’s actions. The PSEi soared by another remarkable 2.89%. This week’s sharp ascent erased and reversed the year’s deficits to register a positive 2.11% return.

Next. technically speaking, the PSEi continues to approach the resistance threshold of the post August 2015 crash levels (right rectangle). This is aside from the breach of the resistance levels that paved way for two unsuccessful attempts to break the May 2013 record of 7,400 during the last quarter of 2014 (left rectangle).

In short, the current runup marks the fourth occasion for the PSEi to visit 7,100.

But in the current instance, the degree of ascent has been even more intense than the 2013 peers. In response to the bear market in August to October of 2013, the PSEi catapulted to a relative lesser 15.63% gains in 35 days. Likewise, in March the charge to the May 2013 record at 7,392 saw the headline index up by 15.15% in also 35 days.

Unfortunately, for the two 2013 episodes, the vehemence of such runups had been fated to fail. And it took a less impassioned incremental approach for the PSEi to recover from the 2013 debacle. To be specific, it took THREE attempts in 19 months for the PSEi to surpass the May 2013 highs!

Also current overbought conditions have only been extended from this week’s overdrive.

Bulls will highlight the point that the Phisix have now reached the 200 day moving average. But so what?

A break of the 200 day moving average does NOT GUARANTEE a return to record highs. If the previous MAJOR bearish patterns had been foiled by circumstance and by the deliberate managing of the index, what makes a break of the 200 day moving average so unique? Sheer belief by the consensus? The same consensus whom were totally blind to the recent crashes? By the way, those major bearish patterns, e.g. head and shoulders have not been totally reversed or negated yet.

And as previously discussed, bear market rallies tend to be ‘fast and furious’.

More than this, despite the supposed strength of the Philippine economy, the Phisix endured two major crashes in a span of 6 months, specifically in August 2015 and in January 2016.

In addition, from a historical context, the odds of a full recovery from incidences of V-shaped reactionary recoil from deep bear markets have been minute. 

Even more, stock market are more than just solely about price actions. Instead, stock market prices should account for the underlying value of the security it represents. As the sage of Omaha Warren Buffett once said, price is what you pay, value is what you get.

To revert to the FOMO.

Despite the frenzied blitz, the same headline index has still been off or remains 12.7% away from the April 2015 8,127.48 record.

Yet TWO issues have now reached RECORD levels while SIX other issues are poised within striking distance—with 8% or less—from the past watermarks

In particular, the TWO critical issues, JGS and AEV, combined had a market share weight of 11.43% as of Friday’s close. On the other hand, the market share of the other SIX PSEi issues—SM, SMPH, AC, JFC, GTCAP and MPI—on path to a fresh record, totaled 31.63%.

In aggregate, the market share weight of these 8 issues comprised 43.06% of the headline index.

And to extend the perspective, the accrued weighting of the top fourteen PSEi issues excluding PLDT as of Friday has been 74.15%.

In early 2015, the string of record milestones set by many heavyweights had been when the PSEi was about 5% away from the record highs, or during the landmark highs.

In short, the fundamental reason for 7,100 or why there has been a 16.7% vertiginous rebound from the January lows, has been mainly due to these EIGHT issues that virtually weightlifted the headline index to its current state.

And by elevating the index, this created a spillover effect to the general markets.

Said differently, for now, the fantastic eight spawned a rising tide lifts most boats phenomenon.

This week, advancers beat decliners by another wide margin of 184. (upper left window)

Advancers have dominated the market’s sentiment in 6 out of 7 weeks. And this week marks the fourth consecutive week for broad market gains

Also among the 30 PSEi issues, 26 rose while only four issues led by PLDT declined. The lopsidedness of advancing issues, for firms which constituted the headline index, has occurred in 5 out of 7 weeks.

Additionally, rising tide has apparently percolated to the banking sector which was the week’s best performer. (upper right window) Not even negative yield spreads would seem to stop a rampaging badly bruised bull.

Curiously, in spite of the ferocity of the current advances, current peso average daily volume remains lackluster relative to the two prior periods where the PSEi traded at current levels, in particular, from April to September 2014 (6,400-7,400) and August to December 2015 (trading range of 6,800-7,300). (Lower pane)

In short, the present ripfest has been underpinned by a stunning low volume which only reveals of its lack of conviction, and more importantly, DESPERATION to bring back the old times!

Bidding Frenzy Amidst Decaying Fundamentals: Ayala Corp’s Topline Revenue Fumbles! AEV Posted Decline in 2015 Income Growth Rate!

And the aggressive bids have only been pushing up valuations to nosebleed levels.

Put differently, all frantic pumping and pushing during the past several weeks, has virtually shunned the significance of valuations.

Fascinatingly, government’s bullish G-R-O-W-T-H headlines, as discussed above, have incited even more dash for derring-do bids even when G-R-O-W-T-H has been nothing but a superficial image.

Based on Friday’s prices relative to the PSE’s 3Q earnings report (monthly January 2016 issue), a commanding majority of PSEi issues have Price to Book Value (PBV) that amazingly have been significantly overvalued!

And again, the concentration of such valuation excesses has been on issues within the top 15!

And ironically, I have pointed out last week, such hysterical pumping comes amidst deteriorating fundamentals that have spread from the periphery to biggest issues. PLDT has reported losses in 4Q and a significant drop in net income for 2015. SM, which ironically has been part of the febrile pumping, has posted ZERO net income growth for 2015!

Positive headlines always appeal to those who never ask.

Yes this week, Ayala Corp disclosed that 2015 have been another year of G-R-O-W-T-H.

But what they didn’t say was, LIKE SM, the firm’s top line growth has been falling dramatically for the past two years (see upper window)!

Their disclosure noted that consolidated revenues expanded 11% in 2015. That’s looks neat, until one realizes that this has been 30% off from the 15.6% growth in 2014 and half the rate of 22.09% in 2013!

This means that while earnings have looked impressive from the outside, they have been showing signs of entropy in the inside. To consider, why has the topline been hardly manifesting optimal contributions from the massive capacity additions? Or what has happened to the enormous (10%+) supply expansions?

Moreover, the company’s earnings seem to have shifted. They seem to have become dependent on contributions or supplemental revenues to the topline, particularly profits from joint ventures and partnership, interest income and others, aside from improvements on business costs rather than from core revenues (see detailed topline performance in % during the 9 months of 2015 on lower windows)

In short, over the past two years, the core businesses’ topline have been contributing less to AC’s earnings. So how sustainable can this be?

And like SM, Ayala Corp’s topline has either been weighed by too much competition or by demand slowdown. Or at worst, it could have been both.

The fact that the topline has been dwindling in the face of massive supply expansions simply reveals that excess capacity has emerged at the margins.

And considering that both of the biggest consumer firms, SM and AC, have been faced by the same predicament, bulging excess capacity extrapolates to an INDUSTRY dynamic!

And an outgrowth of excess capacity translates to eventual diminished domestic demand!

And add to the string of downcast reports in 2015 has been energy holding firm Aboitiz Energy Ventures. AEV’s NET income for 2015 at Php 17.7 billion was LOWER 4% from Php 18.4 billion! Stunningly, AEV’s share prices surged to a near record! LOWER and ZERO growth now serve as catalyst for frantic pumps!

And this makes 3 out of the top 10 PSEi (PLDT, SM, AEV) firms to underperform in 2015. Again THIRTY PERCENT of PSEi has performed below par.

Yet will a new record high in stocks abolish or reverse all the surfacing intrinsic defects? Or will this set up for even more bouts of volatility?

____

1 Philippine Statistics Authority Monthly Integrated Survey of Selected Industries : January 2016 – March 10, 2016

2 Philippine Statistics Authority Construction Statistics from Approved Building Permits for Fourth Quarter 2015 (Preliminary Results) March 9, 2016

3 Bangko Sentral ng Pilipinas, FDI Reach US$273 Million in December 2015; Full-year Level at US$5.7 Billion March 10, 2016

4 Bangko Sentral ng Pilipinas End-February 2016 GIR Level Reaches US$81.30 Billion March 7, 2016