Wednesday, December 30, 2015

Philippine Bonds: Yearend Window Dressing Rally Temporarily Relieves Negative Yield Curve But Zero Bound Spreads Remain The Dominant Theme


Like last year, bond manipulators apparently cut short their holiday vacation in order to conduct a year end (three day) window dressing session.

Of course, the goal of the window dressing operations have not only been to bid up prices of domestic bonds (and therefore lower yields), but more importantly to manage the yield curve which has reached alarming conditions.

Curiously last Friday, in what seems as an attempt to widen the spreads, 10 year yields spiked to 4.6%! And perhaps in realization that while a selloff in the 10 year bonds may indeed widen the spreads, higher yields means HIGHER interest rates! So bond managers went into a turnaround to focus instead on the bidding activities on the front end.


So the window dressing operations as seen from week on week (top) and from two weeks (mainly from three trading days—two from this week’s holiday truncated session and from last Friday). 

Again the focus of the bids were on the short end (green rectangle at lower window)


Seen from a year to date basis, the massive three day bidding sessions only eased part of the upside pressures on the overall Philippine treasury spectrum. Yields have generally risen with the exception of 1 and 10 year treasuries. 

Since 10 year have been the benchmark for interest rates, apparently bond manipulators have kept its yields from rising in 2015.


Seen from the yield variance of 10 year relative to T-Bill counterparts, the 3 day window dressing operations managed to lift the spreads marginally away from negative. 

That’s with the exception of 10yr 3 months which spread has crashed anew!

It’s important to point out that the flattening inversion process has been a trend.

The above shows of the one year and one month trend. A trend, which has only accelerated in 2014-15 (see long term trend below). 

And bond volatility has lately emerged out of the intermittent interventions from faceless bond manipulators.


The flattening to inversion process as seen from the yield variances of the 10 year bonds relative 1 and 2 year notes. 

Bond managers have elevated the 10 year 1 year spread, but not the 10-2 year.


The same character can be seen with the front bonds (3-5 year relative to the 10 year). The difference has been that yields of all three has recently inverted with the 10 year contemporary (see blue rectangles). 

Said differently, coupon yields have been higher for these short end bonds relative to the 10 year. This means profit windows from yield arbitrage have closed to virtually nil.

Last week’s window dressing operations buoyed the spread out of negative. Nonetheless the variance of all three remains at zero bound or spreads are at the borderline with negative. The jury is out in 2016 as to the lasting effects of this week's window dressing operations. My bet is that we should see a return of inversion.

The above developments only reveals that contra mainstream and establishment announcements, pressures on financial liquidity as expressed through credit activities has been simmering or mounting. 

This alternatively means that considering the heavy dependence on credit to spike GDP for instance Php 3 of credit to generate Php 1 of GDP in the 3Q, the steep flattening or signs of invesion translates to various risks (credit, interest rate, market and economic) that are being amplified.


The flattening inversion process as seen via the spreads of the 10 year relative shorter counterparts on an annual basis since 2009.


The flattening inversion process as seen via the spreads of the 20 year relative shorter counterparts on an annual basis since 2009.

Again in contrast to the mainstream whom largely remains intentionally blind or oblivious or unconsciously ignorant of the influence of bond yield spreads on credit activities, the tightening of spreads have begun to impact bank credit activities. 

You see, the consensus 'experts' are only concerned with prices involving stocks and property or asset bubbles. The same experts seem as programmed to see other prices as existing in a vacuum!

Yet the narrowing of spreads or emergence of negative spreads even comes in the face of DISINFLATION.

10 straight months of 30%+++ money supply growth 2H 2013-1H 2014 spiked CPI inflation, since then, M3 has crashed which was reflected on government CPI. November's CPI bounce has yet to establish itself as a bottom. Chart updated to include BSP's November liquidity and bank credit data.

While credit growth has ebbed from the 2014 peak, it remains on a double digit clip. Yet no one dares ask, given all the streak of double digit credit growth, where has all the money been flowing to? Why the disinflation?

Other emerging market nations like Vietnam experienced negative yield curve due mostly to a burst inflation pressures. Not here.

The takeaway: There is NO SUCH thing as a Free Lunch FOREVER. The unforeseen cost from borrowing from the future to spike statistical GDP has not only begun to surface, it has been spreading and escalating. 

And shouting statistical talismans or manipulating markets will not do away with the eventual revelation of unintended consequences from the accrued sins derived from redistributionist 'trickle down' capital consumption policies.

Phony Boom has now been morphing or transitioning into a Bust.

Tuesday, December 29, 2015

Phisix Ends 2015 with Marking the Close Pump!


All actions have consequences. 

Price fixing actions or the ongoing blatant market manipulations at the Philippine Stock Exchange will have ramifications too.

While the consensus and or the establishment continue to deliberately ignore or overlook on the brazen misdeeds (largely because of the benefits from political-economic rent) transpiring at the PSE, eventually history will put into context the (untoward) effects of such price distorting actions. And current developments appear to already been indicative of such direction.

So my continued posting on these have been intended to expose on how manipulations will not only aggravate market distortions or exacerbate on the imbalances, but most importantly it will fail to attain the objectives and worsen the outcomes.

Today December 29 marks the end of the trading activities at the PSE for the year 2015.

After all the ‘this time is different’ boom scenario sold by the establishment from the year’s nascency, the PSE ended the year DOWN 3.85%. 

Virtually NO one in the consensus saw this coming as every ‘experts’ predicted the linearity of price momentum. Importantly the public was been blinded by media’s propaganda and statistical manipulation employed by the political order.

Of course, what makes 2015 remarkable has been the massive or intensive use of market manipulations. "Marking the close" has been the most frequently used index management tool. Yet there were other instruments used to massage the index, like afternoon delight pumps and panic buying during global selloffs. 

All these brought about a series of record highs which peaked in April 10 2015 at 8,127.48. Unfortunately, a short lived glory.

And even then, market manipulations were basically concentrated to a few issues or a rotational pump in 10 out of 15 biggest market cap issues even as HALF of the PSE universe had fallen to the domain of bear markets.

Eventually it turned out that despite the PSE’s censorship, corporate fundamentals had shown signs of deterioration as manifested by the negative NGDP growth and deficit in earnings of listed companies in 2Q.

Manipulations didn’t save the Phisix from the August 6.7% collapse, as with the negative annual returns for 2015.

Well anyway, what a way close 2015.

Marking the close again had been featured during the last two trading days of year (perhaps as part of window dressing)!


51% or 19.91 points of losses had been shaved at the pre-runoff to end Monday December 28’s trading session down by .27%.  

At Php 3 billion, Monday’s session highlighted the LOWEST volume since January 2014!


It’s no different today where 46% or 27.01 points of the intraday losses were pared down from marking the close.

What’s incredible has been that while the pump had been ostensible in all 5 major sectoral indices, it appears that only a few issues delivered the gist.

The major issues that buoyed the index from big losses were…


JG Summit which was pumped 2.8%! Negative suddenly became positive!

Robinsons Land was likewise pushed 1.3%! Again negative transformed into unchanged!


BDO was spiked by 1%! Same story negative morphed into positive!

From the peak of 8,127.48, the Phisix closed 2015 down 14.46%.

This shows that at the end of the day, manipulations will fail.

(charts above from colfinancial, PSE and technistock)

Monday, December 28, 2015

Quote of the Day: The Government Can Not Only Evoke Fear But Also Superstitious Reverence

The government can not only evoke fear in its victims; it can also evoke a sort of superstitious reverence. It is thus both an army and a church, and with sharp weapons in both hands it is virtually irresistible. Its personnel, true enough, may be changed, and so may the external forms of the fraud it practises, but its inner nature is immutable.
This quote is from page 182 of H.L. Mencken’s essay “On Government,” as reprinted in the 1996 Johns Hopkins University Press collection of some of Mencken’s essays, Prejudices: A Selection

tip of the hat to Cafe Hayek

Thursday, December 24, 2015

Tuesday, December 22, 2015

Phisix 6,950: Another Remarkable Price Fixing Day!


Today marks another remarkable price fixing day!

First, price fixers deployed a late afternoon delight pump on the holding (right) and the industrial sectors (left). 

Massaging the index started with the holding sector where pumping actions came at mid afternoon. 

On the other hand, the industrial sector’s panic buying appeared near the runoff period. But both sectors hardly exhibited any significant 'marking the close' actions.


The end minute price fixing was instead applied to other two sectors.

To ensure that the Phisix closed up significantly higher, index managers cemented this with a twin 'marking the close' pump on the Financial and their present favorite or darling,  the property sector.

Marking the close constituted a whopping 85% of the Financial sector’s .81% gains, as well as, a mind blowing 82% of the property sector’s .87% advance. [charts above from colfinancial]

Part of the property sector's windfall emerged from ALI’s .56% advance today.



Yet ALI's gains emerged from a last minute astounding 1.13% pump which suddenly converted losses (red digits) into gains! 

Meanwhile, SMPH's last minute push was much less than that of ALI.


As for the financial sector, a staggering 80% of BPI’s 2.69% advance emerged from the same dynamics! 


And so with 61% of BDO’s 1.26% gains!

Just awesome!


The PSEi's index pump as seen from different providers (Bloomberg, technistock and colfinancials)


Today’s staggering index manipulation came as decliners beat advancers 92-67!


For the second day, broad markets were sold but index were pushed up. The difference between yesterday and today has been the flagrant use of late afternoon delight pump coupled with marking the close! (tables from PSE)

Notice too that the index pumps came with very slim volumes: Php 3.999 billion (yesterday) and Php 4.59 billion (today). 

However today’s end of the day volume was recorded at Php 34.771 billion. And that’s because Php 30.185 billion or 86% of volume arose from block sales of Star Mall.

The PSE lately warned the public about investment scams. Curiously what do you call price fixing or marking the close?

My post has been intended to document the ongoing rampant and brazen stock market manipulations for posterity or for history. Years from now, perhaps some people may come to see how things came about or how today's distortions shaped future price conditions.

Quote of the Day: Monetary Policy Cannot Solve All Economic Problems That May Ail Our Economies; What happens When The Fed Stops Distorting Prices?

The authority of monetary policymakers to intervene in financial markets has come to be accepted and expected. Whether the purpose is to change the relative price of various assets, such as long vs. short dated Treasuries, or to alter the allocation of credit, such as Treasuries vs. mortgage-backed securities, the result has been a much more interventionist central bank. The belief is, of course, that central bankers know enough to control relative asset prices with sufficient precision and that the transmission mechanisms and consequences are sufficiently predictable that policymakers can better control real economic growth and employment, and now, financial stability.

I find this a dubious proposition at best. For central banks to act as if these conditions exist suggests to the public that monetary policy has great ability to fine tune economic outcomes. That means monetary policy makers may well be accepting more responsibility for managing economic outcomes than they, in fact, can deliver. This is a recipe for failure and can undermine the public’s trust and confidence in the central bank. So maybe a little more humility on the part of central bankers and the public regarding what they monetary policy can accomplish is in order and a little less intervening just because it can, or has the power or authority, may be prudent. Monetary policy simply cannot solve all economic problems that may ail our economies.
(bold added)

This quote is from Charles Plosser former President, Federal Reserve Bank of Philadelphia and former Dean, Graduate School of Business Administration, University of Rochester as interviewed by the Money and Banking blog

More juicy quotes (bold mine)
As I mentioned, no regulatory authority anywhere in the world, no central bank no financial supervisory agency, saw the crisis coming. What makes us think we will spot the next one? Whenever it arises it will surely come from somewhere the authorities were not looking.

We face a number of challenges. First we have the problem of defining financial stability. I know of no good definition. Without a definition how do we know if we have succeeded? How do we know if we have over compensated and reduced risks too much without some metric that tells us of the trade-offs? Implicit in the Dodd-Frank legislation is the view that if only we could write enough rules and prohibitions on the financial sector we could solve the problem. I believe this is a bit like the dog chasing its tail, and equally futile.

Second we should acknowledge that stability risks can move around. Where regulators look, those risks are unlikely to be found. The challenge is figuring out where they will show up next. Financial markets are adept at packaging and repackaging risks in forms that the market will buy. There is nothing inherently wrong with this except regulators will always be behind the market developments.

Finally, the central bank should be particularly vigilant in not artificially encouraging financial imbalances or stability risks through its monetary policy actions. Unfortunately, this may bring financial stability and the goals of monetary policy into stark conflict. There is an ongoing and important debate on this issue. That is, should monetary policy be used to address financial stability risks or not; what if it’s a source of the risks?

Today the stated goal of the interventions undertaken by the Fed such as the asset purchases or the maturity extension program have been intended to encourage risking-taking and alter the portfolio balances of economic agents. If successful, these actions distort market prices. One stability risk worth considering is: What happens when the Fed stops distorting prices?
Wow! Ambiguity in the definition of financial stability, stability risk in a state of perpetual flux (or also policy or political response as 'fighting the last war' or dealing with past rather then present evolving problems) and most importantly, treating symptoms while encouraging the disease (financial imbalances) seem as an implied rebuke on central banking's "macroprudential policies" and the Basel Standard!

Infographics: 33 Indicators that Bitcoin is Alive and Well and Will Grow in 2016

The Bargain Fox explains why bitcoins, in spite of present ordeals, hasn't been slowing down and will continue to grow in 2016.
When Satoshi Nakamoto launched Bitcoin in January 2009 it was the beginning of a revolution. The original block in the blockchain was encoded with a bleak snapshot of the failing financial system, a small quote from the UK Times newspaper:  "Chancellor on brink of second bailout for banks." 

It was banks, central control and corrupt government policy, that the fledgling cryptocurrency was hoping to replace. While it has not yet overthrown the financial institutions of old, nearly 7 years on it's still closer to doing so than many people had imagined.

Like all groundbreaking technologies there were technical teething problems, naysayers and outright battles. Some governments tried to outlaw its use (and some have succeeded). The negative PR stemming from the currency's ties to the illegal dark net markets may have scared some people off. And the early adopters were well and truly screwed over when they stored their digital funds in the Mt. Gox exchange, because hundreds of millions of dollars worth went missing.

Yet here were are, closing in on 2016 and bitcoin is alive and well. In fact it's doing better than ever and our new infographic demonstrates that the only way is up, in terms of value and usage.

Indeed the dollar price of BTC has been steadily rising since the start of the year, regaining ground after its first major crash. In just the past 3 months it has doubled its value by a $200 increase and there's no sign of that slowing down as 2016 emerges.

As for the actual trading volume at the exchanges and the overall growth of the exchanges themselves - well both are skyrocketing. From October 2014 to October 2015, OK Coin from Singapore has grown 847%, and even the more western-centric BitStamp has doubled within the year. The market is managing to move $289 million worth of BTC on a daily basis, more than Western Union ($216m) and closing in on PayPal ($397m).

Meanwhile online and offline merchants are increasingly adding bitcoin as a payment method, supported by bitcoin payment service providers such as Coinify, Europe's leader in processing wide range of digital currency payments. Not just to keep customers happy but because it actually costs them less to process. A negligible 1% is charged for BitPay premium members compared to the major credit card networks, which range between 2% and 6%. This has contributed to the jump from 65,000 merchants accepting BTC to 100,000 plus. While we can imagine some scenarios where it isn't beneficial to the customer, retailers like TigerDirect are proud to reveal that bitcoin prevents fraudulent chargebacks which are very common with customers using credit cards.

In short all you really need to know is that giants like Microsoft, Expedia and Time Inc. have embraced BTC and many others are following suit. August 2015 saw BitPay's most successful month, recording 70,000 transactions. 

In turn, as this demand has increased so has the venture capital funding the user-friendly apps, bitcoin ATMs, exchanges, and other technology. In 2012 only $2 million was pumped in to the industry. So far in 2015 this has reached $469 million! 

Perhaps the last remaining concern for the bitcoin revolution is overcoming volatility, the freak fluctuations in value. Thankfully the facts don't lie. As the market has grown the impact of panic and large volume trading has lessened. From 2011 to 2015 the line is quite simply going down. For regular traders who exploit volatility this might not be good, but for those who want a simple electronic currency that is out of the reach of the old monetary guard, then we're on the revolutionary track that Satoshi Nakamoto laid down. 

For 33 indicators that prove the only way is up for Bitcoin, check out our new infographic.
Disclosure: Presently I do not own bitcoins. But sometime in the future, I may test the waters. 

As noted above, bitcoin or cryptocurrencies are in the process of evolving. And bitcoin or cryptocurrencies have been challenged mainly by authorities who see the emergence of online decentralized payment and settlement platform as threat to their monopoly control of central banking fiat money. Nonetheless, cryptocurrencies  will likely play a much bigger role in the coming years.
Made by: BargainFox

Sunday, December 20, 2015

Red Alert: Philippine Bonds Warns of Rapid and Dramatic Deterioration of Domestic Liquidity Conditions!

A loose Fed monetary policy (i.e., a positive sloping curve), sets in motion a false economic boom — it gives rise to various false activities. A tighter monetary policy, which manifests through an inversion of the yield curve, sets in motion the process of the liquidation of false activities (i.e., an economic bust ensues).—Austrian Economist, Frank Shostak


In this issue:

Red Alert: Philippine Bonds Warns of Rapid and Dramatic Deterioration of Domestic Liquidity Conditions!
-Yields of T-Bills Soars!
-Yield Spreads: From Flattening to Inversion!
-Yield Inversion: Symptoms of Balance Sheet Problems
-The Implications of Negative Spreads
-Weak Peso Compounds on Liquidity Squeeze, the 3Q Foreign Investments as G-R-O-W-T-H Mirage
-Phisix 6,900: Desperation Calls For The Rampant Use of Marking the Close Pumps!

Red Alert: Philippine Bonds Warns of Rapid and Dramatic Deterioration of Domestic Liquidity Conditions!

I am supposed to be on a holiday break, but recent developments at the Philippine bond markets have been too compelling to ignore because they have been signaling significant turn of events.

A week ago, I wrote about the intensifying signs of the flattening/inverting of the domestic yield curve as one of the factors that should not only inhibit any meaningful return of risk appetite, but likewise amplify the risk of an economic recession, as well as, risk of a credit crunch.

Apparently, this week’s market activities only reinforced my suspicions.

Yields of T-Bills Soars!


The above represents nominal BPS week on week changes

As of last week, yields of 3 and 6 months bills have rocketed! 5 year yield also jumped!

Perhaps most of the bond yield manipulators went on a Christmas vacation too soon for the surge in yields to have been unleashed.

Nevertheless, to repeat this has NOT been a HOLIDAY dynamic.

The following charts of the yields of 1, 3, and 6 month should tell us why.



Whether seen on a weekly (left) or monthly (right) basis yields of ALL three short term bills (again 1, 3 and 6 months) have spiked to MILESTONE HIGHS!!!

To put milestone in perspective, the weekly rates have been HIGHEST since 2014, while the monthly rates have likewise been HIGHEST since 2012!

However, investing.com charts have been limited to these time frame perspectives. And I suspect that the current yield have reached levels MORE than the demonstrated years.

And with the longer end little changed, the result has been a drastic and a dramatic curve flattening!

What you see depends on where you stand. So let us widen the angle to see how bond yields performed on a year to date basis.

Again the same dynamic holds: The yields of the short to mid end curve have been ascending FASTER than long term counterparts.

And that’s the reason why we have seeing the flattening to inversion process.

Now such dynamic now applies to almost the entire domestic bond spectrum!

Yield Spreads: From Flattening to Inversion!

Nevertheless, considering that the 10 year bond yield has been used as the mainstream’s benchmark, I will use them here to compare with the bills and notes counterparts.

I have noted during the mid-week that the coupon yield of the 1 month bill soared to a shocking 3.96%, but the yield has partly backed off from its high last Friday.
Now the above charts shows the spread between soaring yields of T-bills and 10 year bond equivalent.

The 10yr-1 month spread has narrowed to just 66 bps! (upper window)

The 10yr 3 month spread has dived to just 140 bps! (middle window)

And worst, the 10yr 6 month has collapsed to an astoundingly paltry 18 bps differentials! (lower window)

In short, the front end of the curve appears to be fast approaching an inversion!

Again the above charts reveal that this has NOT been anomaly but an extant dynamic for at least one year. It’s just that recent developments have been accelerating or escalating!

Let us move on to the spreads of the 10 yr relative to longer 1 and 2 year notes.

Apparently both have been plagued by the same flattening conditions as with T-Bill contemporaries.

It’s true that the above spreads have somewhat or marginally widened from previous levels last week, but they remain at landmark lows (as shown by the red arrows)!

Moreover, like the front face, the spreads above have been flattening from last year, but has only intensified during the last quarter.

Understand that the 10yr – 2yr benchmark has been a favorite bellwether by mainstream institutions like ADB. So perhaps current improvement on the 10yr-2yr maybe due to interventions to facelift the curve’s conditions.

However whatever cosmetic changes being applied by manipulators, it appears that they haven’t been successful in the concealment of the inversion process.

As I have earlier pointed out, it’s not just flattening anymore, negative spreads have already appeared.

For the FOURTH STRAIGHT week, the 10 yr-3 yr yield spread remains NEGATIVE!!!!!!!!!!!!

…and apparently, negative spreads have not been confined to 10 yr and 3yr anymore, they have now been joined by….

…the 10yr-5yr where the curve’s spread just crashed to negative last week!

This is totally stunning!

Yield Inversion: Symptoms of Balance Sheet Problems

The crux is: The abrupt narrowing of spreads has now spread to envelop the entire Philippine treasury curve.

The question is WHY has this been happening?

The obvious main answer is that there is no such thing as a free lunch forever.

Balance sheet growth has inherent limits. The continuing massive bank credit inflation has caused short term rates to rise relative to the longer end.

Despite headline profits, many highly levered firms have HARDLY been generating sufficient cash flows to pay for existing liabilities. Many firms have been using NEW debt to pay for EXISTING debt. And these have partly been ventilated through heightened demand for short term loans. Importantly, these firms have been competing intensely with each other for access to these scarce funds.

Meanwhile, as part of exercise to meet current funding requirements, holders of existing short to mid end papers have also been frantically selling these securities to spur the upsurge in yields!

This is simply a symptom of the unraveling of malinvestments.

Remember, that only a few entities in the population have access to the formal credit (banking/bonds) system. Hence, the zero bound to negative spreads are symptomatic of increasing concentration of credit risks!

And such inversion dynamic appear to be signaling the intensification of financial stress within the system.

Now the mainstream would like to blame the US Federal Reserve for current developments. Yet the above charts exhibit that the FED may only be an aggravating factor and not its main cause.

The Implications of Negative Spreads

And think again of what the evolving spreads will do to bank lending activities. Or what will happen to the banking system’s maturity transformation (borrow short, lend long)?

The compression of Net Interest Margins will force banks to sharply reduce credit activities. And loans represent about half of banking assets.

And with the BSP’s 2009 pivot to spur domestic demand through “expansionary monetary policy” in order to embellish statistical GDP, this entailed the entrenched dependence on credit.



As of 3Q, for every Php 3 of loans issued by the banking system (BSP current production loans) such has only generated Php 1 of government’s inflated NGDP (GDP at current price)!

Given that I believe that NGDP has been INFLATED, then the credit/NGDP ratio or credit intensity must be HIGHER!
And any material reduction in credit activities will NOT only diminish statistical GDP, it would raise credit risk as well! Remember, credit money accounts for about 70% of domestic liquidity (76% M3 October 2015), hence a fall in credit activities will translate to a drop liquidity (money in circulation) which should distill into GDP (NGDP and Constant ‘real’ GDP)!

Think of what happens to asset markets too. If the so-called ‘fundamentals’ of asset markets have been juiced up by credit, then the reduction of credit activities will deduce to its deterioration.

And if asset market pricing (boom) has similarly been pillared by credit, then diminished credit activities would substantially lessen demand for risk assets!

Said differently, a reduction of credit activities will lead to a substantial repricing of the considerably overpriced and mispriced assets.

Hence, overpriced and mispriced assets maybe vulnerable to violent adjustments (a.k.a crashes)

2015’s surge in yields should also translate to financial losses for institutions who bought these debt papers during its heydays. However, accounting classification may have shielded them from revealing their actual status. The recent DBP ‘market manipulation’ controversy provides clues to such dynamics.

Now if half of the banking balance sheets have constituted loans and other the half have been divided into financial (and property) assets, and fees, then both will similarly be vulnerable to a downturn in economic activities and from a hefty repricing of assets.

To make a long story short, this means there will be a transmission and feedback mechanism through the sequence of slowing credit growth to NGDP to earnings to asset pricing to credit risk and vice versa.

Developments in the Philippine credit market have been in sharp contradiction to what the mainstream has been projecting. For instance Fitch ratings has recently sold the chestnut that Philippine banks appear to be in tiptop conditions. Fitch appears to be reading statistical leaves while overlooking market signals.

For most of the mainstream, statistics or historical numbers only matters. Crucial market signals, especially one that affects the core of the present GDP G-R-O-W-T-H template, much like basic economics, exists in a vacuum or a black hole.

Furthermore, if yield compression will force banks to substitute volume for margins, then obviously this will come at the expense credit quality, thereby amplifying credit risks.

As I recently wrote: So the banking system must be so desperate as to seek margins by gambling away depositor and equity holder’s resources through the assimilation of more credit risks by lending to entities with poor or subprime credit ratings.

Of course, higher yields don’t just imply credit risk, they also expose many sectors to interest rate risk!

Weak Peso Compounds on Liquidity Squeeze, the 3Q Foreign Investments as G-R-O-W-T-H Mirage

And to compound on the tightening liquidity noose has been the sustained weakening of the peso.

Not only will an infirm peso increase prices of imported items, it will reduce demand for peso assets, and more significantly, it will magnify the onus from foreign denominated liabilities. That’s because a weak peso means more pesos to service every US dollar debt owned.


The flagging peso continues to draw foreign money away from domestic financial markets. Foreign money exodus also contributes to a wobbly peso. It’s a feedback loop. Foreign portfolio according to the BSP posted net outflows last November.

Forgive me, but I would question government’s relentless efforts to exorcise the deterioration in real economic activities through the repeated shouting of statistical talismans.

By real economic activities I don’t mean constant ‘deflator adjusted’ prices. Recall that constant ‘deflator adjusted’ prices magically transformed negative into positive performances in 3Q GDP.

Instead, I allude to a living and breathing, and not an artificially constructed puffed up numerical economy.


While it may be true that government statistics which show foreign investments up 165% in Q3, one quarter does not a trend make.

Moreover, foreign investments numbers tend to be extremely volatile. Having said so, they don’t imply G-R-O-W-T-H!

History shows us why. From 2010 through 2015, two out of six years posted negative 3Q growth, specifically in 2012 -35.14% and in 2014 -44.32%. (green circles). So from a statistical perspective 3Q 2015 data shows of a base effect: current numbers reflect a reversal from the troughs of 2014.

Also this implies of little correlation or even causation with GDP. Foreign investments cratered even when GDP climaxed in 2012!

Additionally, correlation between foreign investments and the peso (BSP’s monthly average end of 3Q) have been loose so far. (top window) This again suggests that the low USD-php volatility in the recent past has had little influence on foreign investments. Such relationship may be altered when currency volatility crescendos.

Worst, historically, huge nominal gains have coincided with collapses, as seen in 1997 and 2008! (orange ovals)

And the same phenomenon applies even on significant gains in terms of % growth, as seen 1997, 2001 and 2005 (peaks in blue trend line).

Besides, foreign investments are not like foreign portfolio flows, where the latter tends to reflect on real time market activities.

Foreign investments have to be “approved” by respective government authorities or regulators. This means foreign investments have to undergo the political bureaucratic screening process by specific agencies based on technical legal guidelines as prescribed by the national government. So it would be obvious that such statistical numbers and or the release thereof would involve certain political elements or contain some degree of political influence. And given the embedded nature of politics on foreign investments, what stops the government from either ‘timing’ its release or embellishing such numbers? Given that government operates as monopoly, who will be there to verify on the authenticity of those numbers? Yet we are supposed trust those numbers.

Nonetheless there has been little evidence where the government’s recent liberalization contributed to the spike in 3Q foreign investments. That’s because except for agriculture and energy, it’s mostly the bubble sectors which benefited from the recent surge in foreign investments.

Besides, given the amplification of the risks of a global recession, this will not only affect foreign investments but likewise magnify risks of protectionism. Because inflationism represents an implied protectionist policy, it is INCOMPATIBLE with liberalization. And the consequence of inflationism will unfortunately (to my dismay as libertarian) lead to protectionist impulses or more politicization of the marketplace, the APEC boondoggle notwithstanding. The domestic strongman rule bubble already serves as manifestation of the rise of populist protectionist politics.

At the end of the day, with monetary conditions rapidly and severely tightening, unless such juncture radically improves, then 2016 should be a mainstream SHOCKER!

As final thought, if the shrinkage of domestic liquidity will lead to deflationary pressures, particularly in parts of the economy where areas or industries have been afflicted by excess supply and debt overhang, on the other hand, the weak peso will lead to inflationary pressures on areas dependent on imports. So the Philippines will likely see a coming stagflationary environment—a simulacrum of the post 1997 era.

Phisix 6,900: Desperation Calls For The Rampant Use of Marking the Close Pumps!

The Phisix stormed to a 1.96% gain over the week on a very low volume rip.

As for the volume, at an average of Php 5.55 billion, daily volume signified the FOURTH lowest for the year! So essentially sellers took advantage of aggressive bids to unload on high prices.

But what has really been striking has been the rampant “marking the close” sessions used to attain the week’s gains.

On Monday, the Phisix losses hit a peak of 1.8%, approached the runoff period down .64% but shockingly closed up by .16% from a spectacular two issue pump! Marking the close produced a whopping .81% swing to turn negative into positive!

And 58.2% of SMPH’s eye-popping 8.25% jump to a new record high came from a last minute pump. And so with GTCAP, where 82% of the day’s 6.02% gains came from marking the close.

Since SMPH ended the week at Php 21.8/share or down Php 1.15 from the record Php 2.95, it’s really sad to see how price fixing actions by some entities have led to undue losses on resources used for such desperation headline enhancing pumps.

The same applies to GTCAP which closed at Php 1,262, though up 3.19% for the week, had been down Php 37 or 2.8% from the Php 1,299 pump.

I posted the egregious price fixing session here.

This wasn’t limited to Monday.

Friday’s session saw the Phisix down by 1.09% prior to the runoff (see upper window). All of a sudden, the Phisix closed down by only .56%! This shows how 49% of the day’s losses had been wiped out from Friday’s price fixing session! A four issue pump had been used to bolster the index.

Hasn’t it been an oxymoron to think the Philippines have supposedly reached “developed economy” status yet depends on brazen price fixing or cheating its way to attain such ends?

Last week’s rally was more than just about low volume, it was also about divergence:

Among the 30 composite issues constituting the PSEi index, 23 issues posted advances, 6 posted losses while 1 was unchanged.

In contrast, the broad market was tilted heavily in favor of sellers (lower right window). Declining issues topped advancing issues by 99. Declining issues led in 3 out of the 5 trading days of the week.

Such divergence reveals of the cosmetic actions to festoon the headlines.

It’s really a spectacle to see how price fixers have been frantically attempting to prop the index up in the face of shrinking liquidity. It’s an example of picking up coins (pennies) in front of steamroller founded on hopium.

And sad to say hopium has never been a good strategy.