Sunday, July 12, 2015

Phisix 7,400: Back to the Future on Pernicious Effects of Receding Liquidity

Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot. Ayn Rand The Meaning of Money

In this issue

Phisix 7,400: Back to the Future on Pernicious Effects of Receding Liquidity

-Phisix 7,400: Back to the Future; Record May 2013 versus Record April 2015

-Diminishing Liquidity: Festering Market Internals

-Diminishing Liquidity: Shrinking Volume and General Trading Activities

-Diminishing Liquidity: Record Low June CPI, Plunging Manufacturing Output and Exports!

-1Q Record Auto Sales: Auto Sales Do Not Necessarily Reflect on Economic Conditions

China’s Massive Xi Jinping Put: Apres Moi Le Deluge?  (note pls see next post pls click link here) 
 
-The Xi Jinping PUT

-The Xi Jinping PUT: Apres Moi le Deluge (After Me, the Flood)

-Crashing Stocks Increases Risk of Financial Crisis

Phisix 7,400: Back to the Future on Pernicious Effects of Receding Liquidity

On May 15, 2013, the Phisix hit a milestone high at 7,392.2. FOURTEEN months later, or this week, the Philippine benchmark returned to almost the same level the PSEi closed at 7,392.59 at July 10, 2015, Friday.

7,392, or to round it off, 7,400 has signified a pivotal psychological threshold for the current boom bust cycle.

Phisix 7,400: Back to the Future; Record May 2013 versus Record April 2015

The original May 2013 record eventually succumbed to bearish forces from the US Federal Reserve’s induced ‘taper tantrum’. However, bearish forces had been sidelined from mostly the policies of activist global central bankers, thus reversing the momentum for the index. This paved way for rising global stock markets the following year.

IN 2014, for the domestic benchmark, there had been two botched attempts to break beyond the said historic level, particularly in September and in December. It was only during the third shot on January 9th 2015 where a decisive breakthrough beyond the historic watermark was attained. From then, the PSEi soared to a series of new record highs. This culminated at 8,127.48 on April 10, 2015.

7,400 has principally been a story of the headline index. The headline index has been seen, or made to be seen, as representative of the overall conditions.

But headlines can also reveal a different character from what has been popularly perceived.

This is the reason I reckoned May 2013 as the AUTHENTIC record high. It was then where the headline responded to the tailwind of a broad market push. It marked a genuine “rising tide lifting all boats”.

However, following the closure of May 2013 record, the broad markets deviated from the headline. 

While the headline index pushed to record grounds in late 2014 through 1Q 2015, the broad markets struggled to recover. The destiny of the others even worsened. But who cared? All that mattered has been the cheerleading. Never mind the losses for those who made the wrong choices. The headline provided HOPE, which had been all that matters.

In short, the 2015 record high has signified as nothing more than a manipulated rotational pump on select index heavyweights. This artificial pump, which etched a new record, has been intended to buoy the headline for cosmetic publicity effects. 

Artificial pump to the upside now comes with artificial pump to prevent a downside.


Fantastic accounts of “marking the close”, which had been a rara avis in 2013, became a regular feature from the last quarter 2014 through last week. 

The above exhibits last week’s intraday activities of the PSEi based on Bloomberg data. The red horizontal line marks the previous closes, while the green rectangles represent the session end pumps.

Unfortunately, the propitious effects from the combo of orchestrated headline pumps seem to be fading as the headline index has reversed almost all the gains acquired early this year.

The Phisix was pummeled by 1.89% this week. Yet without the offsetting actions by the index managers, the losses could have been even deeper.

Intraday losses of Thursday July 9 (not in charts) which reached a low of 7,239.02 came to just 19 points off from the year end 2014 level of 7,230.57. Thanks to the massive pumps by index managers, the 1.7% decline reversed, where the round trip even closed the day with a .19% advance via a minor marking the close pump.

Since I suspect that all these pumps have mostly been fiduciary (third party) money used, it’s really sad for me to think about the hapless depositors or taxpayers see their money go down the drain due to the conflict of interests guiding the actions of these mostly unaccountable financial trustees. Of course, media’s cheerleading provided them hope.

And for as long as the markets continue to slide lower, loses of these unwitting third party financiers, to support a futile cause, will only mount. 

Phisix Weakness Has Hardly Been About China (Yet); But About Diminishing Liquidity

Of course, every blemish has to be blamed on some external forces and not from WITHIN. 

The other week media and their quoted talking heads said that lethargic stocks had been about Greece. 



The flavor changed this week as weak stocks had been attributed to events in China. 

Yet here are some facts to expose on the domestic market’s loose connection with the unfolding events in China.

The Phisix peaked in April 10 while China’s Shanghai index climaxed in June 12. This means that the Phisix culminated two months ahead of the Shanghai index.

Since April 10, the local benchmark has been on a losing streak. The smothered Phisix even found an interim trough which ironically coincided with the Shanghai index’s climatic turning point. 

And this transitional bottom of the PSEi in mid-June, which came as China’s stocks peaked, was tested last week. Depends on how one desires to interpret this, an intraday LOW was etched.

If you noticed, the domestic benchmark rallied even when the Shanghai index took two weeks of severe drubbing. It was only last week where selling pressures reappeared on the domestic index. This overlapped with the China’s meltdown. Yet the events in China served as a convenient scapegoat.

Ironically, the Shanghai index saw an incredible two day rally last Thursday and Friday, which totaled 10.2%. Yet index manipulators delivered a combined .39% gains from marking close pumps over the same period. The recovery hadn’t been organic, it had to be pumped.

The crux of the matter is that current activities in the Philippine Stock Exchange have hardly been about China (yet).

Instead, languishing stocks has mostly been about diminishing domestic liquidity. Declining liquidity has first appeared as flattening yield curve which spread to the real economy, and now to financial asset prices.

Unfortunately, such forces have barely been seen or appreciated by the mainstream.

Yet overall stock market condition has already been manifesting such phenomenon.

Diminishing Liquidity: Festering Market Internals

Remember when the PSE swaggered about the publicly listed firms which reportedly posted a 13.9% earnings growth in 1Q 2015[1]?

Well apparently the broader markets didn’t believe it.

So while the headline index jumped from record to record for 27 times from January 9th through April 10th, the broad market had been uncooperative and defied the index movements. Sellers dominated 7 of the 12 weeks. The difference between losers and winners was vastly tilted towards the losers. This only reveals the asymmetry of earnings growth—a few headline issues carried the weight of the index. But who cared? Headlines only mattered.

And when the Philippine president ‘graced’ the PSE, the week after the April 10 record, the broad based selling pressures mounted. From then, the broad markets have been dragging the Phisix lower. Despite the supportive actions by index managers, interventions to buoy the index have evidently been losing ground.

Yet index managers have so far maintained a semblance of a façade of contained damage. But this has not been so with the general markets. Since April 10, there has only been a week where winners took the lead with one neutral (the difference between winners and losers totaled zero). Yet any gains by the winners had been inconsequential as losers have claimed eleven out of 13 weeks (85%). This means much of the broad markets have been hemorrhaging. Headlines have camouflaged the internal bleeding.

Yet the cosmetic effects have been corroding. The weight of losses has now begun to impact the heavyweights.


The room for index managers to operate on has been rapidly narrowing.

There are now TEN issues within the PSEi basket that have been in bear markets. Additionally FIVE more issues have been within striking distance of the bear markets or have entered bear markets but had been pulled out during the last two day bounce. 

And two among those five are from the top 5 biggest market caps.

Yet there are three issues that have been in purgatory (15-17%), two of which are in top 10.

Paradoxically, while the PSEi or the Phisix remains at May 2013 record levels, a stunning ONE THIRD of the INDEX has been operating on BEAR MARKETS!

Why?

Because of the skewed distribution of weighting of the index in favor of the top 15.

As of Friday’s close, the top 5 biggest issues carry a 38% market cap weighting. The top 10, 64%, while the top 15 or first half accounted for 80% of the index’s weighting. So the last half, which bears the residual 20%, has hardly impacted the headline performance. In sports, the last half members of the PSEi basket would be like benchwarmers. 

That’s how 8,127.48 had been accomplished: rotational pump on a few of the top 15 biggest market cap issues[2].

This has just been proof of how farcical the present record Phisix has been.

Alternatively, this means that once bear markets spread to the top 15 issues, prepare for a nasty headline downturn. It should be an ugly sight.

So index managers better heed my advice. They should push the top 15 away from trouble otherwise the Phisix will be at a mercy of the detestable grizzly bear market.

And the appearance of the grizzly bear will efface all the existing delusions from the stock market bubble.

Diminishing Liquidity: Shrinking Volume and General Trading Activities

And one key sign of the diminishing liquidity has been the shrinking volume.

This week’s volume marks the THIRD THINNEST volume of the year. And it has been THREE straight weeks where daily volume (averaged weekly) has been BELOW P 7.2 billion. This translates to the THREE lowest volumes (with rankings first, third and fourth) for the year!

The reason the PSEi has been under pressure has been because of INSUFFICIENT volume supporting those bids.

While index managers have been actively and assiduously pumping the index with the use of a combination of moves, i.e. breakfast club, afternoon delight, panic buying day and marking the close, their volume has hardly matched those of the sellers. 

As I previously said, index managers should go on aggressively soliciting more funds from greater fools (in political jargon: useful idiots) for their campaign. Otherwise there may not be enough volume to support the heavyweights when another bout risk off dynamic strikes.

(My guess is that given the severe market internal rout for the past two weeks, there might be a selling hiatus next week where the Phisix may recover 7,400. Add to the possibility of the reprieve, could be the ephemeral effects of the China bailout and any avoidance of Grexit via Greek-Troika agreement)

Yet eroding general trading activities has also signified another sign of the ongoing reduction of liquidity. This can be seen in the daily traded issues and the number of daily trades (averaged weekly) which has been posting pronounced slowdowns over the past weeks.

Curiously, while foreign selling had been key sellers, they haven’t been stampeding out. This suggests that local selling have been compounding to the onus of the index managers. Could it be that the cabal of index managers maybe losing cohesion for some of them to break ranks?

Diminishing Liquidity: Record Low June CPI, Plunging Manufacturing Output and Exports!

Diminishing liquidity’s impact on the statistical economy can be seen in the June’s CPI.



The recent crash in money supply continues to plague government’s measure of consumer prices. June’s CPI tumbled to a record low of 1.2%.

Yet the ongoing price weakness has been broad based. Here is the Philippine Statistical Authority[3]: The headline inflation at the national level further eased to 1.2 percent in June. It was posted at 1.6 percent in May and 4.4 percent in June 2014. Annual decreases were still registered in the indices of housing, water, electricity, gas and other fuels and communication. The indices of food and non-alcoholic beverages; clothing and footwear; furnishing, household equipment and routine maintenance of the house; health; and education also slowed down during the month. Excluding selected food and energy items, core inflation further dipped to 2.0 percent in June. It was noted at 2.2 percent a month ago and 2.8 percent in June 2014.

Month on month, June CPI popped out of deflation.

Yet why the decline in CPI? Too much supply? Slowing demand? Or both?

Perhaps we can rule out a glut in supplies from overproduction

Why?

Because government data on domestic manufacturing activities shows of a huge slump last May! 


Whether seen in production index via value (-7.3%) and volume (-3.1%) or net sales value (-11.7%) and volume (-7.7%), industrial output has been SIGNIFICANTLY down!

Let us see some PSA numbers[4]: (bold mine)
Value of Production Index posts a downward trend in May 2015: Value of Production Index (VaPI) for total manufacturing shrank further as it posted an annual decrement of 7.3 percent in May 2015, according to the preliminary results of the Monthly Integrated Survey of Selected Industries (MISSI). The contraction in VaPI were exhibited by nine out of 20 major sectors, with two-digit decreases noted in the following: wood and wood products (-31.7%), furniture and fixtures (-28.3%), petroleum products (-23.0%),footwear and wearing apparel (-19.6%), basic metals (-19.3%),food manufacturing (-13.1%) and electrical machinery (-12.0%). 

Volume of Production contracts in May 2015: Volume of Production Index (VoPI) on a year-on-year comparison dropped by 3.1 percent in May 2015 compared with the two-digit growth of 12.7 percent during the same month of last year. Half of the 20 major sectors reporting decreases in VoPI, five significantly contributed to the decline, namely: footwear and wearing apparel (-19.2%),wood and wood products (-18.4%), basic metals (-16.0%), food manufacturing (-13.9%) and beverages(-10.2%).
For the month, half of the manufacturing industry has been posting reductions in output. Yet the degree of shrinkage has been bigger relative to those that posted increases.

And based on value, industrial output has been declining in FOUR out of Five months. Based on volume, negative output has been the second month of the year. 

Based on Net Sales Value, decreases occurred in 5 out of 5 months. Based on Net Sales Volume output compression has been in 4 out of 5 months.

In short, based on the government’s OWN survey, manufacturing output has been struggling to post gains for the year!

And if so just where did the NSCB get their 5.9% manufacturing growth in 1Q 2015?

Yet why the contraction?


And in support of the downturn, the same government agency reported that manufacturing input prices had been in a compression for EIGTH successive months!

Let us hear it from the PSA[5]: Producer Price Index (PPI, 2000=100) for manufacturing fell by 4.4 percent in May 2015 compared with negative 1.1 percent in May 2014. This is the eight straight month since October 2014 that the PPI reflected a negative annual rate. In May, the decrease can be traced to the double-digit decrements of three sectors namely: furniture and fixtures (-26.1%), petroleum products (-18.0%) and wood and wood products (-16.3%). On the other hand, nine of the twenty major sectors registered single-digit increases led by beverages (8.9%).

Again, a slight majority of manufacturing industry has been experiencing deflation. Yet producer’s price deflation has been for 8 months? Why? Has it been because of excessive imports or surpluses from upstream production in 2014 that has hardly been met by demand that has led to an inventory buildup? And these excess inventories have pushed down prices which unfortunately econometricians can’t fit on their quant models?

Yet, I find it strange to see only a few media outfit to carry such adverse government disclosure.

And for those who did, the article had been buried under the second pages or least visible spaces. (GMA News, Rappler, Interaksyon, Business Mirror)

And curiously June’s government data demolishes the optimistic prediction by Moody’s where the latter expected manufacturing output to grow by 3.5%.

Headline will miss out on this very crucial inflection point.


Four factors that has been indicative of a manufacturing’s stagnation

One, banking loans to the sector has been materially slowing. This is a symptom not a cause. The lower bank loans reflect on lesser optimism from manufacturers. Action speaks louder than words or demonstrated preference.

Two, as I recently noted, the sector’s downtrend looks like a trend. Such a trend, if sustained, would mean more job, financial and output losses.

Three, as also I previously indicated, domestic politics will play a role in the downturn too. Due to populist politics as a result of an unfortunate fire accident which killed a number of workers, the government launched a crackdown on job safety violations on the industrial sector[6]. Such clampdown could have affected expansion plans or even current output.

But sales have been way off too which likely means poor demand.

Lastly, foreign demand as evidenced by sinking exports.


Well, May exports posted a 17.4% year on year crash while the first five months of exports tumbled by 5%. The PSA noted “The negative growth was mainly brought about by the decrease of seven major commodities out of the top ten commodities for the month.”[7]

Exports of Electronic products which has been the country’s top export that has accounted for 48.1% of the total exports revenue tanked by 7.5% in May

I must be lucky because it seems that I have interpreted and projected this accurately[8]…
Importantly, given that many of electronic imports have been used as part of the assembly for higher value components for re-exports, declines in electronic imports have been portentous indicators of future electronic exports. Electronic exports accounts for the largest share of goods exports (see April data).

In short, April’s drop in electronic imports may likely extrapolate to reduced electronic exports over the coming months.
Which countries had been responsible for the weak purchases from domestic producers? Well, exports to China just CRASHED 62.18% (pls insert South China Sea alibi here), exports to US slipped 4.7% while exports to Singapore COLLAPSED by 15.5%!

The right window shows of the nominal price changes of Philippine exports

Moreover, exports have shrunk in 5 out of 6 months. This aligns with activities of the manufacturing sector.

So should there be any external shocks (Europe ‘grexit’, China ‘twin bubbles’, ASEAN sinking currencies, US high yield bubble that has financed stocks, properties and the oil industry or US-Russia military faceoff or etc…), this will be transmitted to exports and subsequently to imports and to manufacturing.

The point is that the Philippines is NOT immune to external developments, as many mainstream media imply. Furthermore, developing internal weakness from sustained liquidity downturn will COMPOUND on the risk sensitivity of the Philippine economy, as well as to the financial system, from global events.

Philippine authorities would like to make us believe that based on statistics the financial system has been sound and can withstand any storm.

The test to this claim approaches. My bet, popular expectations will FAIL.

1Q Record Auto Sales: Auto Sales Do Not Necessarily Reflect on Economic Conditions

BUT not every aspect of the domestic economy has been floundering yet. 

The Philippine automotive industry just crowed about record vehicle sales during the 1Q 2015 on the back of “strong growth across local industries and the local economy” where the supposed growth from sales of “AUVs (Asian utility vehicles), SUVs (sports utility vehicles) and light commercial vehicles” which they say represented the “ongoing refleeting of the construction industry and the stronger demand for heavy duty vehicles, which had fueled the growth in fuel haulers’ sales”[9]


Well, I hope they are right. That’s because the government numbers point to the other direction relative to their claims. 

Besides, vehicle sales do not necessarily reflect on growth conditions of the economy. Soaring vehicle sales, like stocks, can be manifestations of monetary or financial disorder.

Take Greece, Greece has been in a crisis. Yet car sales last April jumped by 47%! (see left) And it’s not just a one month jump…

The Telegraph explains[10]: Here is a slightly surprising sign that Greece is in the classic throes of a bank run: car sales jumped by 47pc in April. It was the 20th consecutive month that car registrations of new and used vehicles has risen. People living in a country gripped by financial turmoil often worry about the security of their money. If it's in a bank, it can be caught up in capital controls or lost through insolvency. Better, then, to spend it. And the purchase of choice is often a car.” (bold mine)

So fear of confiscation of savings via hyperinflation or deposit haircuts can spruce up demand for cars. Cars can be seen as real assets.

The article goes on to cite the Russian rouble crisis experience in the early 2014, as well as, the Cyprus crisis, as sharing the same vehicle-as-purchasing power-safehaven phenomenon. I’d add Argentina’s pre-hyperinflation crisis to the same manic car buying episode.

To be sure, I’m not saying that the Philippines is having the same crisis, instead I am saying that vehicle sales, again, do NOT necessarily reflect on growth conditions.

They can mean other things than G-R-O-W-TH.

China’s slowing economy has ironically led to a surge in car sales in 2014.

Such sales spike in 2H 2014 corresponded with the easing measures implemented by the PBOC, as well as, soaring stocks. So China’s vehicle sales may partly be attributed to the “wealth effect”: higher stocks may have contributed to increased consumption expressed through car purchases (most likely credit financed).

Yet in April 2015, China car sales have slumped. Why? This Wall Street Journal provides a clue[11]: (bold mine) “Agents at luxury-car showrooms in Shanghai say wealthy customers are delaying purchases to invest more in the stock market. Auto sales fell by 0.5% from a year earlier in April, the first decrease in almost three years. Fewer than a quarter of respondents to a recent survey by online news portal Netease said they would consider using gains from the stock market to buy a car. Instead of buying a new vehicle, “some people have decided to lease a car for the first time so they can keep investing,” said Shaun Rein, managing director for China Market Research, a consumer-intelligence firm.”

So instead of the highly embraced wealth effect theory which says that rising assets motivates consumption, which again, may have partly been true for Chinese car sales in 2H 2014, the opposite happened during the climaxing mania in Chinese stocks: People withheld consumption to gamble on stocks!

Incidentally, auto sales in China suffered a third consecutive month of decline last June. Yet the 2.3% had been ironically imputed to the stock market crash! So car buying has been deferred in favor of stock market speculation, and when stocks crash, future buying became a dream! Thus, the Xi Jinping PUT or the Chinese stock market bailout for the dream to come true.


And back to the Philippines, obviously, record vehicle sales from the perspective of domestic consumers has extrapolated to purchases funded by RECORD banking loans (left). 

Interestingly, despite the massive credit finance auto buying spree, BSP’s measure on transport inflation seems muted (right). The Transport CPI numbers rose in 1Q 2015 but after coming down in 4Q 2014. So part of the increased demand reflected on BSP data.

And like China’s recent experience, record Philippine auto sales may be about partial wealth effects.

Credit financed record auto sales in 1Q 2015 has coincided with record headline stocks, as with, the still rampaging high end home index. Based on Global property guide, high end condos jumped by 5.9% in 1Q 2015 but this is down from 1Q 2014’s scintillating 9.2% growth*. Yet these numbers seem far off from the BSP’s measure of housing inflation.

This implies that recent credit flows (despite the declining trend) may have been funneled to chase Philippine domestic assets, including autos, even as the real economy has been dramatically slowing. So 1Q economic activities seem to have transformed into an economic-financial playground for the big boys.

Nonetheless, with the downturn in the domestic economy seemingly intensifying, which has now filtered into the toys for the big boys, much of the credit financed auto vehicle binge will most likely end up as eventual soured debt or even foreclosed properties.

Therefore, I foresee upcoming fire sales on relatively brand new slightly used cars in a not so distant future.

*As a side note, as proof of the social divisiveness of every bubble, in Vancouver Canada, domestic property bubbles have spawned xenophobia and anti-immigration group.

A snip from Yahoo/Reuters[12]: That anger has contributed to a simmering xenophobia in Vancouver, a multicultural coastal city long known for its inclusiveness. With virtually no official data on foreign buyers available, many of those squeezed out of the market are left to believe the worst. That has residents like Xia pressing the government to track international buyers, scrutinize the source of their funds and tax property speculation, before the anti-Chinese sentiment gets out of hand. 

This parallels Singapore’s recent labor protectionist policies which emerged out of populist sentiment against foreigners, who had been again seen as driving “inequality” through property bubbles. This is just an example why bubbles can’t last.





[3] Philippine Statistical Authority Summary Inflation Report Consumer Price Index (2006=100) : June 2015 July 7, 2015

[4] Philippine Statistical Authority Monthly Integrated Survey of Selected Industries : May 2015 July 10, 2015

[5] Philippine Statistical Authority Producer Price Survey : May 2015 July 7, 2015


[7] Philippine Statistical Authority Merchandise Exports Performance : May 2015 July 10, 2015


[9] Inquirer.net PH auto sales reach new high in H1 July 10, 2015



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