Principal Agent Problem: Hong Kong-China Edition, Roots of Why The Mainstream MUST Remain Bullish

Despite growing risk conditions, this is an example why the mainstream has to remain bullish.

From Bloomberg’s Every Stock Was a Buy to This Analyst Team, Then Shares Tanked (May 30)

Companies probably love getting attention from analysts at Emperor Securities Ltd. in Hong Kong. Investors who followed their advice for the past year, not so much.

The unit of Emperor Capital Group Ltd. issued buy recommendations on every one of the 173 companies it reported covering from April 2015 through May 16. Its target prices, which the company says forecast trading levels within weeks, predicted gains of 25 percent on average. They are frequently the most bullish among analysts who cover the same stocks and list their calls with Bloomberg, including those based on the standard 12-month horizon.

The picks ended up being so wrong during the past year’s rout of Chinese and Hong Kong stocks that shorting every one would have resulted in gains of about 6 percent after just four weeks and almost 13 percent if all were held through last week.

Emperor’s record highlights the perils of equity trading for new retail investorsflooding markets in China and Hong Kong. Individuals piled into stocks as the Shanghai Composite Index recorded one of its best rallies ever and policy makers relaxed restrictions on mainland and Hong Kong citizens trading in each other’s markets. Emperor, which caters to such traders, said its revenue increased 64 percent in the year ending March 31 thanks in part to big increases in brokerage fees and margin-lending interest payments.

The firm was hardly alone in making bad calls during the turmoil. Forecasts by firms covering mainland Chinese equities were off by bigger margins on average than those of analysts researching stocks in the rest of the world’s 20 largest markets. Analysts covering Hong Kong-listed companies, Emperor’s focus, were second worst, with their average year-ago targets overshooting the benchmark Hang Seng Index’s current level by 44 percent.

“It’s our style to have a buy with a target price and a stop-loss price and not have hold or sell” recommendations, said Stanley Chan, director of Emperor Securities Research, by phone. The “small, local brokerage” offers trading ideas based on “market sentiment” and “news, events or momentum,” he said, not valuations, earnings potential and other fundamentals. “We pick stocks with a one-to-two-week horizon,” Chan said.

An investor buying each of the 173 stocks on the day of Emperor’s recommendation would have lost 0.9 percent after a week on average, 2.9 percent after two weeks, 4.2 percent after three weeks and 6.1 percent after four weeks, by which time 119 of the stocks had fallen, data compiled by Bloomberg show.

You see, the incentives for brokers, banks and fund managers are commissions and fees generated from transactions. On the other hand, the incentives for the public have generally been to make profits from trades. 

By virtue of asymmetric information (where sellers know more of the market than the buyers), when the mainstream peddles a ruddy outlook in order just to sell financial products, they take advantage of the public’s gullibility by purposely disregarding the risk from their proposed trades. They make it appear that that their trade recommendations are a one way road.

And this goes beyond scheming. Most have been ingrained to steadfastly believe that nothing can go wrong. That’s because when puritanical bullishness morphs into a creed**, this further incents the mainstream’s one sided recommendations.

In short, everything is a buy. The mainstream MUST remain bullish because this feathers their nests. So they won’t ever bite the hand that feeds them by telling of the public of the risks from the environment. They would censor or deflect or dismiss anything or any information that will go against their interests or beliefs.

This is called the principal agent problem or conflict of interest operating behind the interactions between financial agents and their clients. But this is not limited to finance as this is also seen in the world of politics.

So when the market goes awry, clients are left hung out to dry.

For as long as the market remains up, such conflict of interest won’t seem apparent.

But as Hong Kong and China’s experience has shown, when the market has been sharply down that’s when the public gets to know who’s been swimming naked

**In behavioral finance this is called the endowment effect or "people ascribe more value to things merely because they own them". For instance if one is invested into an industry, the endowment effect means that because one has already been exposed in it, one cannot go against this position because doing so only means an admission of a wrong decision. So during market cycle tops (manias) or economic cycle peaks, denials transforms into a religious like conviction.

At the day’s end: Bulls Make Money, Bears Make Money, Pigs Get Slaughtered

Phisix 7,400: Intensifying Signs of Destabilizing Speculative Activities: Vertical Upside Morphs into Downward Spiral for JGS and MER

Below is a series of test post.

 

The Phisix rallied by 1.59% in a highly volatile week. 

Yet it’s not the headline numbers that counts. Instead the main focus should be what’s been happening WITHIN the PSE. Particularly, the intensifying destabilizing speculative actions that has gripped overall trading activities at the PSEi! 

Vertical upside moves which consequently transformed into crashes should serve as writings on the wall.

Two issues suffered crashes this week: Meralco and JG Summit. 

Meralco plunged 6.6%. This compounded on last week’s 5.52% loss for a total of 12.12%. From the recent peak to Friday’s close, Meralco has endured a 13.5% dive! And the crash didn’t just appear out of nowhere. It was an offspring to a parabolic move. (see upper window chart) 

Yet this week’s activities has seemingly resonated with the October-November 2015 mini-boom bust cycle where Meralco share prices also plummeted by 13.9%. As in the March to May episode, it was the same sharp ascent (parabolic move) that has led to its crash in October-November. 

Meralco has even had a bigger boom bust cycle in 2013. MER’s share prices soared from around Php 250 to Php 394 (57%) in just 6 months! Unfortunately, destabilizing speculation meant that ALL gains acquired over this very short period had to be RETURNED to the market! 

MER’s share prices regressed back to its original base by February 2014. The fundamental reason attributed to this volatile punt was the buyout of a 27% stake by JG Summit in Meralco from San Miguel. 

Yet current manic turned into panic developments in MER have even been more intense with JG Summit. 

Since the January’s nadir, share prices of the Gokongwei flagship have virtually gone berserk. Not only has JGS gone parabolic, since post elections, JGS share prices have rocketed vertically!  (see lower window) 

So it would not be unexpected for panic buying to morph into panic selling. All it needs was a trigger. And the said event was supposedly incited by Gokongwei’s selling of a portion the firm’s share for “estate planning purposes” (see my explanation in my next message) 

Yet in no point in the current cycle (2003-2016) has JGS moved in such stunning fashion. 

So what goes up must come down. 

Despite the two huge selloffs, and most especially, the selling pressure on the fourth biggest market cap issue JGS, the PSEi remained unscathed. 

Reason? 

Like in the PLDT episode last February, index managers had to make sure that such crash would remain isolated. So they resorted to the massive pumping of other key issues or the other heaviest market cap issues to neutralize the effect from JGS’ meltdown. 

No less than FIVE of the EIGHT biggest market cap issues posted gains of 4.5% and above this week!

If we include the top 15, 7 issues generated over 4% returns this week! 

And the distribution of gains has been virtually skewed towards the top 15. The average return of the top 15 was 2.41%, while the average gain of the next 15 was only .64%! 

Based on returns, the top 15 had 7 issues with over 4% as against only 3 issues for the next 15! 

Such may be seen as circumstantial evidence of the concentrated coordinated actions engineered to pump the index. 

The low volume-low liquidity of trade activities exposes the vulnerability of the PSE to manipulations. This has been most evident with the frequent and rampant use of "marking the close". Add to this, of course, are the regulators whom have been asleep at the wheel or possibly "captured" by entrenched manipulators. Nonetheless, manipulations enhance on the imbalances developing in the system.

Numbers alone will not do justice to the overall price activities of specific issues 

The above have accounted for as absolutely breathtaking pictures or depictions of mania and manipulation in motion. 

And these three (AEV, AC and SMPH) have not been isolated. The biggest market cap SM shares the same features with nearly equal intensity. Others like JFC, GTCAP, MPI and AP also manifest of the same symptoms but at a lesser degree. 

These are signs of imbalances and maladjustments that seem to have already reached epic or climactic proportions. Thus, vertical or near vertical moves are vulnerable or susceptible to exactly the same fate that has afflicted JGS and MER. 

And such destabilizing speculations combined with market manipulations have signified as products of the increasingly desperate and frantic attempts to push the Phisix beyond 7,400! 

As reminder, record 7,400 was first etched in May of 2013. This means 7,400 has signified a three year old resistance level which index managers have been attempting furiously to engineer a breakthrough during the last three years. 

They temporarily succeeded in the 1Q of 2015 to bring the Phisix to 8,127.28 in April of 2015. But apparently, the breakout failed to hold. Hence, the PSEi collapsed back to 6,100 last January. 

Now or current activities represent the FIFTH attempt. Yet what is of paramount importance is not merely a breakout, but the sustainability of the trend. That was the lesson of April 2015’s 8,127.48.  Yet Philippine stocks have reached 1996 levels in the context of valuations which proves to be a critical barrier for such an undertaking. 

For now, cracks in the likes of February’s TEL, and today’s JGS and MER has been interspersed and thus contained. But what happens when such fissures spread or escalate? Or what happens when index managers lose control? 

Two crashes happened within the span of 7 months or in the 2H 2015 through January of this year. Given that current actions have even been more radical than in 2013 and 2015, then the risks of a market crash is even HIGHER now than in 2013 or 2015! 

For now, it may be true that the crashes of MER and JGS may be partly recoverable. That’s because sentiment is largely a manifestation of risk appetite. And the present state of risk appetite has been underpinned by overconfidence. 

But sentiment is capricious, which consequently means that it is prone to instability and thus a breakout may be ephemeral. As proof, the dominant sentiment in the current environment runs in antipodal to that of December 2015-January 2016. Then it was fear. Today it is GREED…at the extremes 

Most importantly, sentiment cannot, over the longer period, supplant the basic function of stock markets as discounting mechanism of the expected stream of future cash flows. 

In kernel, stocks prices will remain anchored on fundamentals. 

So unless fundamentals improve FASTER than price based returns, any further push on today’s overvalued market will only exacerbate on the present mispricing dynamics. Prices will move further away from reality. Yet the bigger the gap, the more vulnerable to a violent reversion to the mean 

Understand that social policies affect the economy, the credit environment and financial markets. And this IS the PRINCIPAL reason why the stock markets has transmogrified into a gambling casino, as evidenced by severe overvaluations and extreme greed sentiments. 

At 7,411, the PSE bears a lofty average PER of 18.34 and the average market cap weighted PER of a horrifying 24.34*! In short, the market is paying Php 24 for every peso earned. And much of the peso earned by these firms have depended on leveraging. 

* the PSEi index is constructed from the ranking of its composite constituents based on the market cap weights. Thus PERs, Book Values and other financial ratios MUST reflect on the same distribution of market cap weighting and NOT just the average. 

The BSP’s negative interest rate policies have spawned and let loose a monster bubble which has now spilled over to the political spectrum.

The Other Possible Reasons Behind the $250 M Share Sale of JG Summit

Test Post

Shares of JG Summit collapsed 10.64% this week mainly due to the $250 million worth of share sales announced by owner John Gokongwei for allegedly for estate planning purposes. 

I will apply economic analysis predicated on 'demonstrated preference' on Mr Gokongwei’s actions and extrapolate from it the likely effect or consequences on JGS share prices

Austrian economist, Murray N Rothbard explained Demonstrated Preference as 

The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis. 

In layman’s terms, revealed or demonstrated preferences are virtually about “actions speaking louder than words”.

The fact is that whether the publicly announced goal of estate planning has been true or not, from the sale, Mr Gokongwei’s actions expressed preference for cash over equities. 

Q.E.D.

Some questions:

Why would Mr Gokongwei prefer cash through equity sales to a third party? And why would Mr Gokongwei prefer not only cash but in dollars worth of cash equivalent of JGS shares priced at week ago record levels?  

After all, if such were about “estate planning” then why has Mr Gokongwei not just transferred such shareholdings to his desired heirs? But that’s if Mr Gokongwei sees more value in his flagship’s shares than cash. But this does not seem to be the case. 

Again why? 

Could it be because Mr Gokongwei sees increasing risks in the BSP’s silver platter or windfall to him and his family?

Of course, no elite would ever say that his company is overvalued. Why would they? 

Overvaluation essentially inflates on the prestigiousness of their social status as measured by their net worth. The higher the share prices of companies they own, the bigger their net worth! Overvaluation translates to higher Forbes ranking in the global wealth profile. Mr Gokongwei has been ranked 270th among the world’s wealthiest and the SECOND richest in the Philippines based on Forbes calculations 

Overvaluation enhances the collateral values of their companies from which they can use to obtain more credit for business operations or expansions or even for personal consumption. 

Overvaluation enhances the moneyness (exchangeability or liquidity) of the shares of their companies which enables them to use or to conduct merger and acquisitions and other share backed or collateralized deals.

Overvaluation enhances their political clout or political capital in dealing with political agents to seal political deals or obtain political privileges.

And since no elite would generally admit to overvaluation of their company’s shares, would it not be better to see through their actions as a reflection of their insights? 

Could it have been that because Mr Gokongwei sees today’s prices at PER of 31.81 as unsustainable, hence the sale? The proceeds of which would be used to buyback JGS shares when they fall to more rational levels in the future?

Could it have been that Mr Gokongwei sees uncertainty in the political economic environment for him to raise not only cash but cash in USD holdings? Has the proceeds of the sale been kept abroad? 

Oh by the way, the above diagram represents JGS’ first quarter 2016 topline performance. At 6.2%, growth in JGS topline has accounted for the least in the last four years. JGS’s recent cash cow has basically been from his revitalized petrochem business (excluded from the chart) in the face of slower business conditions in 1Q 2016 relative to 1Q 2015.

Could this have been the reason or one of the reasons why cash was preferred to equities?

Yet if JGS share prices continue to advance, will the 82.1 level serve as a threshold for Mr Gokongwei to further sell shares for “estate planning purposes”?

If so, has Mr Gokongwei now served as a major resistance (as implicit seller) to any destabilizing speculation on JGS shares?

Or has Mr Gokongwei’s move been designed to self-regulate against speculators?

But JGS will be spending aggressively in 2016 according to media. Of course the devil is in the details. And minds can change, just look at the incoming president.

Nevertheless, if the sale has signified a politically oriented action, could it be that Mr Gokongwei may continue to hedge his wealth through even more share sales in the name of estate planning with proceeds stored abroad?

Very interesting developments.

6.9% GDP Growth In the Face of Falling Tax Revenue Growth and Online Job Recession

Test post

 

6.9% GDP Growth? Then Why Has 1Q Tax Collection Growth Rate Plummeted to only 1.8% as Deficit Swells 

More signs of political economic legerdemain. While the government says the 1Q GDP was 6.9%, tax revenue growth continues to move towards the opposite direction!

Based on Bureau of Treasury data, for the 1Q 2016, tax revenues grew by only 1.79% which was the lowest level since Q1 2013. That’s because of the 7.8% crash in tax collections last March essentially negated January and February’s gains of 9.4% and 4.7% respectively.  

One can blame politics to the lapses in 1Q tax collections. 

Perhaps tax officials allowed lesser intake in order for corporations to fund the elections campaign. Maybe tax officials joined the elections campaign. Or tax officials were uncertain of the prospective tax policies by the coming administration. But while some of these excuses maybe valid, this won’t be enough to rationalize the decline.  

That’s because falling tax collections have been a trend. The rate of growth of tax collections has been in downtrend since Q1 of 2015, or even from a longer period or from Q4 of 2012.  

What a paradox: NGDP has been climbing since the low of Q1 2015 even as tax collections growth has been plunging to reach to its recent low (1Q 2016)! (see chart in upper window)  

Yet tax collections look as if they mirror on the nominal topline growth rate of PSEi’s 30.  

If RGDP was indeed 6.9% (NGDP 7.6%), then why has tax collections been cascading????  

And the consequence of sagging tax collections and ballooning expenditures has been to enlarge the fiscal deficit.  

And higher deficits would eventually lead to higher debt levels and even MORE downside pressure on the peso!    

Government debt by rose by only 2.57% in the 1Q 2016 with foreign denominated debt taking the load of increase at 7.6%, while domestic debt was almost unchanged up by only +.45%.  

And expect more splurges from the incoming administration to put pressure on the government’s balance sheets

6.9% GDP Growth and the Online Job Market Recession 

It’s not just tax collections.

Private sector’s online hiring statistics continues to show of a job opening recession.  Monster.com’s online hiring tumbled by a huge 24% last March. In the first quarter, job placements plummeted by 32.45%! 

And it is not just Monster.com. 

My weekly tabulation of Jobstreet.com’s numbers* has essentially mirrored Monster.com. From about 110,000 in December 2014, jobstreet’s numbers are now at around 60,000 to 62,000. That’s a collapse of about 45% from 2014. Although current levels have recovered from a low of 48,000-50,000 last January. 

*Jobstreet has no official employment index so I do my own tallying 

Meanwhile Jobs.db’s hiring numbers have entirely collapsed from 37,000 in April 2015 to only 70s (yes seventies) last week! In fact, jobs.db announced that it will cease operations starting June 30! 

Economic boom in the face of jobs drought. Yeah right! 

The only alternative explanation would be that the job hiring process has been taking place outsidethe online spectrum. Perhaps a return to traditional media advertisement (Bulletin) or through direct channels conducted through viral means. Nonetheless, such alternative job advertisement and hiring process would translate to a more inefficient and costly way of getting new employees. Will employers sacrifice profits by going for higher cost of recruitment? 

If the economy has been growing by 6.9% then why has online job placements been cratering? Like taxes, the government aggregated economy wide-survey and actual economic activities simply do not square. 

I will wait for PSE’s 1Q official data on its universe of listed firms.