Illusions of Paper Wealth: The Boom Bust Cycles of Two Hong Kong Billionaires

Paper wealth can be characterized as “easy come, easy go.”

The Chinese government’s stock market pump managed to produce many paper wealth billionaires.

By paper wealth, this entails of the net worth of individuals who owns the majority shares of a listed firm, whose fortunes have been dependent on the direction of share prices.

So a stock market pump inflates the owner’s worth and vice versa.

‘Easy come, easy go’ it has been for two of Hong Kong’s paper billionaires.

Piggybacking on the Chinese government’s stock market pump, Mr. Li Hejun, who at one time was considered China’s richest man based on the value of his majority stake in the Chinese solar company, Hanergy Thin Film Power Group Ltd. (Bloomberg HK: 566), according to Wall Street Journal, saw his holdings suffer when his firm’s share prices almost halved last Wednesday.

Trading was reportedly halted for the firm.

Interestingly, media seem to impute Mr. Li’s skipping his company’s annual meeting to the crash.

Yet prior to crash, according to the same Wall Street Journal, Hanergy’s shares “were up more than 42% since the beginning of the year and are more than triple their level of one year”.

Triple++ in about than a year!

Yet a day after the terrifying Hanergy episode, the fortunes a little-known electronics and property tycoon, Mr. Pan Sutong endured the same fate.

Stocks of Mr. Pan Sutong, the Goldin Financial Holdings Ltd. (Bloomberg HK:530) and Goldin Properties Holdings Ltd (Bloomberg HK: 283), which previously skyrocketed by about 350%, likewise collapsed!

According to the same report, "Goldin fell 43%, wiping $12 billion off its market value. A smaller company with the same owner, property developer Goldin Properties, fell by 41%, reducing its market capitalization by $4.6 billion"

Why shouldn’t a crash happen when prices have totally detached from valuations?

Here is a Bloomberg ex-post analysis: Goldin Financial’s revenue in the six months ending December was $34 million and more than 99 percent of its $181 million profit came from marking up the value of a 27-story office building in Hong Kong that’s still under construction. At its height on May 15, the company traded at a price-to-book ratio of nearly 25 times, compared with an average of about 1.5 times for stocks in the Hang Seng Index. (bold mine)

$22 billion worth of market cap for $34 billion of revenues at PBV of 25 times!

Back to the Wall Street Journal article, regulators have already warned of the excesses in Goldin Financials and likewise reported a connection between the two:

Filings with the Hong Kong exchange show Hanergy and Goldin Financial have previously worked together, although it was unclear whether the relationship contributed to Goldin’s fall. Hanergy said in a February disclosure it had appointed Goldin as an independent adviser for a supply agreement under which Hong Kong-listed Hanergy Thin Film would sell solar panels to its parent company.

The Securities and Futures Commission, Hong Kong’s market regulator, warned investors to exercise “extreme caution” with Goldin Financial in March, noting that just 20 shareholders—including its chairman who owns a 70% stake—held nearly 99% of the company. The company said at the time that there was little it could do because the SFC didn’t disclose who those shareholders were. Both Goldin Financial and Goldin Properties issued filings Thursday to the Hong Kong market saying they are not “aware of any reasons” for the movement of the stocks. The companies didn’t respond to requests for comment.

More interestingly, Goldin’s shareholders have represented big time institutions like Norway’s sovereign wealth fund. From the Wall Street Journal report: (bold mine)

Goldin Properties is building a 117-story skyscraper in Tianjin, a city in northeastern China, that will be ringed by China’s largest polo complex. Illustrating Goldin Properties’ size, it will join the MSCI China Index, an index followed by global investors, at the end of this month. The property company had already garnered big investors. At the end of last year, Norway’s government pension fund was the biggest institutional shareholder, with a stake valued at $30 million. The $926 billion fund has been holding the stock since at least 2008, though it has trimmed the position in recent years, according to its annual reports. Norges Bank Investment Management, which manages the fund, declined to comment. Goldin Financial provides a form ofshort-term corporate financing known as factoring. It owns wineries in France and California and wine-storage facilities in China and invests in property.

As I have recently pointed out, governments (mostly via sovereign wealth funds) and central banks have at least $29 trillion of exposure on global stock markets. And stock market losses would extrapolate to eventual ‘deficits’ that would be shouldered by taxpayers. Fortunately yet, Norway's pension fund has been one of the early buyers.

And individual boom bust chapters have not just been in a Hong Kong event. 

A Frankfurt listed German sanitary fitting firm Joyou AG (JY8: XETRA) which operates and has its headquarters in China recently saw its boom then nearly went to ZERO!

That’s because of this surprise announcement (Bloomberg): Joyou AG, which mainly operates in China, yesterday announced it will write down more than half of its capital and possibly file for insolvency. Losses of which according to Reuters has been due to “extraordinary writedown on shareholding in Hong Kong Zhongyu Sanitary Technology Ltd”

Nonetheless, the above reports represent the ex-post explanations.

But it is sad thing for the shareholders of these companies whose participation on the above issues would translate to staggering losses.

Crashing individual stocks have yet been a minority. Yet what happens when they become the majority?

Bottom line: Paper wealth are illusions. The obverse side of every mania is a crash.

Wow. Indonesian Government Sunk 41 Illegal Fishing Ships (including 11 from the Philippines and 1 from China)

This is incredible. 

The Indonesian government just sunk 41 (allegedly illegal fishing) ships!

From Today Online: (bold mine)

Indonesia yesterday sank a large Chinese vessel as well as 40 other foreign boats that had been caught fishing illegally in the country’s waters, a move likely to spark a strong reaction from Beijing and other regional capitals.

The 300 gross tonne Chinese vessel was destroyed with a low-explosive device on its hull in West Kalimantan, said Maritime Affairs and Fisheries Minister Susi Pudjiastuti.

“This is not a show of force. This is just merely (us) enforcing our laws,” Ms Susi was quoted as saying by The Jakarta Post.

The Gui Xei Yu 12661 is the first Chinese boat to be sunk since Indonesian President Joko Widodo declared war on illegal foreign fishing boats last December.

The Indonesian Navy detained Gui Xei Yu in 2009 after it was caught fishing near the South China Sea, a hotly disputed area involving China and South-east Asian nations such as Malaysia and Vietnam.

Besides the Chinese ship, the authorities also destroyed 40 other vessels in different places across the country. They included five boats from Vietnam, two boats from Thailand and 11 from the Philippines, The Post reported.

Shortly after assuming office last October, Mr Widodo launched a campaign to protect Indonesia’s maritime resources and domestic fishing industry, which loses billions of dollars in revenues to illegal fishing each year. He has also pledged to transform Indonesia into a maritime power and, in December last year, orchestrated a much-publicised sinking of three empty Vietnamese vessels.

Dozens of foreign vessels from Malaysia, Thailand, Vietnam, Papua New Guinea and the Philippines have been sunk in recent months.

Wow.

Media will play up the China-Indonesia card as part of the escalation of territorial dispute. 

But most of the brunt of the Indonesian government measures to “protect Indonesia’s maritime resources” has been her neighbors, particularly the Philippines, Vietnam and Thailand. 

Some questions

What if ALL of ASEAN resort to or copy the Indonesian government’s paradigm of blasting ships of intruders coming from their neighbors under the justification of protecting maritime resources? 

What if the sinking of alleged illegal fishing ships expands more than just to protect maritime resources but uses such rational nevertheless? 

What if there will be mistaken identity/ies from such actions?

So what stops ASEAN from degenerating into a battlefield or a hotbed for military skirmishes? A battlefield not necessarily with the Chinese government as participant.

And what if the Chinese government will be provoked to conduct the same exercise? 

Will South China Sea serve as the cassus belli for a regional war or even World War III?

Whatever happens to ASEAN economic integration if territorial provocations becomes a key issue? 

Or has the Indonesian government been diverting the public’s attention from her economic woes?

Mario Draghi’s ECB Inflates 5 Eurozone Bubbles

When central banks drench the system with money—with the supposed aim to stimulate the economy and or to ignite headline inflation—the money stream flows to only some of the sectors. 

(Of course, that's the headline justification which shields the real reason: subsidy to debt strained government and politically privileged industries)

And those sectors that experience the initial “pump” will then draw in a bandwagon (performance chasing) effect from the marketplace. 

The misallocation of resources from political intervention of money represents THE bubble. Bubbles signify as “something for nothing” phenomenon or from the religious belief of expectations elixirs (free lunches) from money creation.

So when ECB Draghi declared that the region’s central bank would “do whatever it takes” to save the EU, the ramifications of her policies, like everywhere else has been to blow bubbles.

Marketwatch’s Matthew Lynn identifies 5 bubble areas where ECB balance sheet inflation has diffused to: (bold mine)

Here are five markets that are already benefitting from the tidal wave of money Draghi has created.

First, take a look at Spanish construction. Only a couple of years ago, we were reading about how Spain was littered with empty housing estates and airports with one flight a day, the forlorn legacy of the building boom that was raging all through the middle of the last decade. You might think there was nothing left to build — but, as it turns out, you’d be wrong. The cranes are back in action again. Construction output in Spain is currently growing at 12% year-on-year, by far the fastest sector of the economy. Cement consumption is up by 8% this year. The property market is humming again.

Second, Dublin housing. There were few hotter markets at the height of the last boom than Irish housing — nor many crashes that were quite so bad. Now, the froth is back again, and anyone who snapped up a bargain as the country was bailed out and its banks went into intensive care will be feeling smug by now. Irish houses prices are up by 16% year-on-year, and by 22% in the capital, Dublin. The emerald tiger is catching another wave of hot money, and starting to boom again. Don’t be surprised if prices keep going even higher.

Third, German wages. For a decade, despite having supposedly the strongest economy in Europe, German wages had hardly risen. Now that is starting to change.The metalworkers union just secured a 3.4% rise, a decent hike in a country where deflation is still a threat, and prices are not likely to rise. Other workers want a better deal as well. This week, the train drivers are on strike, for the ninth time in the last year, as they push for a 5% pay rise and a shorter working week (who says the trains in Germany run on time). Already in 2015 Germany has lost twice as many days to industrial action as it did during the whole of 2014, according to the German Economic Institute. By the end of the year, wages in Germany are likely to be racing ahead at record levels.

Fourth, Maltese assets: The tiny Mediterranean island is expected to record the fastest growth in the European Union this year, at 3.6%. Prices are not rising quite as fast as they are in Dublin, but property is up by 10% year-on-year, the second fastest rate in the eurozone. Some of the local banks are reporting that their balance sheets are expanding by 40% a year or more. Has the Maltese economy suddenly had a surge of competitiveness? It seems unlikely. In fact, it is emerging as the new Cyprus — an offshore haven for all the hot money within the eurozone to find a temporary home.

Five, Portuguese stocks: It is hard to think of anything very good to say about the Portuguese economy four years after the country had to be bailed out. The economy is only expected to expand by 1.6% this year, only marginally better than the 0.9% it managed last year. Unemployment is still running at more than 13% and shows little sign of falling significantly. But, hey, you never guess that from the stock market. Lisbon’s PSI Index  is up by 25% this year already, making it one of the strongest markets in the world.

In reality, central banks can print money when they want to . But they can’t control where it washes up. Some of the rising markets might be useful — higher wages in Germany, for example, might help to rebalance that country’s massive trade surplus.

But in the main Draghi’s tidal wave of euros is most likely to simply to blow up another series of asset bubbles. Indeed, in many cases they are exactly the same bubbles that blew up last time around, such as Spanish construction and Dublin property. That may be great for investors who get in on those markets on the way up. But it won’t do much to fix the eurozone economy — and it will inevitably be very painful when they finally pop.

The ECB tsunami money has designed to ease interest rates or debt servicing costs. 

So the crucial question will always be: how will bubbles be funded?

The answer gives us a clue to the mother of all of Europe’s bubbles: DEBT!

The previous bubble implosion resulted to an explosion of Europe government’s debt levels as a result of collapsed tax revenues, as government spending ballooned accentuated by bailouts.

That’s European government’s skyrocketing debt as of 2013 according to ECB data. Hockeystick debt!

This is expected change in government debt as % of GDP based on McKinsey Global estimates

Expect mainstream expectations to be conservative once the bubble pops.

Here is the updated government debt table from the OECD.

In spite of the reemergence of bubbles (which has and may temporarily spruce up statistical G-R-O-W-T-H) government debt for European nations particularly the crisis affected ones, namely, Portugal, Spain and Italy, has increased! (with the exception of Iceland and Ireland). Yet the decrease in Ireland’s debt has been marginal.

The above red box represents Europe’s staggering combined private and public sector debt in % of GDP as per McKinsey approximations. 

Those new bubbles are likely to inflate more systemic leverage (most likely centered at non financial corporates).

Finally early this year, a big symptom of the debt bubble has been negative yields.

Negative yields have mainly been a product of a massive stampede to frontrun the ECB (asset buying) by the banking financial industry (the other major beneficiary of the ECB stimulus). 

Negative yields then meant that borrowers were even being paid (rewarded) to borrow!

But recently treasury markets like yields of 5 year German bunds have seen a forceful pushback.

Whether this has been temporary or has accounted for growing cracks in the bond bubble remains to be seen.

Yet the next bubble implosion will not just apply to asset bubbles but to the entire debt portfolio of the region (and elsewhere). 

The most likely outcome will be a horrific deflation (chain of debt defaults), or if the ECB fights it with money printing, possibly hyperinflation.

Bankrupt governments depend on sustained access on the credit markets for them to survive. This makes them highly sensitive to market confidence. And such has been the real thrust of all the cumulative easing policies implemented by the ECB (and by governments). 

Once market confidence dissipates, the whole bubble edifice crumbles.

 

Greece may likely be the first casualty.

Video: Special Interest Groups and Not Voters Influence Political Landscape in America

The following video, originally entitled “Corruption is Legal in America” by represent.us, trenchantly describes not only how corruption is legal in the US, but more importantly, how corruption has endemically been embedded into the system from which corruption became legal.

It is also interesting to see how the popular concept of representative government (seen from academic theory) works in complete departure from reality where voters have little influence on the legal landscape. Instead, the current political economic environment has been dominated by special interest groups via public choice, regulatory capture and revolving door politics.

Because of the enormous windfalls or colossal return of investments when political mandates have been enacted on their favor, many corporations resort to them.

The lesson here shouldn’t be seen only in the frame of US politics but also applies to other representative governments as the Philippines.

(hat tip Gary North/LewRockwell.com)

So Who’s the Biggest Winner from China’s Stock Market Bubble? Answer: The Government!

I have been pointing out here that the Chinese government has engineered the inflation of a massive stock market bubble as part of “C-O-N-F-I-D-E-N-C-E” building measures, and importantly, as alternative option to secure corporate financing

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.

Well, the Wall Street Journal reveals that the Chinese government has indeed been the major beneficiary from their own bubble blowing policies.  (bold mine)

China’s stock market has risen by nearly a third this year, one of the best performances in the world. But the largest beneficiaries of this spectacular rally aren’t the investors who wagered on the country’s corporations or the companies on the Shanghai exchange.

The biggest winner has been the Chinese government, which has made billions in paper profits on its stakes in hundreds of listed state-owned corporations. Now Beijing hopes the stock gains will ripple through the economy, helping the authorities to improve the financial health of debt-laden state companies.

The challenge for Beijing is how to carefully manage the market’s momentum, given that Chinese stocks are no longer cheap. The Shanghai Stock Market, trading at a price/earnings ratio of around 19 times, is at its most expensive in five years. ChiNext, the board for startup companies on the smaller Shenzhen Stock Exchange, now boasts a triple-digit P/E ratio, roughly five times that of the Nasdaq Composite Index.

So far, Beijing has repeatedly cheered on the rally, to the delight of the small investors who dominate trading. That has helped more than double the market value of the almost 1,000 listed firms—in which the central and local governments own stakes—to 20.19 trillion yuan ($3.26 trillion) over the past year.

So how should the inflation of a gigantic stock market bubble “improve the financial health of debt-laden state companies”????

Analysts said one of Beijing’s biggest hopes is that the booming share market will help companies deal with the vast pile of debt on their balance sheets. Higher stock prices can ease a company’s debt burden by increasing the relative value of a firm’s assets and, in the case of companies that subsequently sell shares, by giving the company funds to pay down debt.

As of now, state-owned enterprises, or SOEs, are among the biggest debtors; their liabilities have risen to 65% of their total assets, from 58% in 2007, when the stock market peaked, according to CEIC, a data provider…

As their stocks have risen, a few state-run companies have taken advantage of their increased valuations by selling stakes or issuing new shares, using the cash to pay down their substantial borrowings.

As companies pay down their debt and raise capital, they are more easily able to go ahead with the mergers and acquisitions that Beijing hopes will make them more competitive. The government is seeking to restructure the country’s sprawling array of more than 100,000 state-owned enterprises.

Accounting magic, that's how. Blowing stock market bubbles reduce accounting debt ratios through inflated asset valuations of state owned firms

Of course, that's aside from increased access to equity financing as alternative to debt. And C-O-N-F-I-D-E-N-C-E.

Essentially by inflating a bubble—via policy easing (or force feeding credit into a credit strained system) and from IPO manipulation—the government transfers resources and risks to the public in order to save the skin of these political enterprises.

But there is no free lunch. Not even for bubbles.

The major cost of inflating a bubble extrapolates to more amassment of debt.

According to a Bloomberg report which covered today’s 3.1% surge in Chinese stocks. (bold mine)

Margin traders increased holdings of shares purchased with borrowed money for a sixth day on Monday, with the outstanding balance of margin debt in Shanghai climbing to an all-time high of 1.28 trillion yuan.

Mutual funds managed a record 6.2 trillion yuan in assets at the end of April, the Securities Times reported Tuesday, citing data from the Asset Management Association of China.

And China’s margin debt, according a study from Macquarie “could already be the highest level of margins vs free float in market history…” (FT Alphaville). Wow!

The above only exhibits more signs of how the Chinese government have been a state of panic. They have been desperately working to survive a political economy deeply dependent on PONZI financing.  So they have been doing everything to cut down the cost of servicing debt (so as to extend the DEBT IN-DEBT OUT operations, where lately they have introduced debt for bond swap), as well as, has increasingly relied on asset sales (previously property and now stocks) for financing.

Yet  when the both bubble bursts the government and the citizenry will be a lot poorer. 

Thanks to the misplaced belief on policies that turns stones into bread.  

As American journalist aptly described of the 1929 stock market crash (The Bubble that Broke the World p.38) [bold mine]

Then the invisible pyramids—what are they? 

A delirious stock-exchange speculation such as the one that went crash in 1929 is a pyramid of that character. Its stones are avarice, mass-delusion and mania; its tokens are bits of printed paper representing fragments and fictions of title to things both real and unreal, including title to profits that have not yet been earned and never will be. All imponderable. An ephemeral, whirling, upside-down pyramid, doomed in its own velocity. Yet it devours credit in an uncontrollable manner, more and more to the very end; credit feeds its velocity 

How relevant this has been today! (not only for China)

Example of How Government Uses the “War on Cash” to Confiscate Property

Governments desperate for financing have used various repressive edicts to seize private property. And part of this campaign has been to wage a war on cash. The war on cash has been publicly sold as campaigns against money laundering, war on drugs and other vices or even to weed out the informal economy.

The reality is that such measures has been about expanding political power, channeled through financial repression again intended to seize private property.

Austrian economist Joe Salerno accounts for how such political avarice has made a mess of an entrepreneur’s life, via Mises Blog

Lyndon McClellan is a small entrepreneur who owns and operates L & M Convenience Mart in Fairmont, North Carolina.  L & M comprises a gas station, convenience store, and a small restaurant serving hot dogs, hamburgers, and catfish sandwiches.  One day last July, more than a dozen federal, state and local law enforcement agents swarmed Mr. McClellan's business, including agents from the FBI and the North Carolina Alcohol and Law Enforcement agency---and they were "asking" for him.  When Mr. McClellan arrived, he was escorted by two federal agents into his stock room for a private chat.  The agents showed him paperwork indicating that he had made two cash deposits totaling $11,400 within a 24-hour period in his bank account at the Lumbee Guarantee Bank.  They informed him that the papers also indicated that he had a history of "consistent cash deposits" of less than  $10,000, which was a violation of the the Federal law against "structuring."  They also informed him that the IRS had seized all of the $107,702.66 in L & M's bank account.

What Mr McClellan did not know was that it was against the law to make cash deposits of less than $10,000.  Banks are legally obligated to report any deposit of more than $10,000 to the U.S. Treasury Department.  But if an individual makes several cash deposits of less than $10,000 over an unspecified period of time that total more than $10,000, then he is presumed to be a money launderer or drug trafficker who is committing the dastardly crime of structuring, that is, seeking to circumvent the bank's reporting requirement and maintaining the privacy of his financial affairs Thus banks are also required to file "suspicious activity reports" on cash deposits of less than $10,000.   Based on these reports, if one is merely suspected--not convicted--of structuring, his bank account is seized by the IRS under "civil asset forfeiture" laws, which permits seizures of money or other property suspected of being related to a crime. 

Government agencies have a financial incentive to invoke civil asset forfeiture laws because the law permits the seizing agency to keep the assets and use them to expand  their activities without an appropriation from Congress.  In its insatiable hunger for funds, the IRS even  "deputizes"  state and local law enforcement agencies to go through "suspicious activities reports" in exchange for a cut of the loot subsequently seized by the IRS.  This is probably how a small entrepreneur like Mr. McClellan living peacefully in a sleepy hamlet was targeted for destruction in the War on Cash. 

Months after the seizure of his bank account, the federal government offered Mr. McClellan 50 percent of his money back if he agreed to a settlement.  He heroically refused and intends to pursue the matter in court.  Unfortunately, under the oppressive and despotic "civil asset forfeiture" laws, he bears the burden of proving his innocence.  But as he puts it:

It’s not fair to the American people who work for a living that one day they can knock on the door, walk in their businesses, and say, ‘We just took your money' … I always thought your money was safe in the bank, but I wouldn’t say that now.

Neither would I!

The Philippine Potemkin Stock Market: Record Highs Outside, Bear Markets Inside!

Historically the shift from deposits to banknotes was associated with the fear of commercial bank insolvency or illiquidity. That was called a bank run. Today a bank run is the natural consequence of forcing too much central bank liquidity (bank reserves) onto a system which simply does not want them. A banker does not want to accept this short-term funding if he cannot lend the proceeds at a profit. The only way for the banking system in aggregate to repel such funding is to offer interest rates on deposits (bank liabilities) which force investors into banknotes (someone else’s liability). Tighter regulation and collapsing long-term interest rates mean that profits from lending for Euroland bankers are increasingly illusory. Banks are keen to repel deposits given the lack of opportunity to use them. If QE reduces the banks’ ability to lend money and also creates an arbitrage from bank deposits into banknotes, will it reflate the economy? If you think the answer is ‘no’ then European QE will have to stop with fairly negative consequences for the equity market and positive implications for the Euro exchange rate. Evidence of selling of government debt securities with negative yields is thus not necessarily a sign of inflation. A move to bank deposits or banknotes from government debt securities can instead indicate that the limits for QE have been reached.-Russell Napier

In this issue:

The Philippine Potemkin Stock Market: Record Highs Outside, Bear Markets Inside!

-Examining the PSE: Face Value (Seen) Versus Broader Context (Unseen)

-Bears Are The Rule, And Record Highs Are The Exception!

-Reasons for Divergences: Rotation, Deteriorating Market Conditions and Index Rigging

-Philippine Treasury Market in Turmoil: The BSP Dabbles with Fed’s Bailout Tool called Term Auction Facility (TAF)!

-Statistical Growth Pumps in OFW and Industrial Production? Price Deflation in a Credit Finance Construction Boom?

The Philippine Potemkin Stock Market: Record Highs Outside, Bear Markets Inside!

Examining the PSE: Face Value (Seen) Versus Broader Context (Unseen)

For starters, in this outlook, I’d like to abide by the BSP Chief’s gem of an advice (in a recent speech to journalists[1])

Economic numbers rarely tell the complete story when taken at face value. Therefore, a responsible journalist who seeks to offer readers a fuller appreciation of the information will examine the figures within a broader context or against an array of other relevant indicators.

The context of the above seems to paraphrase or may have been a restatement of French classical liberal economist Frederic Bastiat’s “That Which is Seen and that Which is Unseen”[2].

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.

Since in an April 2009 speech, the BSP chief cited an excerpt of Bastiat’s work, particularly the difference between the good and bad economist, my impression is that Bastiat’s poignant quote may have stuck into his mind and may have been used as basis for his counsel to journalist audiences.

Yet I’m not sure if he has read Bastiat’s masterpiece.

But signs are he hasn’t. For if he has, certainly Bastiat has had no influence on him—except for the intellectually stirring excerpt. That’s because his policies runs in sharp contrast to Bastiat’s advocacy. 

Of course, if he has read Bastiat, then I hope the BSP governor not only preaches, but ardently practice them. But that would be wishful thinking.

Essentially, the BSP governor then warned journalists of falling for the ‘face value’ trap, or giving heavy emphasis on the interpretation of the headline (seen) as against broad developments (unseen). 

[As a side note, yet in that speech, ironically, the BSP chief wanted journalists to focus on ‘deflation’ risks which has also been a ‘visible’ component of an ‘unseen’ economic disorder]

So here I apply such outstanding wisdom (the difference between seen and unseen) in the perspective of Philippine stocks.

Bears Are The Rule, And Record Highs Are The Exception!

Technically, despite the recent selloffs, the Phisix still is in record territory. Technically.

But how about the ‘broader context’?

To take a cue from the legendary trader Jesse Livermore who described the conditions of general stock market trends[3] (bold mine)

I have found that experience is apt to be steady dividend payer in this game and that observation gives you the best tips of all. The behaviour of a certain stock is all you need at times. You observe it. Then experience shows you how to profit by variations from the usual, that is, from the probable. For example, we know that all stocks do not move one way together but that all the stocks of a group will move up in a bull market and down in a bear market. This is a commonplace of speculation

In short, a bull or bear market can be characterized by the general performance trends of most of the stocks. 

So in the ‘broad context’, a bull market should feature MOST stocks as going UP, while a bear market would reveal MOST stocks as going DOWN!

Now let us walk through how Phisix has been attained the recent RECORD milestone in the lens of market breadth—in specific, the advance-decline spread.

Market breadth conditions should demonstrate if record stocks have chimed with the broader markets.

Last April 7th, the Philippine Stock Exchange tallied “26 record finishes” since it broke through the previous May 2013 highs this year.

Two days after, or after one trading session which was followed by a holiday, the April 10th feat of 8,127.48 was etched. This makes 27 record days.

That represented the ‘face value’.

Now for the broader context.

What the PSE didn’t say was that en route to 8,127.48, the broader market was hardly participating from the serial setting of record after record.

In numerical perspective, in NINE out of the 14 weeks or 64.3% of the weekly advance decline spread revealed the domination of sellers. In cumulative nominal numbers, weeks where decliners led advancers tallied 498 as against only 216 for the advancers. In short, declining issues whipped advancing issues by a stunning 2.3 to 1!

And again this has been happening as the index vaulted to records!

And following last week’s astounding discovery that a staggering 69% of firms from the banking and financial index had been in bear markets, I pursued on examining the entire PSE population of listed stocks.

And guess what? The banking and financial sector’s predicament has NOT been in isolation, but instead has been representative of general Philippine stock market conditions! 

Bears are the rule, and record highs are the exception!

Nota Bene: Definition, scope and limitations (on the table above)

-Bear Market: Defined as 20% decline from recent, referenced from 2012-15 highs

-Record highs: Stock prices at all-time highs

-Uptrend: stock price on an uptrend but at non record highs

-Sideways: neither a bear market nor an uptrend/record high

a) These are based on May 12 and May 13 close. b) Excluded from tabulation: suspended issues, foreign or ‘B’ shares, ETF and Small & Medium enterprises c) I included Bloom and AGI as sideways even if they fell into bear market grounds over the week.

In the prism of INDEX issues, aside from finance, bears overwhelmingly prevailed over bulls at record high prices in the property sector 47% versus 27%, holding 43% as against 29%, service 33% vis-à-vis 22%, industrial 52% relative to 35%, and finally, mining 86% compared with 7%.

In general, 51.1% of all sectoral INDEX issues have been enduring bear markets!!! This is against a measly 25.6% share at record highs! 

Importantly, many of the bears experienced landmark highs during the 1H of 2013. Unfortunately since the taper tantrum, stock prices for the SILENT Majority have either been in stagnation or has even been fathoming to new depths!

To have a view of the representative charts from each sector, I pre-posted them at my blog[4] (with the exception of the mines).

Even if we exclude the mining index because of the industry’s microscopic share in the key composite benchmark, and because the mining sector’s quandary has mostly been influenced by external forces, specifically collapsing commodity prices, the bear markets representing the mainstream domestic economy remains authoritative: 45% as against only 29% for record stocks!

Well how about in the viewpoint of ALL issues listed per industry? Has smaller firms performed better?

This is where it gets even more interesting.

The answer is NO.

The bears have imposed an overpowering supremacy on ALL the MAJOR sectors or industries! 

In banking-finance, bears rule 69% versus 15%, in property 52%-26%, in the holding industry 55%-23%, in service 49%-15%, in industrial-commercial 64%-20% and finally in the mining sector 88%-8%!

Overall, the grizzly bears REIGN over stocks in record highs (or even combined with uptrend stocks) with a commanding 60% share as against stocks at record highs with only 19% and stocks on an uptrend at only 8%.

To exclude the mining issues, bears govern with 56% share relative to 20% and 15%!

Have these numbers been suggesting a bear market or a bull market?

This lead us back to the Phisix.

Of the 30 component issues, stunningly stock prices of SEVEN firms have been in BEAR Markets!

Despite a short rebound, Alliance Global (AGI) and Bloomberry Resorts (BLOOM) reverted to the bear market zone this week. 

Record highs have failed to significantly inspire rallies in Emperador (EMP), LTG Group (LTG), Metro Pacific (MPI) and Petron (PCOR)

Add to that list San Miguel Corporation (SMC), and a potential bear market recruit, the second largest market cap, the largest telecom company PLDT. The breakdown from PLDT’s long term trend could be portentous of a shift towards the bears.

As a side note, PLDT’s market cap has been slipping fast. It won’t be far when PLDT’s market cap ranking falls below the second spot with Ayala Land breathing on its neck. As of Friday, the market cap share of the top three firms comprising the Phisix: SM, PLDT and ALI have been at 9.65%, 8.84% and 8.57% respectively.

In short, at 23%, Phisix stocks in bear markets have now accounted for MORE than ONE-FIFTH or almost ONE-QUARTER of the index!

What kind of record bull market has this been?

Reasons for Divergences: Rotation, Deteriorating Market Conditions and Index Rigging

What likely accounts for the deepening massive divergences between record headline numbers and the bear markets plaguing most of the listed PSE firms?

I see three factors.

One. Rotation.

Active stock market participants, or mainly the punters, have jumped on the bandwagon to pump select big market caps on the Phisix. The herding effect pump has most likely been financed by dumping broader market issue holdings.

There has been circumstantial evidence in support of this. As I have recently pointed out, peso trading volume has been gravitating towards the Phisix, particularly to the top 10 best performing issues at the expense of the broader market.

These may also be signs that despite headline record highs and intense media bombardment by major institutions to promote and solicit public participation in equities (directly or indirectly via mutual funds, etfs, uitfs), growth in equity investments from the public have most likely been dismal. Record headlines may have most likely failed to draw in significant depositors to enable a broad market push.

Another possible circumstantial proof? Last week, the PSE implicitly warned about soliciting accounts by undercutting commissions[5]: “Investors are likewise asked not to be swayed by unauthorized discounted pricing schemes offered to attract people to buy shares.”

The dearth of public demand (via customers or clients) for equities seems to have incited price wars among the sellside for market share!

Simply awesome!

Furthermore, those touted or highly publicized big gains supposedly generated by mainstream funds have most likely emanated from momentum or performance chasing on key overpriced or overvalued index issues.

The broad based bear market only shows that any exposure on them will most likely lead to dramatic underperformances or a severe departure from the benchmark. Thus, equity fund ALPHA growth can only be attained by mostly chasing winners which have mostly been through index issues!

So if you want a job from the mainstream, chasing yields is the answer for acceptance!

And I have been stunned to discover of the huge management fees being remunerated on these funds (e.g. 1.5% of Net Asset Value, double digit cut from premiums on initial account openings on some of the mainstream funds). The supply side people are being highly compensated to just chase prices by dismissing risks!

And this signifies the ethical dilemma called the the agency problem in action. The agency problem had been dramatically crystalized in cinema by Mark Hanna’s ‘fugazi’ lecture on the neophyte and soon to be Wolf of Wall Street Jonathan Belfort. 

No wonder, the perpetual cheerleading!

Two. Deteriorating Market Conditions.

The negative advance decline spread that accompanied the path to 8,100 demonstrates of such entropy operating within the Phisix.

Even with last week’s pump 1.53% which on the surface would look broad based due to broad industry gain, advance decline spread has marginally been positive (7). [please see first chart above]

And this comes even as the entire week had been a perfect slate for the bulls; specifically the PSEi gained in May 11 +.19% , in May 12 +.21%, in May 13 +.18%, in May 14 +.3% and in May 15 +.64%.

Additionally while this week’s pump makes the appearance of broad market based gains, the 1.53% has been a product of surges in a few index stocks; specifically, a shocking 16.76% for Globe Telecoms, another stunning 9.05% for GT Capital, an incredible 4.26% for Universal Robina, 3.42% for BDO Unibank and 3.42% for DMC Holdings. In short, 3 of the best performing issues have been from the top 15 weightings of the Phisix. 

And the gains of these issues have been prominently reflected on their respective industries; services, holdings and industrials.

The fantastic pump on GLO was attributed to a reported 43% jump in earnings in 1Q 2015 even when top line grew by only 15% suggests of mostly accounting profits.

Yet the PSE posted Thursday’s PER for GLO at a whopping 68.46! Year to date GLO has surged 47.4% as of Friday, this means that whatever gains in headline earnings has been more than offset by frenetic price pumps! 

This means even more multiple expansions!

Such overvalued issues will suffer what I call as Price Earnings Trap. This means that such extreme level of overvaluations will eventually lead to even higher levels of PERs, whether earnings go up or down

On an earnings upside, speculative pumps will only lead to more outrageous valuations. On the other hand, on an earnings decline, a slowdown will initially bloat the PERs, prior to the market’s digestion and re-pricing of this.

At the end of the day, excessively overvalued issues will face economic reality.

Furthermore, this week’s substantial gains by the domestic benchmark have been accompanied by the LOWEST weekly volume for the year.

Yet this week’s volume has even been padded up by Wednesday’s Php 3.3 billion special block sales mostly from Century Pacific Food.

Also Monday’s Php 5.73 billion trading volume marks the LOWEST daily volume since November 10, 2014 at Php 5.510 billion.

Yet those domestic pumps have been kept in kibosh by foreign selling. Since the presidential visit to the PSE, where fawning officials acclaimed record stocks from foreign buying as C-O-N-F-I-D-E-N-C-E from the incumbent’s policies, foreign selling has accounted for four of the past 5 weeks!

Yet for the broader market, foreign participation which has broadly been positive for 2014 has hardly contributed to the upliftment of broad market performance.

To wit, the broad based bear market (mostly from 2013) has little been about foreign participation.

Third. Index Manipulation.

As I have been saying here, there will be NO record Phisix without the serial index pumping especially from the ‘marking the close’ sessions.

The gravitation of trading volume skewed towards Phisix composite members particularly the top 15 issues, the grotesque index overvaluations—specifically tilted towards Phisix issues that has been objects of repeated pumps, the growing massive divergence between headline index (seen) and broader market performance (unseen), as well as, the daily intraday actions—all converge to exhibit what looks likely as signs of the brazen rigging of the Philippine stock market.

Puzzlingly, marking the close only occurred in only one session of the week. Have these guys been tapped at on the shoulders by officials?

Nonetheless, a reduction of index pump has led to more panic buying day pumps combined with the afternoon delight pushes.

Oh as for those 69% in bear markets in banking stocks, based on 3Q declared earnings at the PSE since 2011-2014, only SECB has challenged the trend. Then why the massive pump only on the banking Phisix heavyweights?

Because these firms has important representation on the financial index and on the Phisix?

Additionally have all these pumps been about the coming national presidential elections?  To have a supposed legacy of economic feat via record bubbles that would work favorably for the incumbent's anointed in the elections? 

The intent seems as to propagandize the economy based on record stocks which in reality has been gamed.

And what of the sloganeering that record stocks equate to C-O-N-F-I-D-E-N-C-E based on G-R-O-W-T-H? How should this apply to the broader market dominated by the bears? Has general markets failed to grow?

Such massive divergence implies that Philippine record stocks have nothing been but a Potemkin Village: Record Outside, Bear Market Inside

And finally just how can record Phisix sustain a run when the bears appear to be getting more recruits than the bulls? 

Remember 7 of the 30 issues or 23.3% are in bear markets. This means that index managers would have to do more than the 15-20 issue rotational pumps. Question is do they have the sufficient resources?

Perhaps they need more advertisements.

Philippine Treasury Market in Turmoil: The BSP Dabbles with Fed’s Bailout Tool called Term Auction Facility (TAF)!

Media reports that the Philippine central bank, the Bangko Sentral ng Pilipinas has been considering to adapt the US Federal Reserve’s tool called Term Auction Facility (TAF) to manage “liquidity”. 

The TAF is a technical euphemism for bailout measures targeted at rescuing troubled banks. That was how it was used by the FED in 2007.

Under the TAF, central bank lending to banks will be coursed through, other than the discount window, but through an auction designed to shield the identity of the distressed borrowers.

The TAF, according to James Felkerson of the Levy Economics Institute in a 2011 study, represented one of the major bailout instruments (13% share of the horrific $29 trillion of bailout funds!) used to rescue the banking system NOT only on US banks, but more importantly, foreign banks which constituted the bulk of borrowers, mostly from the Eurozone.

Here is Mr. Felkerson’s description of the TAF[6] (bold mine)

The Term Auction Facility (TAF) was announced on December 12, 2007. The TAF was authorized under Section 10B of the FRA and was “designed to address elevated pressures in short-term funding markets” (Federal Reserve 2007). Historically, depository institutions have obtained short-term liquidity during times of market dislocation by borrowing from the discount window or borrowing from other financial institutions. However, the “stigma” associated with borrowing from the discount window led many depository institutions to seek funding in financial markets. Given pervasive concern regarding liquidity risk and credit risk, institutions resorting to private markets were met with increasing borrowing costs, shortened terms, or credit rationing. To address this situation, the TAF provided liquidity to depository institutions via an auction format. The adoption of an auction format allowed banks to borrow as a group and pledge a wider range of collateral than generally accepted at the discount window, thus removing the resistance to borrowing associated with the “stigma problem.” Each auction was for a fixed amount of funds with the rate determined by the auction process (Federal Reserve 2008a, p. 219). Initially, the auctions offered a total of $20 billion for 28-day terms. On July 30, 2008, the Fed began to alternate auctions on a biweekly basis between $75 billion, 28-day term loans and $25 billion, 84-day credit. The TAF ran from December 20, 2007 to March 11, 2010. Both foreign and domestic depository institutions participated in the program. A total of 416 unique banks borrowed from this facility. Table 1 presents the five largest borrowers in the TAF. As for aggregate totals, 19 of the 25 largest borrowers were headquartered in foreign countries. The top 25 banks, all of which borrowed in excess of $47 billion, comprised 72 percent of total TAF borrowing. Of the 416 unique participants, 92 percent borrowed more than $10 billion. Of the $2,767 billion borrowed by the largest 25 participants, 69 percent ($1,909.3 billion) was borrowed by foreign institutions. The Fed loaned $3,818 billion in total over the run of this program.

Since there is no such thing as a free lunch, government rescue or loans to politically preferred institutions carry both opportunity costs and unintended consequences.

When government spends on loans to banking system, the opportunity costs for such government action will be resources that could have been spent on other government programs. So the opportunity costs of rescuing banks are political spending on welfare, infrastructure, military, bureaucracy and other political concerns. 

But the most important opportunity cost is that of the market place. Resources used to bailout banks for political purposes means resources that should have been used productively by the marketplace, other than the messed up politically privileged banks.

In short, political spending means a transfer of resources from high value to low value goods or services.

In layman’s terms, bailouts signify an invisible transfer from the average citizen in support of zombie politically privileged institutions.

Of course bailouts do not only signify transfer of resource, they entail transfers of risk. Despite the bailout, should the borrowers fail and defaults on such loans, the losses will reflect on government’s balance sheet as deficits, and therefore, deficits eventually fall on the shoulders of taxpayers (via higher debts first then higher taxes) and of currency holders (via inflation).

The unintended effects will be transmitted—as the BSP chief introductory quote above, who channels a Bastiat—in the ‘broader context’ as unseen long-term consequence, rather in ‘face value’ or immediate visible ramifications.

So only those who believe in the fantasy that the world thrives in abundance will see government loans to any institutions as free lunches or will have no bearing on society.

Of course as noted above, TAF is just one of the many tools employed by the FED. And for the BSP to contemplate on TAF may imply a slippery slope towards more copying or adaption of more of the FED’s bailout tools.

Now the Php 64 trillion peso question: why mull over liquidity measures?

As I have been saying here, the battle arena between the bulls and the bears have been waged, hardly at the domestic stock markets, but at the tightly held Philippine treasury markets. Yes the stock market will be the last to know.

Since yield curve has been rapidly flattening since December, there have been feverish attempts to quash the treasury selloffs. From the 1 month treasury, I highlight the considerable pumps to rein on the dumps over the past two weeks.

The result of such interventions has been a whack-a-mole effect—interventions in one maturity have led to yield surges in other maturities, thus a sharp increase in treasury market volatility!

As noted at the preceding paragraph, the one month bill has been subjected to repeated pumps. Apparently, the interventionists forgot to look at the gauges or their computer monitors as to permit the temporary emancipation of bond bears.

Last Friday based on the investing.com data, coupon yields of one month bills EXPLODED by a whopping 126 bps to mark the highest level since 2012 (right window)!

Since treasuries have mostly been held by the government and banks, then it must be banks which must be experiencing strains.

 

So who has been dumping 1 month bills? And importantly why? Have they been doing this out of evaporating liquidity? From funding pressures out of the growing balance sheet mismatches perhaps?

This week, 3 and 6 months have been under pumps, but maturities of 1, 2 and 3 year papers have vaulted higher. The yield of the 1 year note has reached 3 year highs, while the 2 and 3 year equivalents have posted 2 year highs. There have been minor yield curve inversions even within 1-7 year papers! 

Yes these are striking signs of bedlam at the domestic treasury markets!

The BSP repeatedly tells us, like an incantation, that in terms of statistics the banking system has been liquid and sound. Yet if so why then the colossal pushback being expressed in terms of the frantic selloff at the treasury markets? Because the nasty side effects from the ‘broader context’ have begun to assert their strengths?

Here is what I wrote last December[7]

Current developments in the Philippine bond markets suggest that yields have been rising across the curve but the pressure of increases has been in the short (bills) maturities than the longer bonds…thus the flattening. The flattening of the yield curve thereby signals the ongoing tightening of monetary conditions. Rising short term yields are symptoms of emergent strains in the Philippine financial system.

Let me further add that if the current ruckus in the bond markets will be sustained, the BSP will be forced to intervene. They may inject funds into pressured financial institutions, they may cut interest rates (contra mainstream expectations of higher rates), or at worst, if the problem spirals out of control, they may resort to bailouts.

And so has the BSP’s TAF talk signified a trial balloon (signaling channel) to mitigate pressures at domestic treasuries? So bailout has now been in the cards? 

Yet hasn’t it been contradictory if not satirical to hear of discussions of the use of bailout tools (rationalized as macroprudential tools) in the midst of what has been popularly perceived an endless boom?

Will the TAF be followed by other Lending of Last Resort (LOLR) bailout tools that eventually end up with deposit haircuts?

Yes I do expect some heavy interventions in the coming the week.

But if the current volatility has manifested an outlet valve from balance sheet impairments, then the impact from day on day market interventions will be short-lived.

The next measures will be the cutting of rates and more macroprudential (bailout) instruments.

Statistical Growth Pumps in OFW and Industrial Production? Price Deflation in a Credit Finance Construction Boom?

The Philippine government released last week some GDP sensitive economic data that shows—all of a sudden—of strong rebounds.

The BSP proudly headlined that OFW Personal Remittances posted “stronger growth” in March 2015 which they say represents the “highest monthly growth registered in 15 months”. 

Remittances rebounded sharply after three in four months of near stagnation.

Paradoxically, this comes as the World Bank warned of a sharp slowdown of remittance growth in 2015 due to ongoing deterioration of external economic conditions.

Also, the Philippine industrial production amazingly leapt by 7.4% in March. Ironically too, such gains have been preceded by two months of negative growth.

Has the recent slumps in OFW remittances and Industrial production been a product of statistical quirks from which current gains has smoothened out?

Or has the current data been another statistical pump to justify the end of May release of 1Q 2015 GDP of 6+% and above?

Oh, construction wholesale prices continue to post DEFLATION or price contraction for the month of April. 

This marks the FIFTH successive month of falling prices (year on year; see left) in the face of a supposed construction boom! Construction prices grew by Z-E-R-O (month on month) in April (middle)!

If prices represents the balance of demand and supply then falling prices must mean faltering demand (amidst a boom??!!) or a deluge in supply (coming from where—manna from heaven??)! Or a combo.

Given the still hefty rate of bank loan growth by the industry in March at 24.27%, but far or about half from the 50-60% in 2013-2014, price deflation should theoretically NOT be happening.

That’s unless those issued bank loans have been used for other means—rollover of existing loans (manifested by falling money supply) or speculate on property (land, condos, etc…) or on stock markets instead—than to finance construction projects.

It’s one of statistics that DEFIES the ‘face value’ numbers imprinted on the national income statistics called the GDP. And both statistics shows that prices hardly play a meaningful role in the economic coordination balancing process. And yet the government and their mainstream lackeys still call these numbers economic data!

Deflation in the face of credit financed construction boom?

Interesting.

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[1] See Phisix 7,800: Record Phisix as the BSP Continues with Deflation Spiel! March 9, 2015

[2] Frederic Bastiat, That Which is Seen, and That Which is Not Seen Bastiat.org

[3] Edwin Lefevre Reminiscences of a Stock Operator Chapter 17 p.185 nowandfutures.com

[4] - See Record Philippine Stocks? Bear Markets Prevail Over the Industrial Commercial Sector! (52% of index and 64% of the industry!) May 15, 2015;

- See Record Phisix? Bear Markets Dominate the Service Sector! (33% of index, and 49% of all industry) May 14, 2015

- See Record Phisix? Bear Markets Rule the Holding Sector!!! (43% of Index issues and 55% of the Overall Sector) May 13, 2015

- See Record Philippine Property Stocks? Bear Markets in 47% of Index Firms and in 53% of Firms in the Entire Property Sector!!! May 12, 2015

- See Charts of Non Index Bank and Financial Stocks: Bear Markets Rule! May 11, 2015

[5] Philippine Stock Exchange PSE warns public of investment scams May 12, 2015

[6] James Felkerson $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient Levy Institute of Economics December 2011

[7] See Philippine Bonds Close the Year with a Rally; Flattening Yield Curve as Business Cycle Indicator December 29, 2014