Sunday, May 03, 2015

Regional Meltdown Exposes The Fragility of Record Phisix

Public opinion is the worst of all opinions –Nicolas Chamfort from Maximes et Pensées 

In this issue

Regional Meltdown Exposes The Fragility of Record Phisix
-Index Managers Bruised from Selloffs
-It’s Not Just Stocks, Philippine Treasuries Sold Off Too
-More Signs of Market Based Credit Tightening
-When Access to Debt Shuts, Asset Channels Will Be The Recourse
-The Common Denominator of President Aquino and President Widodo: Mania
-Peak Debt and Shrinking Market Liquidity

Regional Meltdown Exposes The Fragility of Record Phisix

So Philippine stocks are not invulnerable after all. 

Index Managers Bruised from Selloffs

Despite regular attempts at “gaming” the index, last week’s action exposed the chink on the armor of index managers.

For an abbreviated trading week, the Phisix plunged by 2.92%!


Index managers had visibly been active but they virtually succumbed to last week’s selloff coming mostly from foreigners.

Monday posted another “marking the close” session (upper left window) that lifted the Phisix from shallow losses where index managers ensured that the local benchmark ended positive for the day. 

However, during the next three days, attempts at the ‘afternoon delight’ pump, which previously functioned as a setup for marking the closes, were repeatedly repulsed.

Interestingly last Friday, there had been closing minute pumps on some heavyweight issues, unfortunately, they seem to have been neutralized by dumps on the other big ticket issues.

A substantial reduction of market cap weighting by the top 15 issues to 79.32% from last week’s 79.72%, the lowest in four weeks, exhibits how the Phisix ‘dump’ has revolved around mostly the previous beneficiaries of the ‘pump’. 

In short, as of last week, the index manipulators have virtually lost control.

And considering that the Phisix has been down by about 5% from the April 10 record close of 8,127.48, the portfolios of index managers, whom have been responsible for maneuvering or engineering the index to a string of record highs, must be bleeding. Remember, record Phisix came with the deepening concentration of trading activities on the top 15 issues[1]. In terms of volume, this translates to heavy exposures by index managers to the 15 biggest market cap issues at record prices.

Again if leverage had been used to ‘pump’ the index, then sustained losses would likely mean prospective margin calls that would compel them to become eventual NET sellers. It would be interesting to see these index managers take on the opposite position sometime soon. Otherwise, ballooning deficits from equity losses will surface on their balance sheets.

Also index managers must be supplicating that foreign money ease up on the dumping—otherwise losses will mount and continue to puncture holes on their portfolios. 


Yet ironically hasn’t increased foreign participation, which coincided with record stocks, been recently trumpeted by the lapdogs of the incumbent political regime administration as signs of C-O-N-F-I-N-D-E-N-C-E? With heavy net foreign selling during the two of the past three weeks, whatever happened to C-O-N-F-I-N-D-E-N-C-E? 

Or will the current episodes of selling be denied and excused as mere profit taking activities? Will the establishment be consistent with their logic? If confidence drives the market, then both directions entail changes of sentiment.

Of course, no worshipper of the stock market bubble will admit that record stocks have represented nothing LESS than SPECULATIVE MANIAs anchored on hope of the perpetuity of free lunches. So denial will be rationalized.

But the tide so far still favors the index managers.

The degree of current declines can be construed as normal profit taking levels, similar to October and December episodes. The difference has been that the major declines during the last quarter of 2014 had been a global phenomenon, while the recent declines seem more of a regional dynamic. Besides, due to the successful pumps, the Phisix outperformed their global peers, this time the backdrop appears to have changed.

So next week should be an interesting week.

We shall see if the index managers will regain from their composure from this week’s nauseous bludgeoning. We shall see if they will successfully stave off further selling pressures and draw up or reshape the charts again to push the Phisix back to the 8,000 level. Or we shall see if record Phisix will now be in jeopardy.

It’s Not Just Stocks, Philippine Treasuries Sold Off Too

But last week’s intense stock market selling more than meets the eye.


If we broaden our scope to cover the domestic bond markets and observe their behavior in the face of last week’s stock market rout, we then observe that there had been a general rise of yields across the Philippine treasury curve (left window). 

That’s with the exception of the one month yield, which of late seems also very much under selling strains. But the difference last week has been that the upside yield volatility of 1-month bills appears as being “managed” by unseen forces.

In general, for this week, domestic treasuries had been sold off along with domestic stocks.

I have no idea if foreigners were responsible for last week’s selling pressures on Philippine treasuries as it had been for stocks.

Nonetheless, the selling trend on domestic treasuries has been a prominent phenomenon since November 2014.

Also despite the wild short term gyrations, which have transformed the various yield spreads (right window) into “noises” rather signals, yield spreads generally remain on a flattening trend—that’s if we use November 2014 levels as the reference point of comparison

Nevertheless, recent signs of ‘interventions’ seem as intended to steepen the yield curve and smoothen out activities in the short end.

So whether the selling activities has been a foreign or domestic dynamic, all these suggests of pressures building underneath the credit markets.

More Signs of Market Based Credit Tightening

Still, the flattening yield spread underscores tightening credit conditions by marketplace in spite of the pronouncements of the BSP.

And what looks like interventions to steepen the spread has so far only produced a whac-a-mole effect—controls applied to one area leads other areas to vent on the side-effects of accrued imbalances, thus the magnified fluctuations.

The transmission of flattening spreads could be seen via a sustained slowdown in BSP’s tabulation of banking loans which continues to scuttle or sink in March.


From the peak in July 2014, banking loan growth has been shrinking. The current rate of loan growth at 13.26% (as of March) has now skidded to December 2013 levels. Yet the rate of decline has been fastest from November 2014 through March 2015.

Contra the spin where the reduction of loan growth has signified effects of the BSP’s macroprudential policies applied to real estate, the decline in the rate of loan growth has been broad based and not limited to construction and real estate. This must have largely signified effects of the flattening of the yield spreads. 

From the bubble areas (left window) only financial intermediation has recovered. Yet has the growth in the financial intermediary loan portfolio been about leverage pump on stocks and properties? Have index managers accessed funding from the banking system to set a string of record Phisix? We will know soon.


And for those hoping for a robust recovery in retail activities, if loan performance for March serves as indicator, well, then the current number doesn’t seem sanguine for the establishment.

At 12.6% growth in March, BSP’s loan data for the trade industry has reached a June 2013 low!

Moreover, the rate of growth has virtually been collapsing since November 2014. On a month on month differentials, where February numbers registered 16.12%, March data extrapolates to a 21.82% crash!

But at least, as redemption, credit continues to grow… but at a sharply decelerating pace.

Yet for all such frantic race to build retail outlets, what are the implications of slowing credit activities?

How has the trade industry been financing their working capital and or expansions? Have they been funded from accumulated retained earnings? From personal savings? Or from non bank borrowing, perhaps? Or could it be current developments has been reinforcing signs of a hissing shopping mall bubble?

And that’s from the supply side. On the demand side, even the limited number of population who has access to banking system[2], consumer loans have been dropping since November (right). Record auto loans appear to have inflected. 


Furthermore, the formal economy personal savings rate has been steeply rising since the recent nadir during mid-2014. The recovery of personal savings rate coincides with the peaking of the statistical CPI.

Have these signified as the increasing ‘social demand’ for money, a symptom of the first stage of inflation, where price inflation has been seen as a transient phenomenon, thereby prompting consumers to defer on present purchases into the future, and stash money instead? Has current surge in savings also been a symptom of how resident consumers have been intensely harassed from the 9 consecutive months of 30+% growth in money supply? 

Add to this equation the foundering growth in OFW remittances.

So if consumer demand seems to be stalling and supply side has been sharply slowing then where will the industry’s G-R-O-W-T-H come from?

Will revenues and income just fall from the skies like manna from heaven? Or will these just emerge out of statistics as the consensus experts think they have been?

In the general industry (excluding government activities), banking loans to only the mining and agricultural industry has evinced modest signs of credit growth. The rest have been declining. So where has G-R-O-W-T-H, if there have been any, been obtaining their finance?

Just a reminder, current developments have signified as continuing trends from the 4Q 2014 which paradoxically grew by 6.9% according to the government! 6.9% GDP really?

When Access to Debt Shuts, Asset Channels Will Be The Recourse

And here is more bad news for consumers. 

The crash in money supply growth as measured by M3 seems not only to have hit the floor, they appear to be reemerging again. The BSP reported that March money supply have reaccelerated to 9.4% year-on-year from 8.5% last February, a second month of recovery. 

Since the BSP says that the increase in money supply has been due to demand for credit, where claims on private sector and other financial institutions account for 72% of March’s M3, a sustained bounce on M3 will eventually reflect on statistical CPI.

And the BSP’s March statistical CPI seems to mirror M3 growth.

Hence, a temporary boost in CPI would imply more reasons for consumers to postpone from current spending.

Given how financial repression policies has vastly distorted the economy’s resource allocation, areas the like agriculture and fishing, which has been underinvested and has underconsumed resources will be prone to spikes in prices. So these areas will be sensitive to surges in money supply growth.

On the other hand, overinvestments and overconsumption of resources to bubble industries will suffer from prospective gluts and therefore downside price pressures or what mainstream calls as “deflation”.

Price deflations brought about by pressures from intractable debt levels have really been about bursting bubbles.

The BSP’s March CPI data already reveals how food, education and health have been the key sources for price inflation pressures. Ironically on a month to month basis, March data reveals of NEGATIVE one tenth of one percent (-.1%) or DEFLATION!

Nonetheless since money supply has largely been a function of domestic credit activities, a continued thawing of credit growth should lead generally to more downside price pressures. But because of the entrenched imbalances in the distribution of production system brought about by aggregate demand-financial repression policies, price changes will be relative. Additionally, such imbalances imply that some areas will be more price sensitive to changes in government policies.

And more downside price pressures that could be backed by a potential downshift in statistical GDP will justify the BSP governor’s tacit desire—as revealed by his latest speeches[3]—to slash interest rates.

The bottom line is that the slowing economic activities as suggested by credit activities and other data, which I have previously shown[4], should extrapolate to increased credit risks.

Acquired debt at record high levels have mainly been founded from projections of an interminable G-R-O-W-T-H milieu, that has been undergirded by the perception of eternal zero bound rate environment.

Now that economic reality has begun to reassert her existence, apparent changes as revealed by the diffusion of slowdown in vast areas of the economy will increase pressures in the funding of existing liabilities. Thus the increasing realization of the mismatch between expectations and reality, as well as the disparity between cash flows and debt servicing requirements, will most likely prompt levered firms enduring financial duress to resort to Ponzi financing—debt IN debt OUT with asset sales as supplement.

However, higher short term yields in domestic treasuries, which should translate to higher bank financing rates, are exposing such vulnerability. And as double whammy, a sustained flattening of the yield will mean lesser credit activities.

Hence if access to debt markets shrinks, then the asset channel will be the only recourse for the source of financing, therefore credit strains will ultimately lead to asset dumping. That’s unless the government steps in to bail them out. But bailouts are no free lunches, and would likely turbocharge domestic price inflation.

The battle seems as invisibly being waged at the tightly held by the government and banking industry domestic treasury markets. Again market interventions seem as tacitly being implemented in order to mollify short term yields, as well as, to steepen yield spreads.

But curiously, for unstated reasons, some members of the formal sector have been pushing back and instead been dumping treasuries. 


With about half of the banking industry’s assets in loans and with the rest of banking system’s non cash assets dependent on asset inflation that indirectly depends on credit expansion, just where will bank profits emerge from?

Could it be that foreign money may have just realized this for them to stampede out of banking shares?

Finally it’s not just stocks and treasuries. The peso fell to 44.52 to a US dollar this week from last week’s 44.3. So far the peso remains up year to date due to the general trend of the falling US dollar.

The Common Denominator of President Aquino and President Widodo: Mania

Here is a trivia, aside from being heads of states of two of the largest ASEAN nations, what does Philippine President Aquino and Indonesian President Widodo share in common?

Well the answer is that both presidents graced their respective stock markets in April where both indices had been at record highs. In addition, both political leaders delivered their desired targets for their respective stock markets during the said occasion.



The Philippine President wished for 10,000 Phisix at the close of his term in 2016, as previously discussed.

On the other hand, the Indonesian President hoped for JCI at 6,000 by the yearend: "The JCI closed at its highest level in history," Widodo told reporters after the session. "Investor confidence in the Indonesian economy has been very good. I'm very optimistic that the index will top 6,000 by the end of this year."[5]

Interestingly, just right after the celebrated paying homage to the bullmarket, the ramifications has been nasty. 

Last week, the Indonesian benchmark plunged 6.42% while the Philippine counterpart, the Phisix, was clobbered by 2.92%.

As since I have noted above that selling pressures had been regional affair, the Malaysian FTSE KLSE got trounced by 2.38% while Thailand’s SET had been smashed by 1.85%. Other ASEAN bourses also suffered loses.

Part of the mainstream excuse for the Indonesian equity meltdown had even been on executions! Yet the same article notes that “The Jakarta Composite trades at 21 times reported earnings, 47 percent higher than the 14.4 multiple of MSCI’s developing nation gauge.” Even more, the frantic grapple for explanations, where “lower growth” had been imputed to the last week’s gruesome losses.

None even bothered to explain why JCI has been trading at 21x reported earnings and what justified such conditions given that the Indonesian economy has been racking up significant amount of foreign debt and where the domestic currency has been pounded to record lows.

As I recently warned[6]
The rupiah has been taking it to the chin and now has crashed to record levels. Question now is: To what extent will the current ‘capital buffers’ hold in the prospect of a sustained US dollar juggernaut vis-à-vis the rupiah??? Where is the breaking point for the system to snap?

If Indonesia’s system wilts and eventually cracks how will this affect the entire region? Do the big bosses of the BSP and their hordes of economists know?...

So what happens if Indonesia’s financial conditions shatters? Will capital flight be limited to Indonesia or will it spill over to the region and to the Philippines?
Last week’s actions seems to have provided the answer.

Also last week's meltdown does not represent a definite shattering of the Indonesian financial conditions YET. But the repeated market seizures signify as symptoms of an escalating and progressing disease.

Last January, the Malaysian PM went on air to deny a brewing crisis. Such response have been due to increased strains on the market and on the economy that have spurred political pressures for the Malaysian leadership to address such concerns.

In addition, the Indonesian government recently imposed foreign exchange controls to limit foreign currency transactions in their domestic economy.

Last week, Bank of Thailand unexpectedly (for the mainstream) trimmed interest rates by .25% to 1.5% anew. This was supposedly implemented in order to boost falling exports and economic growth. That’s because Bank of Thailand expects that 1Q GDP 2015 to CONTRACT again, as well as, their policy response to four successive months of disinflation (including April).

To add to the pixie dust political solution of weakening currencies in order to boost economies, the Thai government wants residents to buy foreign assets and has thus partially liberalized capital controls. But on the other hand, the government raised limits on cross border transactions by multinationals, resident companies and non-resident currency speculators. 

In other words, the Thai government wants to generate economic growth by preventing investments thus the imposed limits on cross border transactions which is tantamount to capital controls.

Yet the government wants the highly indebted residents to send capital away and worst to gamble overseas on foreign assets!

Curiously, the Thai government fails to foresee that corporate entities will likely just arbitrage around such controls through residents. And the most likely outcome is that aside from black markets, only politically connected individuals or corporations will have the privilege of going around regulations.


Because of present changes on policies, the Thai government got what it wanted for now. The baht crashed! The USD-THB gained about 2% this week.

And this would seem as like a “be careful of what you wish for” moment, why? Here is the quote of note[7]: Thailand’s household debt stood at 89.5% of GDP at the end of 2014—one of the highest in the world, compared with the country’s income level.

How much of Thailand’s household and corporate debt have been foreign currency denominated???

By keeping interest levels of domestic debt artificially low, which has been designed to subsidize debtors, such as the Thai government and crony companies, the risks will be to add on more debt. And given the growing inability to service debt from a faltering economy, growing debt burdens may just collapse on its own weight. So the Thai government solution for now is to pay present debt with more (rollerover) debt. Ponzi finance.

And instead of the idea of expanding real growth to payoff debt, Thailand’s government seem so desperate as to mimic the solution of her developed economy peers in solving debt problems in the hope of inflating them away!

And such has been the political economic template that characterizes the major Asian and ASEAN economies: a debt trap.

And when the debt window narrows or shuts, the result will be financing via asset dumps.


ASEAN equities look very vulnerable to a broad based intensifed asset dump. 

Thailand’s SET has had a mini crash last December where intraday the benchmark plunged 9% before recovering two thirds of its losses. After recent the sharp rallies which apparently seems to have petered out, the SET looks now on path to test the September and October 2014 lows.

Malaysia’s KLSE looks equally fragile. The recent fierce rally appears to have also stalled and now has turned sharply lower.

The risks of a crisis will be vehemently denied…until it can’t.

Here is what current Vice Chairman of US Federal Reserve Stanley Fisher said about in a 1998 speech on the Asian crisis when he was still the International Monetary Fund’s First Deputy Managing Director[8] (bold mine)
In the case of Thailand, the crisis, if not its exact timing, was predicted. Beginning in early 1996, a confluence of domestic and external shocks revealed vulnerabilities in the Thai economy that, until then, had been masked by rapid economic growth and the weakness of the U.S. dollar to which the Thai baht was pegged. But in the following 18 months leading up to the floating of the Thai baht in July 1997, neither the IMF in its continuous dialogue with the Thai authorities, nor increasing market pressure, could overcome their sense of denial about the severity of their country’s economic problems. Finally, in the absence of convincing policy action, and after a desperate defense of the currency by the central bank, the crisis in Thailand broke.
Haven’t I been posting about repeated warnings by the BIS, IMF, or the OECD here?

If the above problems surface, then stock market goals by President Aquino and President Widodo may not be fulfilled. At worst, they may be faced with an economic Typhoon Yolanda.

Peak Debt and Shrinking Market Liquidity

Lastly, exports (and imports) have been dropping almost everywhere.

Aside from Philippines, the US, or Thailand, despite three interest rate cuts (the last was on March) and a weak currency, the the South Korean won, where the USDKrw soared by 12% from August 2014 until March 2015, South Korea’s external trade has virtually collapsed on a year on year basis last April (imports -17.8%, exports -8.1%). 


The slump in merchandise trade has been a global phenomenon (left window).

This can even be see n outside merchandise trade activities at the national or global levels, for instance, spot prices of container shipment rates for Asia and Europe has crashed by a staggering 70% from January! The Baltic Dry index, which measures the cost of transport of raw materials by sea, has broken below the 2008 lows!

In addition, according to a report from Bloomberg[9], “Orders at Chinese shipyards, the world’s third-largest, have fallen 77 percent in the first quarter from a year earlier”! Wow!

And these has not been because of the neo-mercantilists’ fantasies where currencies have not been weak enough to bolster exports, but rather, the world has reached ‘peak debt’ levels. And peak debt has enervated real economic activities as investments and consumption. Or differently stated, at 286% of global GDP based on McKinsey Global estimates, global debt has pushed economic activities to near stagnation. Much of the world’s resources have been redirected to debt servicing.

And this is why central banks have now pushed policies from zero bound to negative lower bound. And this has also been the reason why governments and mainstream political lackeys masquerading as experts have pushed for the abolition of cash. Parasitic governments intend to accelerate the invisible resource transfers of people’s resources to fund their rapidly decaying bankrupt institutions.

And since monetary policies have been failing to generate economic traction, governments have increasingly been using capital controls to dragoon the public in order to corrall their resources, Indonesia and Thailand as current examples. The Philippines will eventually follow.

Yet central bank subsidies or invisible transfers are not without consequence, even in the dimension of financial markets. 

Government QEs, for instance, has been siphoning liquidity out of the bond markets even as global debt instruments continue to swell. The sudden spike in the yields of German bunds has spread to rattle Europe’s equity markets has incited the German Dax to tumble to its the biggest one day loss since 2008 last week.

Thailand’s surprise rate cut hardly goosed up the SET which closed -1.85% down for the week. 

The markets appear to have reached a saturation point for the magical effects from central banks to take hold. Said differently, these could be incipient signs that financials markets could be pushing back on central bank policies.

The US Federal Reserve raised such liquidity concerns the other week. From Reuters[10] (bold mine): Sections of the U.S. financial system that may be vulnerable to investor panic are raising concerns inside the Federal Reserve, as policymakers preparing for the first interest-rate hike in nearly a decade seek to ensure the market is ready and able to handle it whenever it happens. Years of Fed bond-buying and new bank rules are seen to have left the ultra-liquid U.S. Treasuries market more vulnerable to an abrupt selloff. But in particular, the Fed is worried whether the booming asset management industry can withstand a run of redemptions in a financial crisis. Chief among the Fed's concerns, increasingly voiced in public remarks, is that certain funds held by individuals and institutions will not have the underlying assets sufficient to back investors cashing out in a panic. This lack of liquidity would expose investors and the economy to sharp price swings.

The US Federal Reserve has basically been echoing JP Morgan honcho Jaime Dimon’s concerns.

Another Reuters report this week highlights again on the growing risks of shrinking liquidity[11]: (bold mine) Liquidity is an amorphous concept and impossible to measure accurately. Its scarcity is only exposed in times of crisis. But everyone agrees it is shrinking, and this could dramatically push up the cost of trading, widen bid-ask spreads and make it harder for traders to close out positions. As long as asset prices are rising, as most are thanks to super-easy global monetary policy, this isn't a problem. But it will be if there is a sudden reversal and traders are forced to offload assets only to discover there are no buyers. "This is a critical problem to the functioning of markets," said Andy Hill, director of market practice and regulatory policy at the International Capital Market Association. "Without secondary market liquidity, primary issuance will be impaired. We're in a fragile state now," he said, adding that lower rated corporate bonds, high yield debt and emerging markets are most vulnerable to a crunch. The potential for a sudden freeze across a range of markets is a growing source of concern and debate among global policymakers and regulators.

It’s not just a concern. The currency markets have been feeling it, where shrinking liquidity has already been reducing trading volume and amplifying volatility

From Bloomberg[12]: (bold mine) Trading volume is so thin in the foreign-exchange market that it’s difficult for strategists and investors to analyze the signals behind the price actions. That’s what Geoffrey Yu of UBS Group AG says. Overall flows of Group-Of-10 currencies fell below average for three consecutive weeks, the bank’s client flow data show. Among the worst were currencies that are traditionally the most liquid, such as the yen, Swiss franc and the Canadian dollar, where volumes were down at least 30 percent…Even for the euro versus the dollar, the world’s most-traded currency pair, exaggerated fluctuations are evident. The 14-day average true range, which takes into account the differences between intraday highs and lows, averaged 0.014 in the past month, compared with less than 0.01 in the past year.

The crux of the matter is that volatility has hardly been about random walk but rather manifestations of seething imbalances looking for an outlet valve to vent. They are symptoms of an underlying disease: debt trap.

Thus, expect accounts of market volatility to increase.



[2] The BSP announced that as of 2014 based on World Bank’s Findex survey 31.3% of the population have now bank accounts. Unfortunately, the survey also said that only 15% of the population has formal savings and only 12% have engaged in formal borrowing. The implication is that 50% of those with bank accounts save through banks, and only 38% of bank account holders borrow from banks.



[5] Nikkei Asia Review Widodo vows to keep stock momentum alive April 8, 2015

[6] See Phisix 7,700: Deepening Signs of Exhaustion March 1, 2015; The quote has been edited or adjusted for my previous error in transcribing the Indonesian currency as ‘ringgit’ instead of ‘rupiah’

[7] Wall Street Journal, Thailand Unexpectedly Cuts Benchmark Rate April 29, 2015

[8] Stanley Fisher The IMF and the Asian Crisis March 20, 1998 IMF.org





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