Monday, February 15, 2016

Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!

There is a serious credit contraction underway, I think [Yellen] should acknowledge that. I think she has to look at the capital base being wiped off the banks in this downdraft and equities: that's not supposed to be happening right now. They're supposed to be bulletproof, and oh, by the way, gold at $1,200 an ounce, what does that tell you? It tells you that in a flight to quality, in a safe haven, people have more confidence in gold than in bank deposits or paper money. I think things have gotten out of control—Robert Michele, JP Morgan Global CIO & Head, Global Fixed Income, Currency & Commodities Group

In this issue
Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!
-Global Stock Markets Dive as Faith in Central Bankers Fade
-Has Gold’s Resurgence Been About A Developing Major Dislocation In The Global Monetary System?
-Deepening Strains in the Global Banking System, Singapore as Epicenter for Asian Crisis 2.0?
-Phisix 6,650: Rotation from Mainstream to Mining Stocks, Trend for 2016?
-Gold Miners Lead the Mining Index
-Divergent Trends Between Mining and Mainstream Stocks, The Absence of Domestic Commodity Markets
-Yield Spread of Philippine 10 Year Bonds and 1 Month Bills Turn Negative, Yikes!

Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries
Global Stock Markets Dive as Faith in Central Bankers Fade
At the end of January I noted that markets seem to have lost faith in central bankers1
If so, in the next transition from fight to flight, then this would mean that the ensuing cascade should be sharp and fast as central banks have effectively lost control!

With equity markets of developed economies in a freefall last week, the central-bank-losing-control dynamic appears to be gaining momentum.
Despite Friday’s massive stock market rallies, equity benchmark of Europe and the US has closed substantially lower. Friday’s sharp rebound has largely been imputed to the colossal 12% bounce by oil prices, which news say had been about rumors of an OPEC deal or possibly, from liquidations from inverse oil ETF positions or even from both.
Most of Europe’s bourses have lost 3% and above. Peripheral Europe, nations which suffered the debt crisis in 2011-12, bled most. Equity benchmarks of Greece, Portugal, Spain and Italy dived 9.84%. 7.63%, 6.77% and 4.26% respectively. And it’s not just stocks, benchmark sovereign bonds of these nations came under pressure (or bond yields has recently spiked.

The 10 year Greek yield surged to a 7 month high at 11.516%. The Portugal equivalent soared to an August 2014 high at 3.734%. Italy’s yield jumped to a two month high at 1.65% and the Spanish yield increased to a month’s high at 1.739%. If current trends will be sustained, then have these been seminal signs that Europe’s debt crisis returned?

It’s interesting to note that Japan’s Nikkei 225 hemorrhaged by 11.1% from three days of steep losses during the holiday truncated week.


Stock markets of China and Vietnam were closed for the week.
Yet if Hong Kong’s stock market should serve as precursor to the China’s performance this coming week, then HSI’s heavy 5.02% losses this week may reflect on bear market forces reasserting dominance on mainland China’s bourses. That’s unless the ‘national team’ goes to work early to offset the selling pressures.
Meanwhile, one of the latest Asian bellwether to fall into the domain of the grizzly bears has been the Australian benchmark, the S&P ASX 200. The S&P ASX 200 crashed 4.24% this week.
On the other hand, India’s Sensex dived 6.62% this week even as the government declared a 3Q (October-December) GDP of 7.3%.

Apparently, some quarters in media have expressed doubt on the methodology of how the Indian government has arrived with its numbers! This week’s meltdown has also brought the SENSEX to the bear market!
This is not to say that actions of central banks will have no effects on the markets. Rather, present dynamics have shown diminishing returns in terms of boosting risk assets. Or said differently, central bank magic has been fading. But it won’t stop them from trying.
Central bankers have been busy this week. Sweden’s Riksbank sent their policy rates deeper into the negative zone. In her Senate testimony, Fed Chair Janet Yellen said that since there “is always some chance of recession in any year” … the Fed would consider negative rates: “ In light of the experience of European countries and others that have gone to negative rates, we're taking a look at them again, because we would want to be prepared in the event that we would need (to increase) accommodation”. 
In addition, the Bank of Japan may call an emergency meeting soon for them “to undertake additional monetary easing if financial markets remain turbulent”. Additionally, the European central Bank was reported to be in talks with the Italian government for the former to buy “bundles of bad loans as part of its asset-purchase programme and accepting them as collateral from banks in return for cash”

It’s truly amazing how central banks have shown even more expressions of panic with financial markets apparently ignoring their overtures and or even actions (such as Sweden’s Riksbank).
But sentiments abroad depart from that of the Philippines.
Yet it has truly been a fascination to observe on how the establishment perceives of the escalating global financial volatilities as having little impact on the Philippine economy or the financial markets. For them, it’s all about the incantation of “domestic demand”. As if domestic demand have permanently been engraved on the economic stone. As if domestic demand occurs automatically, just like manna from heaven. As if prospective losses from exports, tourism, BPOs, OFWs, foreign investments and portfolio outflows would have little or NO direct and indirect effects on jobs, incomes, earnings, investments or consumption.
And if policies of ZIRP and NIRP have been backfiring on economies and markets of both developed and emerging markets, then why should the Philippines, which embraced the same policies in 2009, be immune to such pathology?

Because media ‘experts’ and authorities say so? Because the Philippines is immune to the law of economics? Or has it been because the Philippines, coming off a clean balance sheet prior to 2009, have represented the one of the few nations to enter the late stage of the credit cycle?
The more the misperception the greater the crash
Has Gold’s Resurgence Been About A Developing Major Dislocation In The Global Monetary System?
Last week’s equity meltdown seem to have punctuated a pivotal change in market dynamics: from Risk OFF to Flight to Safety

As stock markets bled ($FAW-FTSE ALL World), gold and government bonds of some developed economies soared.
This week, yields of US 10 and 30 year treasuries fell by 10 bps to 1.748% and by 7 bps to 2.6% respectively. Shown as prices, the 10 year UST soared (lowest window)
On the other hand, gold (main window) rocketed by 5.49% over the week. Gold has surged in 4 consecutive weeks to account for a massive 13.19% in gains. Gold’s surge has been accompanied by a magnificent 10.55% runup of the HUI gold bugs or an index of 15 major gold miners (middle window).
Gold (and UST) appears to have ‘bottomed’ when the FED raised rates in mid-December. Both have spiraled higher when the Bank of Japan announced the NIRP in late January.
In September 2015 I made this recommendation2 (bold original)
One should consider hedging against further market volatility or from more episodes of meltdowns or from a torturous bear market in stocks.

So here’s my recommendation, for Philippine residents I recommend to stay in cash, especially in US dollar. Use any USD-peso reprieve to buy the US dollar or sell the peso.

One can add gold (and or gold based assets) to such hedges. Gold may be down today (which makes it a value buy), but this may be a different story when the “real thing” arrives.

And by “real thing” I mean that if the current Emerging Market-Asian-ASEAN market selloffs morphs into a financial crisis, then the USD-PHP high in September 27, 2004 at 56.45 can easily be taken out.

And growing risks of confiscation from indirect means (inflationism) or from direct means (war on cash via negative nominal rates, wealth taxes, deposit haircuts) should spur a reversal in gold.
I followed this up last November with3
So I expect the USD to serve as a lightning rod against stresses that would surface in response to massive imbalances as an outgrowth of central bank policies from all over the world. And once the charade from risks assets have been sloughed off, gold will scintillate.
So far gold has been affirming on my recommendations

Gold as a flight to safety hasn’t been always the case. Gold chart from goldprice.org
Nominal USD-Gold prices fell when the dot.com bubble burst in 2000.

Gold prices plunged during the emergence of the US mortgage crisis or the Great Financial Crisis (GFC) in 2007-2008.

Gold’s secular bullmarket began in 2003. That’s when global stocks bottomed from the dotcom bubble bust. That’s also after the FED went into a series of rate cuts from 6.5% in 2001 to 1.75% in 2003.
Gold also rallied when the FED and various central banks launched their massive rescue programs in the face of the GFC from 2008 onwards.

However, after 11 consecutive (2001-2011) years of annual gains, gold prices peaked in August 2011.

Gold’s climax came a month before the FED announced QE 2.0 (Operation Twist, September 2011) and 6 months after Eurozone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, plus the string of bailouts from the embattled PIGS, which signified the core of the European Debt Crisis.
In the meantime, 3 years after the imposition of gargantuan $586 billion stimulus in November 2008 to shield her economy from the GFC, China’s GDP began its descending path in 2011.
Following gold’s 11 years of successive run ups, cyclically speaking, it would be natural for gold to take a reprieve. So perhaps gold’s 4 year and 5 months old 41.96% downturn signified a cyclical bear market under a secular bullmarket. If this is true then a bullmarket for gold should be in the works.
Yet even as the central banks of US, Europe and Japan and the rest of emerging markets deployed life support policies, which in particular, according to Bank of America Merrill Lynch: 637 rate cuts, $12.3tn of asset purchases by global central banks in the past 8 years, $8.3tn of global government debt currently yielding 0% or less and 489 million people currently living in countries with official negative rates policies (i.e. Japan, Eurozone, Switzerland, Sweden, Denmark)4, initially economic performances diverged. Today, economic signals point to a convergence—increasing risk of a global recession.
So maybe gold smelled of the impotency of central bank policies. Perhaps too gold’s bear market instead reflected on the spreading of deflationary forces regardless of central bank actions.

And possibly with Japan’s adaption of the Negative Interest Rate Policy (NIRP), gold may have seen this as a reinforcement of a de facto global central bank policy trend.

Coupled with growing ban on cash by governments mostly under NIRP, the likelihood of imposition of myriad capital controls, prospective bail-ins or deposit haircuts on troubled banks, and or even perhaps outright protectionism, probably gold senses a massive disruption in the banking system, and the large scale drying up of global liquidity as the public gravitate towards cash with gold functioning as an alternative medium of exchange.
In other words, could gold be sensing a brewing or developing major dislocation in the monetary system?
Deepening Strains in the Global Banking System, Singapore as Epicenter for Asian Crisis 2.0?
And signs of such escalating strains seem to have already surfaced in the global banking system.

First, the tightening of “dollar” liquidity, which has created a feedback loop with economic slowdown, has been a key reason for deteriorating bank fundamentals.

The US dollar has been manifesting such dynamic since 2012.
The Bloomberg US dollar index or BBDXY (upper window) has risen by 31.5% from the lows of 2012 through last week. Or said differently, the US dollar has risen against a broad measure of currencies of her key trading partners.
The BBDXY’s distribution share as follows: 34.3% euro, 16.2% yen, 12% Canadian dollar, 9.9% British pound, 8.5% Mexican peso, 5.5% Australian Dollar, 4.9% Swiss Franc, 3.6% Korean won, 3% China yuan and 2.2% Singapore dollar
On the other hand, the JP Morgan Bloomberg Asian dollar index or the ADXY has fallen by 11.6% since 2012. The bulk of Asian currency losses to the USD have emerged from the 2H 2014 through today.

The ADXY’s basket consists of the following: China yuan 38.16%, Korean won 12.98%, Singapore dollar 11.07%, Hong Kong dollar 9.22%, India rupee 8.75%, Taiwan dollar 6.1%, Thai baht 4.92%, Malaysian ringgit 4.23%, Indonesian rupiah 2.85% and the Philippine peso 1.65%.
So rising BBDXY (USD) since 2012 eventually spilled over to as the weakening of Asian currencies in 2H 2014.
Second, has been the recent meltdown of global banking stocks.

Third, has been the transmission of credit risk. The crash of commodity prices has spread to emerging market debt, to high yield bonds and then to bank exposure on vulnerable industries and economies. In short, the deterioration in credit conditions has spread to many industries which leaves banks and other financial institutions vulnerable given years of massive credit expansion.
Fourth, has been an upside spiraling of credit default swaps (CDS) of several major European banks such as Deutsche bank, Credit Suisse and UBS, which means default risk has been rising.
Even additional Tier 1 bank capital in Europe’s banking system has now come under scrutiny.
From Bloomberg5:
The volatility and credit spread gyrations seen in the financial space over the past 24 hours may be the consequence of more than just investor unease over Deutsche Bank AG’s ability or otherwise to meet obligations on its riskiest bonds and other debt service costs, Bloomberg strategist Simon Ballard writes.
Rather it probably highlights the extent to which investors have chased yield down the capital structure over the past couple of years and are now left exposed to possible re-pricing risk.
From a regulatory perspective, Contingent Convertible Bonds, known as CoCos or additional Tier 1 securities, were developed to be a strategic funding tool -- a regulatory capital buffer to prevent systemic collapse of important financial institutions. Effectively, CoCos are designed to fail, without bringing down the bank itself in the process. The key problem in understanding the true risk embedded in this asset class, though, might be that it has never been tested. Deutsche Bank, in feeling compelled to reassure investors and employees that it has the solvency to meet its coupon obligations on this riskiest debt may have only exacerbated market uncertainty over, and price reaction in, these assets.
Investor concerns remain over what the overall market impact might be if a bank should see the need to suspend a coupon payment on a CoCo security. Indeed, such a move could make the latest selloff in credit risk look like a mere correction.
Fifth and lastly, a sharp widening of credit spreads in the US and across the globe, as well as negative swap spreads in the US and a sharp flattening of the yield curve in the US and in other developed economies which raises the risk of a US-Global recession.

This has simply been the periphery to the core in motion. And the feedback mechanism from the underlying deterioration in finance has only been spreading to infect the center of credit transmission, the banking system.
Of course it has been interesting to note of the significant deterioration in the US retail industry: as enumerated by Fox business contributor Gary Kaltbaum6: Wal-Mart is closing 269 stores, including 154 inside the United States, KMart is closing dozens of stores, JC Penney shutting down almost 100 stores, Macys shutting 36 stores, The Gap closing 175 stores, Aeropostale closing 84 stores,  Finish Line closing 150 stores, Sears shutting 100s of stores and  Massive sales and earnings misses by Kohls, Bed Bath and Beyond, Best Buy, Ralph Lauren and many others.

Not only will the above imply more DEAD shopping malls in the US, these should extrapolate to a wider spectrum of credit risk for the financial system!
The above should be another wonderful template to what will happen to the shopping malls bubble in the Philippines.
Nonetheless, a popular Swiss investor Felix Zulauf who runs Zulauf Asset Management predicts that Singapore will be the epicenter for a banking crisis that will spread to the rest of Asia7
"Singapore, which has attracted a lot of foreign capital over the years because of its image as a strong-currency state, will be extremely exposed to the situation in China," Zulauf told Barron's Roundtable in January.
"Singapore's banking-sector loans have grown dramatically in the past five or six years. Singapore is now losing capital, which means the banking industry is losing deposits."
He said this would probably cause carry trades to backfire, triggering heavy losses for those who had borrowed heavily to buy higher-yielding assets.
"I expect a banking crisis to develop in Singapore and to spread eventually to Hong Kong," he said.
So with multiple hotspots for a potential crisis and the risk of prospective confiscation by the government of private funds, it’s no wonder why British bullion dealers reported last week that investors had been “going bananas” over physical gold.
Phisix 6,650: Rotation from Mainstream to Mining Stocks, Trend for 2016?
It’s been a long time since I wrote about the mining stocks.
Well what a week of surprise!
What used to be the most unpopular and ignored sector seem to have stolen the thunder from mainstream stocks.

For three successive weeks, superb gains have made the once dejected the mining sector the recent darling of momentum traders.

The mining sector soared by an amazing 8.55% this week, 9.19% the other week and 4% two weeks back to lift the index back to a positive 2.4% this year.
It’s the only sector with a positive returns year to date.

The mining sector (black candle) has parted ways or diverged from mainstream stocks or the PSEi (blue line). It has missed out on the record boom in May 2013 and in April 2015.
Since May 2012 through January 2016 or in a grueling 3 year and 9 months, the sector’s index has sunk by an agonizing 68.5%. The torturous saga of the mines reveals what a full blown bear market looked like.

Fantastic gains of the past 4 weeks have rendered the said benchmark to be quite overbought.

Regardless of the coming hiatus, or profit taking sessions, the recent actions perhaps may provide clues to what may become the dominant dynamic for the year: will there be a rotation from the mainstream to mining stocks?
Gold Miners Lead the Mining Index
Of course, not all mining stocks are the same.





Based on the mining index, it appears that the best performers had been gold mining stocks.
For the week, Lepanto A and B sizzled by a breathtaking 81.32% and 75.88% respectively!! Philex Mining took second spot up by a phenomenal 25.98%!! Lepanto subsidiary Manila Mining A and B took third spot by posting an exceptional weekly advance of 18.18% and 16.67% correspondingly.
These 3 issues accounted for 30.16% share of the mining index as of last Friday. The biggest weight, coal miner Semirara, which likewise is a PSEi composite issue, fell 3.17% this week. Atlas Mining, the third ranked firm in the index, which includes gold as byproduct, was up 3%.
The rest of the non-gold mining issues were mixed.

Other non-index gold mining issues Benguet Consolidated, Apex Mining, Omico Mining and Alsons Consolidated likewise racked up significant gains, specifically 35%, 24.73%, 17.53% and 8.73% correspondingly.

Only United Paragon Mining (UPM) underperformed with a measly 2.67% advance.
So the sharp gains in the international prices of gold may have been a pivotal factor in juicing up the speculative fervor of domestic participants. As noted above, the HUI gold bugs soared by 10.55% over the week and have been up 47.13% year to date even as gold has only been up 16.78%
Perhaps too, some corporate deals may be at work for Lepanto to have fueled such stark outperformance.
Question now is: have recent activities signified just another vicious bear market rally or the birth pangs of a bull market? The answer entirely depends on the price of gold.
Divergent Trends Between Mining and Mainstream Stocks, The Absence of Domestic Commodity Markets
I do not believe that domestic participants have pumped gold stocks because they see this as a bid on safehaven assets.

Instead, they seem to see this as another opportunity to play the stock market casino.
Both mining index (black candle) and Phisix (blue line) has conjointly dropped in the 4Q and simultaneously rebounded from the massive January selloff.

But while the recent rally in the Phisix (blue) seem to have stalled, the mining index picked up speed to show, possibly and hopefully incipient, signs of divergence. Nonetheless, as of the last quarter, the correlation of both indices moving in the same direction seems greater than the last week’s departure. For now.
Divergence or rotation can only be affirmed when gold mining stocks will move independently from the mainstream stocks. The best evidence will emerge when both will move in opposite directions. This had been the case from 2012 through 2015 when miners collapsed while the bubble industries blossomed. It should be a curiosity to see when both trade places. Time will tell.
Gold miners for me serve as a proxy or titles to claims on physical gold. That’s because spot and futures commodity markets have been missing in a country which sees itself as first world. Yes the Philippines has been the only ASEAN major without a commodity market.
The establishment thinks that they can leapfrog over the commodity backdrop of Philippine economy by blowing property, shopping mall and casino bubbles financed by massive leveraging or credit expansion.

The reality is the commodity (agriculture-mining) industry, even when they constitute a small segment of statistical GDP, employs close to a third of labor force. Such translates to mountains of unlocked savings, investment, demand and consumption.

The absence of commodity markets simply means that productive growth for the sector has lagged behind by virtue of insufficient investments and that the sector remains virtually inefficient as prices have reflected political obstacles than sheer demand and supply.

The absence of commodity markets can also be tied to the lack of interest by the industry to hold savings at the banking sector. That’s because the industry’s financial knowledge and earning potentials have been limited to merely growing/mining and selling their output to politically privileged middle men, rather than through bid and ask in the commodity markets. When farmers and miners learn to directly trade and hedge their produce, output or products, such will allow them to hedge or to reduce their risks and amplify their earnings. Having to increase their level of trade knowledge plus an increase in earnings will surely prompt them to enroll in banks and tap capital markets.
But the BSP would rather go on a publicity campaign on ‘financial inclusion’ rather than deal with real issues
And the reason for the nonexistence of the commodity markets has been politics: there has been too much vested interest rooted in them. The existence of commodity markets should mean a substantial reduction, if not an extirpation, of these politically privileged middle men protected by byzantine regulations and mandates or agricultural protectionism.
So the establishment’s lack of desire to establish commodity markets should translate to local market participants’ little respect for precious metals. Never mind if the peso’s origins were from mainly from a silver standard and a brief period of a gold standard. History has little or no importance to people blinded by present orientation predicated on feel good politics.
Nonetheless, since international prices of gold will serve as the key determinant of the fate of gold shares and if locals have been oriented to follow this correlation, regardless of what they think gold, then domestic gold stocks should resonate with their international peers.

Other potential factors that influence share price movements of domestic gold miners will be the operations side of each miners, as well as, the politics behind the industry and the locality where these mines operate. But this will be subsidiary to the international price of gold.
Yield Spread of Philippine 10 Year Bonds and 1 Month Bills Turn Negative, Yikes!

For the establishment, except for stocks and property prices, all other prices are considered inferior, irrelevant or beyond their definition of numbers based ‘economics’

Yet if international media have raised the issue of flattening of the yield curve abroad as increasing the risk of recession, in the Philippines, the yield curve has no significance at all.

Last week was a milestone in terms of yield spread activities.

As yields of Philippine treasury bills (1,3 and 6 months) spiked, the 10 year equivalent dropped (upper window). The result? The first ever inversion of the yield of the 1 month bill at 3.907% and the 10 year benchmark at 3.826%! Or coupon yields of the 1 month bill has become higher than the 10 month.
The spread between the 1 month bill and the 7 year at 3.75% has also turned negative as the 1 month and 5 year yield at 3.938% has massively flattened.
Because yields of 3 and 6 month bills also spiked, the result has been a massive flattening of the spread relative to the 10 year benchmark.

And it has not just been the front face of the curve, negative spreads have returned to the 10 and 3 year, as well as, the belly of the yield curve the 10-5 year yields.
Not signs of signs of severe monetary tightening?
Disclosure: Writer owns several mining stocks.
____
4 Bank of America Merrill Lynch 637 Rate Cuts And $12.3 Trillion In Global QE Later, World Shocked To Find "Quantitative Failure" Zero Hedge.com February 12, 2016
6 Gary Kaltbaum Fox News Business Contributor Our response to the President’s patting himself on the back on 4.9% unemployment rate! garykaltbaum.com February 7, 2016
7 Australian Financial Review Forget about Europe, investor tips Singapore banking crisis February 10, 2016

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