In this issue
Wow! Mall Vacancies Surfaces in Mainstream Media! Cement Industry’s 1Q woes! 1Q PSEi’s EPS Growth in Dire Straits!
-Three Reasons Why The BSP Maintained Record Stimulus
-Wow. The Shopping Mall Bubble Has Gone Mainstream!
-The Shopping Mall Mania And the Escalating Concentration Risks
-Cement Industry’s Three Biggest Players Suffers from Sales and Earnings Convulsion!
-1Q 2017 EPS Average Growth of 17 Phisix Issues: NEGATIVE 11%!
-More Volatility from GDP Week? The Stock Market From The BSP’s Perspective
Wow! Mall Vacancies Surfaces in Mainstream Media! Cement Industry’s 1Q woes! 1Q PSEi’s EPS Growth in Dire Straits!
Three Reasons Why The BSP Maintained Record Stimulus
Yet real economy prices have been raging. Even from the government’s various price measure statistics, such as the General Retail Price Index GRPI, General Wholesale Price Index GWPI, Construction Materials Retail Price Index CMRPI and Construction Materials Wholesale Price Index and even manufacturing’s Producer’s Price Index PPI, have all recently topped 2014 highs!
However, the policy sensitive CPI has signified as the ONLY price measure that has LAGGED the others and has remained BELOW the 2014 threshold! (right window)
And curiously, the gap between the GRCI (estimated consumer prices based on the declared selling prices of retail outlets) and the policy sensitive CPI (estimated consumer prices based on prices purchased by consumers) have significantly widened.
Since prices fundamentally represent the rate of exchange between goods or services consummated in a transaction, where money serves as a medium, then prices from both the buy and the sell side MUST match for a transaction to occur.
Yet in the government’s eyes, consumer BUYING prices have been LOWER than the prices SOLD to consumers by retail outlets. Such widening divergences occurred in 2016.
Yes, this shows that government’s own statistics CONTRADICT each other!
Social policies serve a political economic purpose. Hence, the BSP’s actions reflect on its understanding of the political-economic conditions, and of the perceived ramifications of these actions over a given period.
I will summarize again the narrative of why we are here or the feedback loop effects from the BSP’s actions which has led to the current circumstance.
The BSP has been traumatized by the 2014 series of tightening, which it undertook in response to the real economy price surge brought about by the 10 successive months of 30+++% money supply growth in the 2H 2013 to the 1H 2014. The main effect of their tightening measures was to curtail bank credit issuance. The deceleration of credit growth effectively crashed the money supply growth rate. The lower circulation of money subsequently spilled over to as downward trajectories in what mainstream calls as “aggregate demand”’ and was expressed in the real economy as NOMINAL GDP, real economy prices (see upper pane), corporate earnings and GDP. The BSP then even fretted over deflation risks. Such was apparent when the governor harangued the media to write about it. Unfortunately, deflation is something alien to the public whose expectations have been hardwired to G-R-O-W-T-H by inflation. Thus, ostensibly perturbed, the BSP commenced on a “silent” but grand economic stimulus scheme. It first launched a gargantuan monetization of government debt in the 2H of 2015 which as of March 2017 has accrued to a staggering Php 500 billion (lower right). The BSP also pushed policy rates to historic lows under the guise of assimilating the US Fed’s corridor system (lower right).
The public has been inculcated to believe that the current economic conditions have been a consequence of propitious direction of economic policy. Yet hardly anyone ever asks if economic conditions have been sound then why the inability by the BSP to wean away from the monetary stimulus? The answer is that of the confusion in the understanding of productivity growth vis-à-vis inflationism.
As I pointed out last week, the BSP has been caught in the quagmire of contradictions because they cannot distinguish between the two
They see the decline of the return of equity as a temporary development even when such has been ongoing for the past eight years. The BSP fails to realize that the decline in ROE is tantamount to capital consumption where the sustained engorgement of debt has eroded the nation’s capital base.
And so we go back to why the BSP maintained their present status.
Three reasons for these: Shopping mall vacancies has now segued from the fringe to the mainstream, Cement industries suffer a big time drop in 1Q financials and 17 of the PSEi 1Q eps growth has stumbled to DEEP NEGATIVE
Wow. The Shopping Mall Bubble Has Gone Mainstream!
Eventually, the truth surfaces!
Mall vacancies have likely reached a point to arouse the public’s curiosity. Because of the accelerating dynamic, mall vacancies, which have been buried for quite some time, has emerged in mainstream media.
Previously, mainstream denials had been channeled through the suppression of information and rationalizations thereof, viz. mall vacancies were due to “renovation”. Today, unexpected troubles for the most popular industry have implicitly been projected as “anomalies”.
(hat tip to reader Shak for the article)
The Inquirer quotes a property expert who says mall vacancies were increasing everywhere but were contained particularly in large malls: “vacancy rates were rising across all mall formats, while most “regional” or large shopping malls in the country still enjoyed almost full occupancy at 97-99 percent. Due to uptick in vacancy in smaller malls, average vacancy spiked to about 7 percent”
To say “vacancy rates were rising across all mall formats” then assert “country still enjoyed almost full occupancy at 97-99 percent” would signify an egregious inconsistent claim.
For if such generalization (all mall formats) is distinguished from the particulars (large versus small), then vacancies would a problem hardly for the industry but limited to small malls and non-mall retail outlets. There won’t be “vacant space troubles” as the title suggest. Such is an example of a categorical error. The idea is to put the shopping mall woes at the doorstep of minor players and safeguard the status of the majors. In short, DENY the problem!
Yet interestingly, three years back, when I first predicted this (which Forbes’ Jesse Colombo used for his article), none from the mainstream ever foresaw the current predicament.
Now to the stunning quote: “With new malls, Bondoc said the average vacancy rate could rise to 11 percent but might drop to 8-9 percent as food and beverage and “fast fashion” retailers absorb the additional space. Colliers projected about 500,000 square meters of leasable space would be completed in the metropolis this year, 48 percent more than last year. Most of the new malls were expected to be built in towns in Metro Manila. Colliers saw rental rates in the Makati central business district and Ortigas Center to grow by only 2-3 percent, respectively, in the next 12 months, down from last year’s average of 5-6 percent.
Please reread: “Colliers projected about 500,000 square meters of leasable space would be completed in the metropolis this year, 48 percent more than last year.”
F-O-R-T-Y E-I-G-H-T PERCENT!!!! Woa! FORTY EIGHT PERCENT!!!
Though I may have doubts on the sanctity of such numbers, even if projected growth represents only HALF of this rate, it is still unsustainable.
Let us put 48% in perspective.
The Philippine population growth is estimated at less than 2% a year (1.51% 2017 worldodometer.info). At 24x mall inventory over population growth, this means grave problems on foot traffic in the shopping mall industry.
Generally, the sustained expansionary number of retail outlets will COMPETE with a limited number of mall visitors. So expect mall traffic to shrink.
Ghost malls here we come!
Naturally, location and market matters. So the effects may be different for distinct malls. But in general, the industry will continue to suffer from escalating issues of excess capacity.
Yet theoretically a shopping mall can survive with a single visitor every month. That’s for as long as the visitor buys enough to provide all mall occupants profits.
In short, the most important factor for retail outlets and of the shopping mall landlords is the PURCHASING POWER capacity of the consumer.
Said differently, demand is infinite. In a world of scarcity, the problem is never about demand but of the WHEREWITHAL to finance or fund demand. Again, it is the PURCHASING POWER capacity of the consumer.
And purchasing power stems from THREE major sources: income (profits, earnings, fees, commissions, salaries, rents, dividends, annuities, pensions, welfare programs and etc…), credit and savings.
So even if income capacity grows at a wondrous hypothetical rate of 10-15% for the average Pedro Juan and Maria, this won’t be enough to fill in the gap from the massive growth in supply (+48%). It is simple math, if not common sense!
Yet even from the government’s data (Philippine Statistics Authority)—as of 4Q 2016, employment index was down 1.4% (yes job loss NOT G-R-O-W-TH), compensation index +6.5% and compensation per employee +4.5%--present number PLUS credit growth will NOT close the galactic chasm from such intensifying demand-supply imbalance. And government data are USUALLY overstated.
And take a look at the price projections. If mall vacancies will rise by anywhere 8-11%, just what leverage, does the expert think, the mall operator/s has for keeping prices or rental rates elevated? Have these experts ever considered the law of demand and supply? Do the experts know of how leveraged the balance sheets of many of these mall operators? Given these factors, what makes them certain that mall operators can demand rental prices at their terms?
The BSP should now be terrified of deflation. That’s even with the current credit growth at 18.5%. Rocketing excess capacity would translate to an eventual market tightening which will force the hand of the BSP. This means credit is bound to shrivel big time. Said differently, 48% capacity growth would not only imply cascading rental rates, but it also puts to the forefront the risks of credit deflation!
The above is an example of what mainstream analytics look like.
Statistics is wrapped around a pseudo-cerebral discussion which then is packaged and presented as economic analysis. It’s hardly an analysis for the simple reason that it does away with economics 101. It’s more of a sales script or a copywriting function.
The Shopping Mall Mania And the Escalating Concentration Risks
Moreover, FORTY EIGHT percent (or even just 24%) growth just shows precisely where the MANIA is!
It’s hardly in the stock market where vertical prices have been a function of manipulation by industry participants.
Mania involves the massive herding of participants across the sectors, namely, from big players to mid to small-scale players to even Mom and Pop mall developers and operators.
48% or even 24% growth are telltale signals of credit induced blowoff phases!
Such mania has been so evident such that they exist in my neighborhood. Almost all idle lots, especially along the major thoroughfares have been or are being developed into mini malls or retail edifices combined with residential/apartments/office. It’s not just idle lots. Even old structures are being converted into such herd driven projects. The BSP’s credit boom has certainly been a crucial factor in the financing of such speculative and unproductive projects.
Mania also leads to concentration risks.
As I have pointed out in the past, since real estate is tied to the hip with retail and construction, concentration risks have been escalating in these sectors through the capture of a larger share of the Philippine government’s GDP pie. (middle window)
The same industries hold almost a similar (38.12% March 2017) share of the banking system’s industry loan portfolio.
Even more explosive is the share of employment by the retail sector: From Philippine Statistics Authority on January 2012 employment: Those employed in the services sector comprised the largest group, making up more than half (52.7%) of the total employed persons. Employed persons engaged in wholesale and retail trade; repair of motor vehicles and motorcycles comprised the largest group in the services sector (19.3% of total employed).
The same report from the same agency updated January 2017: Workers in the services sector comprised the largest proportion of the population who are employed. These workers made up 57.1 percent of the total employed in January 2017. Among them, those engaged in wholesale and retail trade or in the repair of motor vehicles and motorcycles accounted for the largest percentage (35.2%) of workers in the services sector.
From 19.3% in 2012 to 35.2% in 2017 or in 5 years or 12.8% a year! Wow! Remember, like the automotive industry, the ecosystem of retail, real estate and construction industries are INTERCONNECTED and INTERDEPENDENT with many segments of the economy! Assuming the number is correct, the sector’s massive 38.6% share of Philippine GDP lays out the blueprint of the entrenched latticework of industry dependencies.
Just imagine what would happen if these sectors CONTRACT even by a modest %! The Philippines is going to experience social mayhem!
And hotels, the automotive and banking system have not been included in the above. Yet these are interest rate sensitive projects that have been benefiting from the current ZIRP policies by the BSP.
If we break real estate and retail into their respective segments based on the government’s data, we find that while mall inventories are BURSTING at the seams, real estate projects have even been worse. Real estate output have been EXPLODING more than retail, such that the share of retail trade to real estate has been shrinking since 2009 (see lowest pane)!
Let me revert back to the implied recognition of the Philippine shopping mall bubble.
You see for the mainstream, the problem will never be about misallocation of resources, as evidenced by oversupply even if this STARES at their faces.
As a function of attribution bias, the problem, for them, would have to be shifted to external influence: “Aside from the growing number of shopping malls, Bondoc said another factor accounting for the rise in vacancy was the challenging environment for some international fashion brands. For instance, some US fashion brands such as Aeropostale and Payless, which have local franchisees, have filed for bankruptcy and shut some of their stores, he said. Their local distributors, however, have assumed that Philippine operations would continue.”
So their conclusion: “The increase in space coupled with the closure of a number of high-end retail shops led to an overall rise in vacancy in Metro Manila.”
If purchasing power backed demand has been as strong as popularly expected, then there won’t be closures of a number of high-end retail shops, not even if their parent abroad is affected by retail slumps.
The fundamental problem of overcapacity is that it represents COMMITTED unproductive assets. Such misallocation effectively REDUCEs society’s purchasing power to finance demand.
Naturally, with constraints on purchasing power, people will work to find substitutes or bargain priced items. And online offers an alternative avenue for cheaper shopping.
And this COULD BE one of the reasons WHY the BSP kept it policy rates at a historic easiest level.
You see, if the BSP tightens, mall speculators will likely backoff, thus enlarging the already ballooning vacancies. Understand that mall vacancies have been burgeoning despite the 17.28% growth in industry loans and consumer loans in 2016!
This should not be happening for the simple reason that money remains FREE by historical standards!
Moreover, mall operators and retailers who depend on credit for working capital will see profits reduced. Shrinking profits will lessen undertakings for project and or for organizational expansion (thus reduce GDP). It will also diminish the incentives for consumers to tap credit to augment purchasing capacity. Hence, a constrained consumer essentially will put pressure on the retailer’s P&L statements as well as their balance sheets. (see US and Singapore’s plight)
Tightening will also expose highly leveraged firms hiding under the camouflage of low interestrates.
The tightening of yield spreads translates to reduced interest rate margins which subsequently diminishes the banking system’s incentive to lend (although some will go for volume in place of margins).
The sum of these: the shopping mall bubble will crack open!
So the BSP is attempting to buy itself time!
Cement Industry’s Three Biggest Players Suffers from Sales and Earnings Convulsion!
Given the visible construction boom and the much touted “build, build, build” and the “golden age of infrastructure”, I was surprised to see HLCM’s 1Q earnings PLUMMET 37.34%! Vetting further, I realized that HLCM’s topline suffered a harrowing 12.47% meltdown!
My initial impression was that this could have been a company specific development.
As a side note despite the collapse in 1Q earning, HLCM was only down -2.03% for the week and -6.42% year-to-date. This shows how Philippine markets have been buoyed by blatant misperceptions, brazenmanipulations and hope. Thus such translates to glaring misperceptions that have prompted for structural mispricing of mainstream stocks that have been devoid of actual economic conditions.
So I had to cross check with the competitors. Shockingly, collapsing sales or earnings was not limited to HLCM. The significant slowdown affected three largest producers!
Here is Global Cement on Holcim’s reversal of fortune (bold mine): “Holcim Philippines has blamed lower public infrastructure spending, tighter industry competition and higher production expenses for a drop in its financial performance in the first quarter of 2017. Its net sales fell by 12% year-on-year to US$176m and its operating earnings before interest, taxation, depreciation and amortisation (EBITDA) fell by 32% to US$40m. The subsidiary of LafargeHolcim also attributed its problems to rising fuel costs and a declining local currency. It estimates that cement demand in the country fell in the quarter year-on-year due to higher infrastructure spending in the lead-up to the election in 2016.”
Here is Global Cement on Cemex: “cement sales volumes fell by 9% in the Philippines”
There is no comparative date noted on the PSE’s 1Q 2017 Cemex report.
Here is Aboitiz Equity Venture’s 1Q 2017 report: Republic Cement and Building Materials, Inc. posted acombined income contribution of ₱202 million for 1Q2017, down 48% from previous year's ₱391 million.Cement demand slowed down in 1Q2017 compared to the same period in 2016 when demand picked up due to the election season.
So the big three were unanimous in attributing the immense meltdown of sales from a weaker demand. However, HLCM added competition, price instability and weaker than expected infrastructure expenditures from the government.
While there have been no aggregate figures for the industry yet, the material decline in sales by the biggest three cement producers will likely lead to a range of NEGATIVE 5 to 10% for the industry for the stated period.
In the same period last year, CEMAP declared cement sales soared by 13%. In the same period in 2015,cement sales increased 9.6%.
The sharp drop in cement sales appears to signify a carryover from the 4Q of 2016. From Global Cement:Cement sales had risen by 10.1% year-on-year to 20.1Mt according to CEMAP data in the first nine months of 2016 and the Duterte Infrastructure Plan was starting to target hundreds of billions of US dollars towards infrastructure spending. In the end cement sales rose by 6.6% to 26Mt for the full year in 2016 and this was a solid performance despite being brought down by the fourth quarter.
Industry sales must have skidded by about 3.9% in the 4Q for the yearend to post 6.6% despite the 9-month growth rate at 10.1%. If I’m right this makes two consecutive quarters of sales pullback.
Back in December, the industry looked so sanguine such that many firms announced massive expansion programs. Fast forward this May, sentiment has turned into frustration: “The Philippines has been messing up the balance sheets of cement producers so far in 2017….CRH isn’t the only organisation that has been burned by the Philippines”
The industry is presently being investigated by the government for anti-competitive practices.
From the HLCM perspective, it’s pretty much clear that the effects of inflation must have had affected both the company’s supply and demand significantly. Inflation must have caused higher operating cost, especially for the imported components for these manufacturers. Inflation must have also caused severe dislocations in demand. Costs of real estate and infrastructure projects must have risen too to have caused budget overruns. With budgets exceeding estimates, companies had to deliberate and work on securing additional access to funding which takes time. Thus, such delays essentially reduced demand. Even more, rising costs may have prompted the shelving of some projects on the pipeline.
Moreover, an overestimation of demand could be another major culprit. Cement manufacturers could have channeled stuffed inventories to wholesalers and distributors in the hope of magnified construction and infrastructure spending. Since demand was overestimated, it may take awhile for wholesalers and retailers to run down the existing high levels of inventories.
Third, the cement black market or smuggling may pose as a supply side threat to existing manufacturers. The Philippine government has put a wall of tariff to protect domestic manufacturers at the expense of domestic consumers. Perhaps the wall has not been foolproof enough for leaks to occur.
Fourth, the politics of infrastructure spending can mean unfulfilled promises. The Philippine government expects that the Chinese counterpart would help in the financing of the regime’s pet infrastructure projects. But there seems to be a problem with this popular expectation. It appears that the supposed Philippine patron saint for infrastructure doesn’t have enough funding for their own grand “Belt and Road Initiative”. The Chinese government has been reported to solicit from global investors funds to close a yawning financing gap.
Moreover, China’s financial markets have lately been experiencing intensifying stress. Should such stress reach critical levels, the Chinese government could be expected to devote its resources internally. This means that the Duterte government can kiss its China financed infrastructure dreams goodbye!
Like shopping malls, the cement industry has been building a mountain of capacity in the hope of the perpetuity of “demand” from a low-interest rate regime. Yet their army of experts sees demand as similar to manna falling from heaven, or from Sadako coming out of the computer screens. They have been clueless of the evolving risks from the current environment.
Do you see now why the BSP has to keep rates at current levels? A system chronically addicted to credit will suffer from a withdrawal syndrome if the BSP takes the punch bowl away.
Don’t forget that the BSP has NOT engaged in tightening yet. But the cement industry has already shown symptoms of trouble in the past two-quarters!
1Q 2017 EPS Average Growth of 17 Phisix Issues: NEGATIVE 11%!
This should be the third reason why the BSP has maintained its current rates
It’s been a marvel to see contradictions, in specific credit growth rate in the proximity of its highest levels, yet NINE of the 17 issues or 53% posted red figures for the 1Q of 2017.
59% of the reported earnings from the above firms have profoundly underperformed, if EDC at ZERO growth would be included.
The returns of the 17 issues would be a DECLINE of EPS growth rate of a stunning 10.7% if the earnings numbers are summed, averaged and compared from a year ago!!!
Such figure would even be WORSE than in 2015. Back then, credit and money supply growth were in descending. Today, credit continues to ramp even as money supply growth has shown signs of inflection.
But do earnings matter?
As of Friday, the Phisix was UP by 14.25% year-to-date. Unless the last 13 firms can deliver something like an average of 17% to push eps growth back to a positive 1, the likelihood is that the PSEi 30 1Q 2017 earnings will be down (probably in the ballpark of 5-8%).
If my tabulated numbers are accurate, then media’s very bullish forward expectations just melted down. (Again in the condition of no miracle)
I presented the year-to-date returns to exhibit how DETACHED the stock market has been to the actual earnings performance.
I noted here that the earnings growth of the Philippine stock market has been vastly OVERRATED. The above essentially confirms my view.
The public has been programmed to the idea of G-R-O-W-T-H equals HIGHER stocks. Yet where expectations fail, the next rationalization would be G-R-O-W-T-H in the next reporting future. So with little downside adjustments in share prices, prices surge again based on another bidding binge engineered and orchestrated by the establishment institutions.
So, the most expensive in Asia becomes even MORE expensive. Price multiple continues to expand relentlessly. Risk have totally been dismissed or ignored. So it would not just be the most expensive in Asia if the last 13 issue falters to deliver a miracle, then current price levels should elevate PERs to once again the SECOND most expensive in the history of the Phisix since 1995.
When eps growth turned negative in the 1Q of 2015, GDP slumped to 5.2%. It’s just amazing to see the how micro (eps) substantially diverge from many very highly optimistic government data. It’s likely that government data has been thoroughly politicized.
Yet will history repeat?
More Volatility from GDP Week? The Stock Market From The BSP’s Perspective
And given that next week is GDP week, where GDP will be announced on Thursday, the Phisix has not just been expensive but will get even MORE expensive but overbought will transform to exceedingly overbought!
GDP week has been quite consistent in terms episodes of volatility. While one may justify this as market “expectations”; with all the afternoon delights and mark the close pumps, such an optimistic excuse would be bereft of reality. Mostly pumps and rarely dumps have most likely emanated from insider tips. Philippine markets today have become totally warped. Just look at eps growth and year to date performances.
Yet GDP week volatility represents just one of the curiosities of emotions in the marketplace. And it has not been about sentiments of the general public, but passions from those who purposely distort the marketplace.
This week’s performance should be an example. The Phisix moderate decline of -.34% appears to have been managed.
Based on market cap calculations, URC’s startling -11.35% crash was basically neutralized by Ayala Land’s 6.27% forced bids. As if someone deliberately guided it. So the week’s outcome reflected on the mild retrenchments from the top 6.
To consider, volatility in the Phisix exploded at the start of the week. Like the usual pattern, the rest of week had been spent defending the early acquired gains or reducing the losses.
Here is how the PSEi performed last week: Monday +1.53, Tuesday -.49%, Wednesday -1.63% Thursday +.29% and Friday +.1%. Friday’s almost unchanged outcome was actually a product of a ‘come from behind’ (-1%) rally that ended with another splendid marking the close (+.32%)!
It has been a spectacle
For the establishment, the stock market is seen as a numbers game. They are hardly viewed as prices. Yet such numbers are seen similar to jai alai players or race horses with numbered jerseys or saddles. Or for casino habitués, numbers are viewed similar to slot machines, cards or dices whose impact are all momentary—win or lose.
To consider, these highly paid people have been armed to the tooth with sophisticated econometric algorithms. And interestingly, these numbers impel them to aggressively buy! At the end of the day, with high prices, they get a pat on the back from their superiors and bonuses for spiking prices. They are rewarded for devious and reckless behavior. And when out, they explain to the public that it’s all about G-R-O-W-T-H!
In 2014, the outgoing BSP governor Tetangco warned TWICE about excessive speculations when the Phisix was testing the 7,400 level. After that he bizarrely kept mum, even when the Phisix raced to 8,100 in 2015 and 2016!
What caused such change of attitude or the deafening silence?
Let me guess. In a single word, the answer is POLITICS.
Public and private bank and non-bank financial institutions have heavy exposures in the stock market. The BSP has no clue as to how much leverage these institutions have parlayed for such bets. This means that sustained stock market losses could extrapolate to credit tightening and thus expose the real economy to the risks of deflation. And the subsequent economic fallout and credit turmoil would spread to the government’s financial statement (read deficit blowout).
The elites may have also influenced the BSP through their manifold tentacles. Since rising markets translates to the transfer of resources to the publicly listed firms and a transfer of risks to the gullible public, falling markets would deprive the elites to use their stocks as currency for myriad deals and for risk reduction
So the BSP would rather opt for the serially blowing of bubbles and hope that bubbles would magically transform into productive growth without destabilizing the economy and the markets.
Finally, Mr. Tetangco is retiring. So why carry the cost of risk on his shoulder when he can pass this to his successor?
Brilliant!
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