More Signs of the Year of the PIG: The Incredible PHA! PhiSYx: BLOOM in, PCOR out, US Primary Dealers Panic Hoarding of UST Continues

In this issue

More Signs of the Year of the PIG: The Incredible PHA! PhiSYx: BLOOM in, PCOR out, US Primary Dealers Panic Hoarding of UST Continues

-More Signs of the Year of the Pig? Second-Third Tier Stocks Signal Late-Stage Rally, The Incredible PHA

-PhiSYex: Bubble Stock BLOOM Returns to the Index, PCOR out!

-4Q GDP and 2018 GDP Inflated: December Industrial Production Crashed, Consumers Went Slow on Spending

-Primary Dealers Still Panic Hoarding US Treasuries! 3M LIBOR Rates Crashed!

More Signs of the Year of the PIG: The Incredible PHA! PhiSYx: BLOOM in, PCOR out, US Primary Dealers Panic Hoarding of UST Continues

More Signs of the Year of the Pig? Second-Third Tier Stocks Signal Late-Stage Rally, The Incredible PHA

Figure 1

The PSE opened trading on the Chinese New Year of the Earth Pig with a fantastic surge! Panic buying prompted intraday gains to reach a high of 1.8% just before lunch break. When trading resumed, gains were sustained until the last hour when the PSYei 30 began to crumble. By the last 15 minutes before the market intervention phase, panic selling rule. The day ended with marking the close dump which forced the index lower.

The Phisix roundtripped by a stunning 3.74% on the post-New Year’s Day trade!

Has this been signs of the things to come in the Year of the Pig?

The manic performance of second-and-third tier issues has been amazing.

Figure 2

Particularly fascinating is how the market has been riveted by a Php 2-3 billion market cap issue, the Premiere Horizon Alliance (PHA). Though PHA plummeted by 22% this week, it remains in the top 15 in terms of peso traded volume. A Php 2-3 billion company in the league of the market cap heavyweights for 13 straight sessions! What a feat!

At its recent peak on January 28 and 29, PHA corralled 10.6% and 12.22% of the total board volume. As PHA plunged last week, its share of daily board volume dwindled to 7.85%, 3.15%, 3.23% and 1.98% on February 4, 6, 7 and 8 – yet still ranked within the top 15 most traded issues. (see figure 2)

That the market’s attention shifts to the second-third tier issues as the PhiSYex enters its late-stage rally is hardly appreciated. After the Phisix culminated at 9,058 in January 2018; the previous darlings, TBGI and MRC, climaxed. Both issues fumbled along with the PSEi and rallied alongside it.

PHA appears to be the cynosure de rigueur.

And for good measure, the furious rallies in select second-third tier issues have prompted the average daily traded issues to hit its third highest level.  

The average number of issues traded daily raced to the third highest level this week to 255.25, only marginally different from the July 21, 2017 peak at 256.8. The milestone high was at 269.6 set on January 19, 2018.

Though last week’s numbers haven’t reached the crest of January 2018, the common denominator appears to be the ardent belief that there is no way to go but up as highlighted by the excessive speculations!

PhiSYex: Bubble Stock BLOOM Returns to the Index, PCOR out!

And even more. The Philippine Stock Exchange announced changes on the major indices effective February 18.

Figure 3

The Phisix would bring about changes in its composite members. Enrique Razon owned casino firm Bloomberry Resorts (BLOOM) will replace oil refiner Petron (PCOR) in the index. 

Curiously, it would be the second return of gaming behemoth Bloomberry Resorts (BLOOM) to the Phisix. Its inaugural was onMarch 11, 2013. Three years later, or on September 12, 2016, it was substituted by Security Bank [PSE: SECB].

BLOOM's entry into the elite benchmark in 2013 must have been an outcome of its strong share price performance. Its 2016 exit also reflected on its share price decline. With BLOOM up 8.65%, this week for a 2019 return of 28.16%, the same pattern in the PSE’s selection process seems to be unfolding.

In an attempt to boost the index, the PSE selects big ticket winners and weeds out the underperformers. So these can be aligned with the blatant mark-the-close pumps.

With BLOOM’s entry, the service sector would have the second biggest representation (6) after holding firms (10) in the composite index.

The headline index becomes an abode for winning issues only. Forget the representation of industries which should reflect the economy.

The PSE also introduced a new index, last week, which would incorporate dividends, reinvested dividends aside from capital gains through its Total Return Index (TRI)

4Q GDP and 2018 GDP Inflated: December Industrial Production Crashed, Consumers Went Slow on Spending

I argued that the 4Q and 2018 GDP had been padded.

The Zeitgeist of 2018 GDP: The Record Deficit Spending, Was the Export Data Been Inflated?, History has Rhymed January 27, 2019

Figure 4

Industrial production by 9.3% collapsed in December (PSA).

From the Inquirer: The Philippine Statistics Authority’s (PSA) Monthly Integrated Survey of Selected Industries for December 2018 showed that the Volume of Production Index (VoPI) declined 10.1 percent that month. The drop in the December 2018 VoPI, a proxy for manufacturing output, was steeper than the 6.1-percent decline in December 2017. “Ten out of the 20 industry groups registered annual declines [in VoPI], with two-digit decreases noted in the following: printing (-79.4 percent), chemical products (-28.9 percent), tobacco products (-22.1 percent), food manufacturing (-17.8 percent), basic metals (-16.7 percent) and machinery except electrical (-12.6 percent),” the PSA said. In the meantime, the Value of Production Index (VaPI) slid 9.3 percent, also faster than December 2017’s 7.1-percent drop. The PSA said the following sectors led the decline of the VaPI in December last year: printing (-78.5 percent), chemical products (-28.2 percent), basic metals (-16.5 percent), food manufacturing (-15.8 percent) and tobacco products (-11.1 percent). (bold added)

Consumer credit and cash (M1) also stagnated in December. Credit card growth was marginally up 20.93% in December from 20.2% a month ago. Auto loans growth plunged to 11.96% from 13.13%. Salary loans contracted -2.66% against -1.71%. M1 was little changed to 9.48% from 9.47% over the same period.

Consumers didn’t go wild last Christmas. 4Q GDP and 2018 GDP had been inflated.

Primary Dealers Still Panic Hoarding US Treasuries! 3M LIBOR Rates Crashed!

As global stocks went into bidding orgy, I wrote about the panic bidding of USTs by Primary Dealers in the US.  

Mania at Phisix 8,050! Beware of the January Effect, Will 4Q GDP Be Lower Than the 3Q? January 20, 2019

Instead of going away, the hoarding only accelerated.

Figure 5

Panic hoarding by primary dealers are increasingly signs of collateral-liquidity hedging-issues by third parties served by the primary dealers. They maybe central banks (PBOC?) or European banks.

Next the astounding collapse of the 3-Month LIBOR.

From Marketwatch: Three-month Libor sees biggest drop since 2009 (February 7): “The three-month rate at which banks on average charge each other to borrow funds fell around 4.1 basis points to 2.697% on Thursday, its biggest one-day drop since May 2009, according to ICE Benchmark Administration. Trillions of debt and loans are benchmarked to Libor , or the London Interbank Offered rate. Some analysts speculated that the Federal Reserve's hints that it would keep rates on hold for the foreseeable future at its January meeting contributed to the fall in money market rates”

Based on the inversion of the Eurodollar futures curve, this could be a sign that the US Federal Reserve will be cutting rates soon.

Beware the Year of the PIG!

Vital Signs from Expenditure 2017 GDP: Bye Bye Consumers, Welcome Big Government; Automobiles Dominate Capital Spending and Bloomberry shares as Giveaway!

In this issue

Vital Signs from Expenditure 2017 GDP: Bye Bye Consumers, Welcome Big Government; Automobiles Dominate Capital Spending and Bloomberry shares as Giveaway!

-The Current Imbalanced Consumer Based Economy

-Government Footprints on Bureaucratic and Welfare Expenditures and on Public Works

-Capital Investments Has Largely Been in the Transport Sector

-Shifting Transport Investments via PUV Modernization? RA 10963 as Anchor to Big Government

-The Effects of the State-Corporatist Economy II

-Money for Nothing! Bloomberry Shares For Free!

Vital Signs from Expenditure 2017 GDP: Bye Bye Consumers, Welcome Big Government; Automobiles Dominate Capital Spending and Bloomberry shares as Giveaway!

If the government’s national account statistics has a facsimile of accuracy, then we are witnessing a vital shift in the structure of the domestic economy

The Current Imbalanced Consumer Based Economy

It barely has been about a transition from consumption to investment. Instead, indicators suggest a shift from the private sector (consumption) to a bigger statist government (consumption). 

 

This chart, which I have previously shown, signifies the current hallmark of the Philippine economy: the consumption economy.

However, rather than keeping pace, intense competition has driven capacity growth buildup faster than the ability of the consumers to spend.

As a matter of technicalities, comparing household spending, an expenditure account, with trade and real estate, an industry account, would seem apples-to-oranges.

That’s because the opposing direction signifies the relative growth rate of these factors in comparison with the other variables within its category.  In the expenditure account, the general variables are household, government, capital formation and merchandise trade. In the industry account, these are the agriculture, industry, and services. Thus, the growth rates affect the share distribution of variables within their respective class domain.

However, irrespective of the categorization, GDP numbers for both expenditure and industry are the same. The purpose of the national account data is to exhibit the direction of expenditures and its distribution through its varied industries

Therefore, there is no ambiguity in the comparison of household spending activities to specific groups in the industry accounts.

Having said so, the contradictory directions of such activities embody mounting economic imbalances exhibited through excess capacity in specific industries

In details, for the year 2017, (real or inflation-adjusted) trade and real estate grew by 7.1% and 7.5% respectively, while household spending expanded by 5.8%.

Just how can these be?

Given that the products of both sectors compete with each other for household’s peso, the supreme paradox is the marked differentiation in the statistical performance of household spending relative to where it spent - or the industry or industries where money had been allocated or spent.

Government Footprints on Bureaucratic and Welfare Expenditures and on Public Works

Nevertheless, to have a better insight, we’ll move to account for the specifics in the expenditure aspect of the GDP

 

Because government spending and capital formation have grown faster over the years, the household consumption share has deteriorated.

In 2017, HFCE’s annual share was 68.74% which is lower compared to the 69.31% share in 2016. Government expenditures marginally rose to 10.52% from 10.46%. Capital formation also eked up slight gains to 28.61% from 27.99% in 2016.

Since net exports were both negative in 2017 and 2016 these were deducted from GDP.

For a clue to what has driven the government spending

I quote the PSA in the 4Q (bold added)

GFCE expands to 14.3 percent in the fourth quarter of 2017, surpassing the 4.5 percent growth in the same period last year. The increase resulted from the release of year-end bonus and cash gift of government employees, the release of performance-based bonus of some agencies, the filling up of government positions. 

The expenditure in the relief works and operations in Marawi, the school operating expenditures, purchase of drugs and medicines, and the payment for completed ASEAN-related events also contributed to the expansion of GFCE.

The 3Q

Government Final Consumption Expenditure accelerated to 8.3 percent in the third quarter of 2017, which is faster than the 3.1 percent in the same period last year.  The increase resulted from the disbursements for social protection programs, the filling up of government positions, and the implementation of the second tranche of the salary adjustment based on Executive Order No. 201, series of 2016, which increases the base pay of civilian, military, and uniformed personnel.

Outside of ad hoc expenditures, growth in government spending in the last half of 2017 had been mostly about expanding the bureaucratic organization, increases in benefits and wages of government employees and social welfare spending

So the National Government (NG) can be seen here as expanding its size.

On the other hand, capital formation has rapidly expanded.

 

Construction activities are also part of the expenditure account. Construction represents a subset of fixed capital.

However, as earlier noted, public sector construction has grown at the expense of the private sector.  Think of it this way: A construction crane used in public sector projects is the same construction crane that will NOT be used in the private sector. Hence, private projects are the opportunity costs of public works

Last year, the sizeable pick up in public sector’s growth was inadequate to support the entire industry.

Nevertheless, while the ambitious “build, build and build” projects may boost parts of the construction industry, what it does is to redistribute resources and funding towards politically-directed activities.

Hence, bigger expenditures will arise from increases in public works and ancillary projects. Not only that, the bureaucracy will expand as well. After all, who would do all the regulating and controlling of both direct and indirect (Public Private Partnerships PPP) projects?

Bureaucratic expansion implies an increase in manpower and logistics to support implementations of political projects.

Who says public works are for free?

Capital Investments Has Largely Been In the Transport Sector

The other major variable in the expenditure account is the durable equipment which has consistently outperformed.

So what has pushed up the share of durable goods over the recent years? In two words: Transport Equipment (48.08% share in 2017).

Fundamentally, road vehicles constituted 44.63% share of the durable equipment GDP or 92% of the transport equipment account in 2017.  Transport equipment share was lower in 2017 from 49% in 2016

That said, transport investments accounted for close to 50% of durable equipment GDP since 2011.

At the same time, while transport investments improved, the capital investments have slumped in specialized machinery 19.72% in 2017 from 20.6% in 2016 and in general machinery 15.23% from 15.4%.

Specialized machineries have been in a steady downtrend since 1999. On the other hand, general machinery investments growth has fluctuated in a range of 13-16% since the new millennium.

Meanwhile, miscellaneous equipment increased to 16.97% in 2017 from 15.1% 2016.  This year’s growth marks the first improvement which has steadily declined since 2011

The overall Expenditure GDP picture tells us that capital goods investments have mainly been about transport equipment and have been lessabout the other forms of capital.

Shifting Transport Investments via PUV Modernization? RA 10963 as Anchor to Big Government

And the capital formation dynamic may be about to change too!

With the institution of RA 10963 or the Tax Reform Acceleration and Inclusion Act, higher excise taxes on private sector transport, as well as, in the fuel prices are likely to affect the economics of the transport industry.

Should higher prices reduce demand, this will resonate with diminishing investments in transport equipment.

Nevertheless, a response has been prepared by the NG. The Public Utility Vehicle (PUV) Modernization Program estimated to cost around P417.3 billion over the next five years will come into action.

So the government again will most likely take over “investments” in the transport sector.

See? RA 10963 had been furtively engineered to expand the NG’s control over the entire economy!

By the way, the new tax regime is not a sign of federalism or advancement of “state rights”, but of “centralization”.

So household consumption will be replaced by government consumption

As I earlier wrote, We are seeing and will see a vastly bigger government.

[Build, Build, and Build: Construction GDP Growth in the 4Q and in 2017 Slipped to 2013-2014 Lows! More on Infrastructure Risks and the Path to Big Government January 29, 2018]

The writing is on the wall.

The Effects of the State-Corporatist Economy II

Yet the transition to an economy driven by state-corporatism (cronyism) will aggravate existing imbalances, distortions, and malinvestments in the system.

As Richard Salsman wrote in Forbes, “Corporatism goes hand-in-hand with statism, with abandonment of the fully free economy and adoption of the welfare-warfare state”

Interestingly, since the main street and the stock market have gone gaga over consumer-related industries, imbalances should accelerate as an avalanche of money flows will be directed to these sectors.

The supreme irony is that the NG will take a substantial cut in the household and private sector consumption. Additionally, it will divert part of resources and funds away from these.

Moreover, the new tax and spending regime will exacerbate the embedded distortions from zero bound rates. Such combination would have a significant unseen (by the mainstream) impact on the real economy prices, interest rates and the peso.

Largely ignored by everyone is that the inflation tax and price instability from these policies will gnaw deeper on the financial conditions of both the consumers and small and medium enterprises.

Worst, the increased politicization of the economy extrapolates to the substitution of economic incentives from servicing the consumers to servicing political agendas. The evolution implies reduced free markets activities that would support taxes to finance aggressive and spendthrift political projects.

If the NG has been trying to expand its presence under a free money regime, what more if such free money bonanza ends?

Money for Nothing! Bloomberry Shares For Free!

Oh speaking of free money and going gaga, here is a striking development: equity shares now serve as marketing giveaways to patrons of a casino!

From Nikkei Asian Review:

Bloomberry Resorts will reward its loyal patrons with shares in the Philippine casino company.

The resort operator on Tuesday said it had been authorized by management to buy up to 2 million shares at prevailing market prices. "These shares shall be given as a reward to Solaire's loyal patrons and as part of Solaire's marketing program," a statement says.

The company has already purchased 382,90 shares valued at 4.24 million pesos ($83,000).

Translation: If you lose money, our shares will compensate for it. But if you win, you win both from bets on casino games and from our shares. It’s a win-win proposition! Gamble with us!

Now falling prices wouldn’t be an effective enticement, would it?

The takeaway: Because free money is seen to last forever, shares are being given away!

 

Such marks a historic (manic) sign of times!