Sunday, July 10, 2016

Even at Only 7,800: PSEi Hits Historic Proportions in Terms of Valuations Excesses!

This week’s outline

Even at Only 7,800: PSEi Hits Historic Proportions in Terms of Valuations Excesses!
-Déjà vu 1996? Furious Pumping Sends PSEi Valuation Excesses to 1996 Levels!
-Broadening Misperception: Historic PERs Not Just About Price Pumping, But Lethargic Earnings Growth!
-BSP’s Silent Stimulus Will Aggravate the Malinvestments and the Coming Violent Market Clearing Process!


Even at Only 7,800: PSEi Hits Historic Proportions in Terms of Valuations Excesses!

Activities at the Philippine Stock Exchange have reached historic proportions.

The headline index has yet to match the April 2015 milestone threshold of 8,127.48 but current developments have already signified epochal scales in the context violent price pumping.

And since actions have consequences, the ramifications of such frenetic or manic episodes of price pumping (combined with rampant manipulations) have led to the panoply of momentous vertical price charts for the PSEi majors.

And since price pumping equates to the disproportionate increase in prices relative to fundamentals, or price multiple expansions, or seen in economics as mounting imbalances between prices and fundamentals, thus another consequence has now been manifested through the acceleration of climatic valuations!

Déjà vu 1996? Furious Pumping Sends PSEi Valuation Excesses to 1996 Levels!

Early last week, the Philippine Stock Exchange updated their PER data to incorporate the overall performance of listed companies for the year 2015.

As a side note, I validated this by looking at the SMPH’s 2015 annual report where the firm’s earnings for the year 2015 was at Php .982 per share. At Friday’s closing price of Php 27.5 per share, PER was at 28.004. This number matched the PSE’s data. In 2015, SMPH had a huge jump in earnings due to one off extraordinary gains (Php 7.4 billion) from sale of marketable securities. The 2015 data bloated the eps and artificially reduced the lather from the previous high PER. But being an extraordinary item, in the 1Q 2016, the firm’s earnings at .202 represented a 54% drop. So SMPH 1Q annualized (1Q eps x4) would still entail a fantastic 34 PER!

Based on the PSE’s PER* as of Friday’s close, the average PER catapulted to an earth-shattering 1996 level of 25.7!!! It was even at 26.06 last Monday, the Fourth of July!

Meanwhile, the market cap weighted PER now stands at a staggering 26.65!!!

The PSEi was down by .75% this week but the average PER rocketed by 30.8% to 25.7 from 19.65! This means that the average PER have now caught up, or closed the gap with the market cap weighted PER!

Nota Bene: The PSE includes the PER on their quote page which is updated real time. The PSEi’s average PER represents the summation of indicated PER of the headline 30 composite members divided by 30. PSEi PER= Σ PER (of 30 issues)/30. The market cap weighted PER is the summation of PERs of the headline composite members multiplied by their respective % share in terms of market cap weight during the period of reckoning. Market cap PSEi PER= Σ PER x market weight (of 30 PSEi issues). Market cap weights are also reflected real time on the PSE’s index composition page. I routinely tabulate and input the closing figures at the trading week’s end. Anyone can go to the PSE website to generate their data.

Aside from their reckless and disingenuous cheerleading, the PSE’s apparent taciturn on the performance of listed firms has prompted me to write disparagingly on them. It appears that the annual report card for the PSE universe will be published in their coming monthly report for May. But like the 2Q and 3Q reports, I suspect or doubt that they will broadcast a summary as part of their “press room” disclosure, if the results have been dismal.

The PSE only brandishes their data only when the numbers fit on their preferences. Or the PSE highlights the numbers only if they resonate on G-R-O-W-T-H theme which palpably has metastasized into a political slogan! That’s the stylized du jour version of financial professionalism. That was the case for the last two quarters where the PSE universe underperformed. Total silence.


Yet what the PSE reckons as the PER for a specified period is the PER of the last trading day of the said timeframe. This applies to the monthly or annual data.

This means that in 1996, the PER of the last trading day of December 1996 reflected on the 1996 data, the PER of which was at 26.14 (left window).

What this illustrates has been that the contemporary PERs have already matched the 1996-1997 levels!

Yet the end December 1996 PER level had been extended further for the next three months, in particular 28.21 in January 1997, 27.35 February and 27.57 in March (right window)! This happened even when the PSEi grew by only 1.65% over the three month period.

(Just a side note, the PSEi composition and methodology have been different then and today. So it is unclear how accurate the headline numbers are)

Nevertheless, the 1996-1997 episode only demonstrated that ultra-high valuations only means negative returns.

Said differently, prices and returns have an INVERSE relationship, ceteris paribus (given all things constant). The higher the price paid for an expected stream of future cash flows would only translate to lower returns for a perceived investment over time.

Just take a listed firm, ABC with say a fair value of Php 10. If the ABC’s share price is at Php 8 then expected return should be 25%. At Php 9, this would be 11%. At Php 10, returns should be ZERO. Anything in excess of Php 10, or its fair value, would mean NEGATIVE returns.

So prices can only go permanently higher only if the laws of economics and finance (via valuations) have been rendered obsolete or broken. Though the same price-return valuation relationship do not discount that prices can go up momentarily.

The 1996-1997 aeon have only demonstrated that such fundamental laws existed. It delivered a fatal blow to popular expectations—through a 68% market crash. Though of course, price-valuation imbalances remained elevated for a certain period of time before the day of reckoning.

Such market crash, thus, put into spotlight the statistical law called the reversion/regression to the mean. The market cleared valuation excesses via the reversion or regression to the mean. The Asian crisis, which belatedly appeared in July of 1997, only served as trigger to such mean reverting process.

The 1996-97 lesson applied today.

Should the 1996-1997 milepost rhyme, then this means that while the current episode could further extrapolate to even higher prices, that should magnify valuation dislocations, any further upside run will likely be limited.

Moreover any further runup will extrapolate to intensifying market risks in the face of enhanced buildup of price-fundamental discrepancies.

And should history serve as blueprint of the present, then current developments indicate that present price levels would represent a crucial turning or inflection point!

Broadening Misperception: Historic PERs Not Just About Price Pumping, But Lethargic Earnings Growth!

Since PER represents a ratio between prices and reported earnings, it looks most likely that not only has the spike in the headline index PER been about rabid price inflation, but also about the denominator, or an earnings growth issue.

For a specific time period, the PSEi price index level can be divided by the estimated PER to generate an estimated nominal based earnings to represent the index.



Nevertheless I’d rather wait for the official PSE disclosure to see the outcome.

The past provides a clue. Through the 3Q of 2015, whether income or revenues, the official numbers had only evinced inertia. Revenues and income for listed companies, including PSEi composite members, were mostly drifting in the negative.

And this has been why these numbers have not made it through the PSE’s “press room”. Any facts outside the G-R-O-W-T-H theme must be considered as an anomaly thus excluded from official announcements or censored!

And I surmise that the based on a back of envelop calculations, fourth quarter numbers could even be WORST!

Hence, the current ferocious price pumping in the face of growing divergence with real developments represents the worst dynamic in motion—concrete signs of widening misperception!

And current unfolding conditions have only reinforced my suspicions of why the BSP launched a silent stimulus in 4Q 2015-1Q 2016!


The chart above represents the distribution of PERs according to the quintile market cap ranking based on Friday’s data.

Again it shows of the concentration of the HIGHEST PERs towards the top 15 or specifically, the top 5.

However, the huge leap in the 16-20 quintile has been mainly due to the surge in ICT’s PER to 124!

Yet the end of the year for 2015 numbers could only likely mean an extension of the stagnant 9 month performance.

Moreover, to fill in the blanks, the 1Q 2016 30 PSEi eps numbers gives us clues to the 2015 report.

The present savagery in price pumping has come even as eps continues to falter! Not just in 2015.

For the PSEi, 1Q 2016 eps growth slipped by 2.25% over the comparable period!

It’s not just the headline numbers that has been bad. The breadth and quality of earnings appear to be in decay.

Firms with at least 10% in eps growth or the outperformers accounted for only 16 or 53% of the PSEi universe.

Firms with less than 5% growth (2015 NGDP was 5.2%) totaled 8 or 26.67% of the Phisix.

5 firms or 16.67% of PSEi issues posted growth rates that were down (negative) from last year. One posted negative or loss.

Overall, 14 or 47% of the Phisix had underperformed. And most of the underpeformance comes exactly were the furious vertical pumping had occurred—the top 15! 9 out of the top 15 or 60% had performed below par in 1Q 2016 relative to last year!

1Q 2016’s underpeformance numbers have now been far greater than the 2Q 2015 numbers where only less than a third had lethargic eps growth.

Moreover, a vast majority of listed firms has shown of declining top line numbers or revenues. This means that most of the growth in eps had emerged from cost side reductions. This only reveals that the 6.9% 1Q GDP was a puffery!

Again this goes to show why the BSP had taken action in 4Q 2015-1Q 2016.

Also this exhibits why the mainstream has been inundated by misinformation, balderdashes or drivels, like the 4G telecom monopoly that has served as fuel to a frenzied 5 month + pump!

That’s because industry and economy wide eps has been hurtling downward!

BSP’s Silent Stimulus Will Aggravate the Malinvestments and the Coming Violent Market Clearing Process!

Of course, I do not discount that the sudden spike in bank credit growth from 4Q to the present could provide a TEMPORARY boost to NGDP and eps.

Nonetheless, the bank credit response to the BSP’s silent stimulus would postulate to an enlargement or the amplification of an already existing excess capacity in bubble sectors, the accretion of deeper mispricing (as seen in the vertical pumping of stocks, but has yet to be seen in property), significant degeneration of balance sheets of credit recipients and credit providers, and most importantly, the loss of purchasing power by Philippine resident consumers.

Proof?



June CPI spiked by a stunning 18% to 1.9% from May’s 1.6%!

The BSP explained (bold mine): The higher June headline inflation was driven mainly by higher prices of most food commodities, particularly meat, fish, fruits, milk, cheese, and eggs, as well as vegetables. At the same time, non-food inflation went up as price increases of clothing, furnishings, and household equipment as well as service-related CPI components such as education, health, and catering services more than offset the decline in electricity rates and in the prices of domestic petroleum products.

Food accounted for 36.29% in BSP’s CPI basket. Food related restaurant CPI which represented the second largest non-food category has a 12.03% share. Education and health which ranked fourth and sixth has 3.36% and 2.99% share. To wit, food, food related services and basic spending on health and education has accounted for 54.67% of the consumer’s income.

It’s not just the CPI, there has similarly been a fantastic surge in prices at the retail levels (+37.5% in May to 2.2% from April’s 1.6%).

From the Philippine Statistics Authority (bold mine):  The annual growth of the General Retail Price Index (GRPI) in the National Capital Region (NCR) moved up by 2.2 percent in May 2016. It was registered at 1.6 percent in April 2016 and 1.5 percent during the same month in 2015. Higher annual increases were recorded in the indices of food at 5.7 percent; beverages and tobacco, 1.9 percent; crude materials, inedible except fuels, 1.4 percent; and manufactured goods classified chiefly by materials, 0.7 percent.

Let us assume that these statistics have not been understated. Or let us give the benefit of doubt that these figures somewhat reflects on actual developments. This tells us that overall, the abrupt swelling of prices in basic items means LESSER disposable spending power for consumers. That’s if the erosion of consumer spending power through price level inflation have not been offset by income growth.

Yet with the PSE’s performance as a guidepost, then the 1Q 2016 data hardly provides evidence that income has grown enough to offset the ongoing corrosion of the consumer’s purchasing power.

And more signs that whatever stimulus implemented has hardly been felt in the job markets.


Major online job advertisers as Monster.com and the largest online job website, Jobstreet.com, have shown bounces off the recent lows. But such bounces may reflect on cyclical responses rather than a structural recovery.

Not even the BSP silent stimulus appears to have filtered into Jobstreet’s nominal based job openings which appears to be turning lower again [see lower window] (I tabulate this every Thursday).

So just where are the jobs to provide spending power for consumers?


OFW remittances? The BSP fidgeted with the April remittance data perhaps to hide another negative remittance growth rates last March.

Yet OFWs growth rates are clearly headed downhill. OFW remittances are unlikely sources of marginal demand and income growth.

And here is a curiosity. The government says that since the Philippine NGDP grew by 5.2% in 2015, disposable income grew by ONLY note 6%!

From the Philippine Statistics Authority: “Net National Disposable Income amounted to Php 15.0 trillion in 2015 or 6.0 percent higher as compared to Php 14.1 trillion in 2014. With the HFCE and GFCE amounting to PhP 9.8 trillion and PhP 1.5 trillion, respectively, total Savings in 2015 amounted to PhP 3.7 trillion, up by 1.9 percent from 2014.”

The plunge in CPI (thereby GFCE) most likely helped contribute to the disposable income growth data. Of course, I would suspect that this had been tilted to the higher income levels (or the few beneficiaries of the credit boom) to have lifted the aggregate numbers.

YET go back to the 2015 NGDP figures. In the year 2015, the NGDP performances of the bubble industries: Construction 10.4%, Real Estate 10.3%, Retail 7.5%, Hotel and restaurants 9.7% and financial intermediation 7.6%.

To repeat, from the government’s perspective: Disposable income grew by only 6%. Yet all these industries ballooned by MORE than the growth rates of disposable income. Since every industry competes for the consumer’s peso or disposable income, then just what happens to the variance or the gap in the growth rates between the industry and consumers? Would this not translate to excess capacity??!!!

You see, malinvestments reveal themselves even in government numbers!

And because the numbers cited are from the government, disposable income is likely to be overstated, while based on industry declarations, previous declared expansion numbers suggest that some like real estate and retail could be understated.

All one has to do is to look at bank credit loans to the industry.

Yet with disposable income under pressure from spiraling inflation rates, just who will buy all such massive outgrowth in the supply of shopping malls, office condos, horizontal and vertical housing and hotels and casinos?

The BSP hasn’t learned. They inflated domestic liquidity M3 by 30%+++ for 10 consecutive months in 2H 2013-1H 2014. And these caused massive displacement in the economy from which side effects (as reflected the erosion of eps, jobs and income and etc…) continues to linger.

YET with the silent stimulus, they apply more of the same treatment to the very symptoms that emerged out of their 2009 “trickle down” policies of borrowing growth from the future to pump GDP today.

The BSP can never learn because this represents the prevailing central bank dogma adapted by contemporaneous central bankers everywhere.

The central bank catechism: Spend the economy to prosperity by through credit expansion! Forget the balance sheets!

And because balance sheets are not just imaginary and serve as real function to every entity, the “spend to prosperity via debt” paradigm has only been disintegrating.

So worldwide, we now see central bank actions sending debt levels skyrocketing even as the war on interest rates escalate. The war on interest rates is now being conducted via negative interest rate policies (NIRP) and bans on cash transactions!

And worst, the central banking easy money doctrine transformed into policy applied to the Philippines have only been intensifying price-fundamental misalignment at the Philippine Stock Exchange.

Thus the credit expansion fueled historic price pumping activities have now been manifested through a landmark disparity in terms of price valuations!

The ramifications of which—if history where to rhyme would be an earth-shattering nasty market clearing process via a reversion to the mean!

A historical milestone has been set just last week!

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