Last June, I observed that the BSP engaged or implemented a dramatic “silent” stimulus in 4Q 2015 and 1Q 2016. I say “silent” because none of this has been discussed at media or by establishment outfits (as I know of). The BSP has made no such disclosure.
But actions speak louder than words.
The BSP enforced the stimulus by prying open the drastically flattening (or even the slightly inverting) yield spreads. Like in 2009, the forcible widening of spreads had been designed or engineered to reverse the tightening of liquidity in the financial system.
Credit tightening has been seen via the reduction in bank loan activities which resonated through the crash in M3, and subsequently got vented on the slide in CPI.
So aside from widening spreads of domestic sovereigns, the spikes in the balance sheet of both the BSP and the banking system has accounted for as the smoking gun evidence of the silent stimulus
I proposed three reasons for this: 1) To finance election spending, 2) to overturn the trend of falling price levels (thereby support claims to GDP advancement), and finally 3), to save the domestic stock market from the August 2015-January 2016 crash.
As for the second motivation: In 2015, the Philippine government repeatedly announced that the GDP (statistical economy) has been rising. Yet ironically, the supposed G-R-O-W-T-H dynamics emerged, again, in the face of falling bank credit growth, liquidity and falling prices.
So the cosmetic GDP activities have deviated from many real economic events. And part of such disparity or contrasting scenario has been at the corporate levels.
While GDP supposedly rose, PSE’s corporate performance actually went into the opposite direction. This was eventually reflected on the stock market through the crash.
And so the masquerade of propping up statistics will only be exposed if the discrepancies continue. Hence, the political imperative targeted to desperately bolster eps and the GDP or the statistical economy, by the BSP, through the monetary policy mechanism.
In short, the above suggests that the BSP’s action has prioritized the rescuing of the stock market.
The nominal changes of the Philippine treasury yield curve in 1H 2016 exhibits the odd man out. Yields of 10 year yield rose as the entire curve plunged. This accounts for further proof of yield management practices by BSP.
And the opposite directions taken by the yields of the 10 year and the rest have extrapolated to the broadening differentials or variance. (see upper window)
Last July I wrote, “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.”
By forcibly widening the yield curve, this entails the following:
-Widening spreads translates to higher net interest margins. And higher NIMs encourage bank lending (ceteris paribus). Hence, this would redound to the expansion of nominal bank credit volumes.
-Higher interest margins translate to more profits from banks.
-Bank credit expansion help power asset prices higher.
-The inverse of vastly lower yields are higher bond prices. Since bonds are mainly traded by financial institutions thus rising bonds prices adds to the financial system’s portfolio gains.
-Bank credit expansion has moved along with PSEi index but with a time lag (lower window). This means that PSEi’s vertical price movements have likewise been financed by credit.
-Higher asset prices means higher collateral values. And higher collateral values can be used to generate even more leverage. And more leverage leads to higher prices. Thus the feedback loop mechanism pillared on credit expansion.
This also means that higher asset values inflates on the banking system’s non interest income such as gains from trading, commissions, fees and others
-Inflation of bank lending also leads to magnified consumer spending.
So Ladies and Gentlemen, allow me to present the impact of the BSP’s silent stimulus to the performance first of 1Q and 2Q eps in the context of the PSEi 30.
First a correction. Last July I placed 1Q eps growth at 2.25%, I inadvertently interchanged ICT’s eps of 2016 and 2015. So the revised numbers reveal that 1Q slumped by wicked 5.5% or double the 2.25% earlier indicated.
Second, the BSP has answered the supplications of PSE officials. PSE officials will now scream in glee and in elation. This will impel the PSE to move out of their shells or from hibernation to pompously broadcast on 2Q earnings. That’s because 2Q eps zoomed by 12.3%!
Also this would prompt for the spreading of more disinformation anchored on GDP equals EPS equals G-R-O-W-T-H, therefore VERTICAL price pumps.
Third, because of 2Q’s scintillating performance, 1H eps growth accounted for an eps recovery of a modest 3.9%.
Fourth, headline eps growth hasn’t been a rising tide lifts all boats dynamic. Instead 1H eps signified a story of huge divergence—superb outperformance by a slim majority as against a substantial number of underperformers
In the 1Q, there were only 6 issues which posted declines in eps growth, 1 suffered outright loss while 8 posted lower than 10% growth. The underperforming firms afflicted HALF of PSEi companies!
In the 2Q, 9 issues posted declines in eps growth (50% increase relative to 1Q), while 5 issues underperformed. So 2Q 12.3% growth was mainly due to 16 or 53% of the issues which accounted for substantially enormous eps growth numbers.
In the 1H, 7 issues registered negative growth, while 4 issues were subpar for a total of 11 or 37% of the PSEi firms. While the number of underperformers whittled down to 37% from 50% in the 1Q, the quality of eps growth more than the quantity matters. This leads to the fifth factor.
Fifth, much of those big numbers were either inflated by BSP’s silent stimulus and or through non core or non-recurring events.
Example of beneficiaries of BSP silent stimulus:
BDO: 17% surge in NET interest income on loans and other receivables which grew by 14% from consumer loans and 50% surge in interbank loans. Other income soared 35% based on Php 2 billion of trading gains, service charges and fees up 20% and trust fees higher 9%.
BPI: “Net interest income at P10.7 billion, increased P1.2 billion, or 13.1% on account of the P176.8 billion, or 12.6%, expansion in average asset base and increase in yields. Interest income stood at P14.7 billion, up P1.9 billion, or 14.6%...” More… “Other income at P9.2 billion was P4.1 billion, or 80.9% higher than the P5.1 billion earned in the second quarter of 2015: Trading gain (loss) on securities at P4.8 billion, increased P3.9 billion, or 435.7% due to gains derived from the sale of the reclassified portion of certain held-to-maturity securities to AFS as disclosed in the Notes to Financial Statement Disclosure Portion of this document. Other Operating Income at P2.3 billion, increased P160.6 million, or 7.4%, mainly due to higher trust fees and miscellaneous income” Trading gains accounted for about 44% of BPI’s net income accountable to equity holders which served as basis for eps
AEV: “ Share in net earnings of associates rose by 86% YoY (₱4.16 billion vs ₱2.24 billion in 1H2015) largely due to the growth in net income of UBP resulting from higher net interest income, fresh equity earnings contribution of infrastructure group, and higher ancillary revenue of SNAP-Magat…. The 34% increase in consolidated net income combined with 1270% surge in AEV's share of an associate's unrealized mark-to-market gains on its available-for-sale (AFS) investments, accounted for this growth.
AEV and AP’s other non-core income: “Other Income increased by 488% YoY (₱1.85 billion vs ₱314 million in 1H2015) mainly due to TSI's collection of insurance proceeds from settlement of liquidated damages, AP's gain on step acquisition of EAUC and lower foreign exchange losses.
JG Summit: inclusion of the petrochem’s freshly integrated operations fervidly energized 1Q eps by a staggering +59.52%! But since 2Q has seen normalization of operations, JGS’s eps plunged to just +5.77%. Nevertheless the legacy of 1Q eps outgrowth meant that 1H eps growth remained at a majestic 31.02%! This gives us a clue why taipan and patriarch of JGS Mr John Gokongwei sold $250 million in JGS shares.
The above are just some examples of the many that have emerged to have prompted eps growth to be kicked upstairs in 1H 2016.
Or many of the magnificent numbers have accounted for acutely expansive dependence on the BSP’s sustained leveraging of the system through financial repression or trickle down negative rates policies channeled through the sustained manipulation of interest rates and the yield curve. These are broadly seen at the front end (demand side), the back end (supply side), through credit intermediaries (interbank and intercompany loans, bonds and other credit based money substitutes) and sustained asset inflation (bonds, currency, property, stocks and derivatives). These leveraging comes in many forms as accounting profits from mergers and acquisitions, as well as project expansions, asset arbitrages, transactional fees and related charges, loan issuances, marketing of big ticket items and many more.
And by juicing up credit through the silent stimulus, as I wrote in July, “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.”
Those risks have become palpable from the valuations perspective.
From the official 2015 PER as indicated at PSE, despite this week’s marginal .32% decline, the average PER of the PSEi 30 whizzed by 1.32% while the market cap weighted PER bolted 1.1% to respective LANDMARK HEIGHTS of 27.64 and 28.5 respectively.
Interestingly the PSEi remains at 7,930 but valuations continue to soar as vertical price actions rotate into the PSEi bench players or the lower half of the headline index such as LTG 8.49%, ICT +7.61%, EMP 4.32%, BlOOM 4.04% and DMC 3.42%. SCC’s 11.11% pump was in reaction to last week’s 13.85% dump.
This week’s market cap weighted PER of 28.5 has already flown past the January 1997 high of 28.21. This also means that the average PER at 27.64 has signified a hair away from 28.21. From the PSE published records these numbers have already attained a breakthrough in historical prism. Since the 1997 zenith has been surpassed, thus part of momentous history has already been made!!!
Even if to apply the 1H 2016 eps (annualized), the average PER would still be at 23.86 while the market cap weighted PER 22.11. This assumes that the current conditions will be retained towards the year end
And yet it has been a bizarre episode to recently see the BSP chief subtly censure the fund management industry as “not to be oblivious to financial stability issues”. Unfortunately like Pavlov’s dogs, the establishment has been programmed to conditionally respond to the stimuli thrown at them via artificially lowered interest rates. Therefore, without taking off those psychological influencing conditions via monetary policies, a stricture on self-discipline alone would not do the work since these agents have become dependent on them.
Yet to maintain the present tempo of monetary stimulus inflated eps, the BSP would need to see the banking system continue to churn loans at a far faster rate than the present. Or as the great Austrian economist Friedrich August von Hayek once explained, such perceived boom*
“requires not only continued inflation but inflation at a growing rate. Because, as we have seen, it will have its immediate beneficial effect only so long as it, or at least its magnitude, is not foreseen. But once it has continued for some time, its further continuance comes to be expected. If prices have for some time been rising at five percent per annum, it comes to be expected that they will do the same in the future. Present prices of factors are driven up by the expectation of the higher prices for the product—sometimes, where some of the cost elements are fixed, the flexible costs may be driven up even more than the expected rise of the price of the product—up to the point where there will be only a normal profit.
But if prices then do not rise more than expected, no extra profits will be made. Although prices continue to rise at the former rate, this will no longer have the miraculous effect on sales and employment it had before. The artificial gains will disappear, there will again be losses, and some firms will find that prices will not even cover costs. To maintain the effect inflation had earlier when its full extent was not anticipated, it will have to be stronger than before. If at first an annual rate of price increase of five percent had been sufficient, once five percent comes to be expected something like seven percent or more will be necessary to have the same stimulating effect which a five percent rise had before. And since, if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which, in spite of rising prices, many firms will be making losses, and there may be substantial unemployment. Depression with rising prices is a typical consequence of a mere braking of the increase in the rate of inflation once the economy has become geared to a certain rate of inflation.
We have seen this happen in 2013, the effect became evident in 2015.
Now the BSP just doubled down.
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