But the evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit. Every principle of justice is put to the rack, and the bond of society dissolved: the suppression, therefore, of paper money might very properly have been put into the act for preventing vice and immorality.—Thomas Paine
In this issue
Vista Land’s Amazing Friday’s Magic! A January Pullback in Build, Build, Build?! Blame Foreigners for Retail Underperformance!
1. Vista Lands’ Amazing Friday’s Magic!
2. Have Liquidity Strains and Unsustainable Fiscal Deficits Triggered a Pullback in January’s Build, Build, and Build?
3. Cracks on PSEi Facade? Should Foreigners Be Blamed for the Retail Portfolio’s Underperformance?
-What Bull Market? Skimpy Annual Returns
-PhiSYx is NOT the Market, The Concentrated PUMPS on the Top Six!
-The Foreign Money Scarecrow, Maximum Pain on Maximum Participants
Vista Land’s Amazing Friday’s Magic! A January Pullback in Build, Build, Build?! Blame Foreigners for Retail Underperformance!
1. Vista Lands’ Amazing Friday’s Magic!
AT the PSE’s trading floor last Wednesday, some floor traders openly talked about an alleged ‘big’ close for former presidential aspirant and real estate magnate Manny Villar’s Vista Land & Lifescapes, Inc. [PSE: VLL] near the session’s end.
It didn’t happen. Not on Wednesday.
Figure 1
On Friday, February 15th, VLL ended the regular session lower by .47%. Then the shift to the 6-minute market intervention phase commenced. When the bell rang to signal the run-off period, VLL closed magically and majestically higher by 26.98%! (upper and middle window)
VLL zoomed by an astronomic 27.5% within the transition process of the matching of bids and asks invisibly and furtively!
Because of the closing transition pump, VLL’s prices have been booted up to a 2015 year high!
If such price actions have been the character that has driven firms of the elite, such as the Sys and Ayalas, why not the real estate firm of the possible anointed successor?
As historian Charles P. Kindleberger wrote "Commercial and financial crises are intimately bound up with transactions that overstep the confines of law and morality, shadowy though those confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom." (p.66)… “The forms of financial felony are legion. In addition to outright stealing, misrepresentation, and lying, there are many practices close to the line: diversion of funds from stated use to another, paying dividends out of capital or borrowing, dealing in company stock on inside knowledge, selling securities without full disclosure of new knowledge, using company funds for noncompetitive purchases from or loans to insider interests, taking orders but not executing them, altering the company’s books…one could go on.” (p.76)
Financial shenanigans are getting bolder!
2. Have Liquidity Strains and Unsustainable Fiscal Deficits Triggered a Pullback in January’s Build, Build, and Build?
Figure 2
Half of February has passed but the Bureau of Treasury has YET to publish 2018’s fiscal conditions and debt servicing data.
Why?
In the face of overly aggressive spending and a shortfall in revenue, has 2018's deficit exploded beyond its targets?
And as a result, has the plunge in Construction Wholesale Material Prices in January signified a substantial pullback by the National Government (NG) on its build, build and build programs in January?
Construction Material Wholesale Price Index (CMWPI) growth plummeted to 4.86% in January from 7.81% a month back. That’s an enormous 38% plunge in the growth rate.
The Philippine Statistics Authority’s (PSA) primer on the CMWPI states of its function: “It is used for the computation of price escalation of construction materials for various government projects as indicated in the Presidential Decree (PD) 1594.”
The crash in the CMWPI has also aligned with the recent cascade of the CPI. (figure 2, middle window)
Or has the rapidly dwindling money supply growth siphoned money in circulation enough to curb public construction? But M3 bounced in December. Will this be sustained? If so, then build, build and build will recover. Otherwise, with the GDP anchored on sustained NG’s spending binge, a persistent slowdown of public works would slam statistical growth!
If prices involving build, build, and build has dived, that’s not true for private construction. The PSA’s data on Construction Material Retail Price Index (CMRPI) accelerated upwards to 2.46% in January 2019 from 2.35% a month back. (figure 2, upper window)
So the crony-based private sector components of the Private Public Partnership (PPP) projects may have filled up some of the gaps as ramification to a likely slowdown in public works.
Why has the ‘build, build and build’ prices plunged?
Has there been a deluge of supply to have underwhelmed demand? That is not likely. Industrial production has stagnated since the 2H of 2018 and collapsed in December. Imports have also crashed in December. [see last week’s GDP: 6.1% 4Q and 6.2% 2018? Exports and Imports (Domestic Demand) Crashed in December! How was the Record USD 41.44 Billion Trade Deficit Financed? February 12, 2019]
If supply hasn't been the issue, a shortfall in demand must be the principal reason. The question is WHY?
Could this be related to the possible record blowout of 2018’s fiscal deficit? Could tight competition with the banks for access to the public’s savings been another pivotal force?
Treasury yields have dropped materially, which means the cost of servicing must have partially eased. But could surging debt volume have also offset interest rate declines?
And part of the slack from ‘build, build and build’ must have been taken over by the private sector’s PPPs, hence the uptick in retail prices.
One can sense the desperation for funding of the NG’s spending spree from this anecdote.
From the Inquirer (February 16): [bold added] “To support the Duterte administration’s ambitious “Build, Build, Build” program, the Insurance Commission (IC) has issued rules to guide insurance firms when investing in big-ticket infrastructure projects. Circular Letter No. 2018-74 issued by Insurance Commissioner Dennis B. Funa late last year said insurance and reinsurance companies could invest either in debt or equity instruments for projects covered by the Philippine Development Plan (PDP), the country’s medium-term socioeconomic blueprint.”
So more of the private sector’s savings will be drawn away for use from the private (market-based productive) sector and funneled, instead, into the government (consumption-based) which should be a classic example of crowding out syndrome.
Since 'build, build and build' has all been about politics rather than financial and economic viability, investing in them will beset further an industry already pressured by liquidity and credit constraints. (figure 2 lower window) The insurance industry is part of the BSP’s nomenclature of Non-Bank Financials.
The consequence from such would be to further the erosion of capital than its productive accumulation.
The good news is that with the pullback in build, build and build, more resources and financing should be free for use to the private sector. BSP’s funding of deficits should ease, thereby softening inflation (not the CPI) in the general economy, and reducing risk pressures for a run on the peso.
The bad news is that credit flows to institutions latched into the ‘build, build and build’ institutions and industries could be compromised and undermined from which may incite tighter liquidity conditions that lead to a substantial decline in the statistical economy, the GDP.
In short, the real economy wins, the phony economy loses.
3. Cracks on PSEi Facade? Should Foreigners Be Blamed for the Retail Portfolio’s Underperformance?
What Bull Market? Skimpy Annual Returns
To what degree have retail participants suffered portfolio underperformance from investing in the PSE in the last six years?
Figure 3
Over unfulfilled promises promoted to clients, the establishment has been rather getting jumpy in defending their tenuous positions.
How can they not be?
In nominal peso terms, since 2013, volatile returns have plagued the PhiSYx. There were three years of positive and negative returns.
The average nominal return has been 5.16% per year. To incorporate the average annual CPI with it, 2.45% per year represents the average real return for the period!
An investment made in the headline index delivered only 2.45% returns (not including dividends), so why would this satisfy the crowd of retail long-term participants?
On a nominal basis, CAGR has only been 4.26% (not inflation adjusted)! Since the CAGR of the CPI 2012 was 2.77%, real CAGR would be a puny 1.49%!
A foreign investor would even be more frustrated. That’s because the average USD php return would amount to only 1.25% per year in six years! The CAGR? Hold your breath — a shocking .05% per year!
Because of innumeracy and selective perception, the headlines make feel good numbers. But reality strips these illusions away.
Pumping up returns is easy. By pushing the reference point back to 2009, which is at the bottom of the cyclical bear of 2007-9, such would magnify returns. And that’s what some institutions do. In psychology, such framing is called the Contrast Effect or pivot the reference base from which creates the desired effect.
Nota Bene: I’m using the 2013 base because this was the reference point used.
And the reference is on the headline index which assumes representativeness of the general market.
PhiSYx is NOT the Market, The Concentrated PUMPS on the Top Six!
No one will dare say the following.
Let me repeat: the headline index IS NOT the market.
Figure 4
How can six issues carrying HALF of the share market cap weight be representative of the market? (figure 4, upper window)
And this asymmetric distribution didn’t happen overnight. The market weight of these elite issues climbed from less than 40% at the close of 2014 to a whopping slightly over 50% today!
The paltry returns of the Phisyx had been shouldered mostly by just SIX issues! As such, the outperformance of these issues translated to the UNDERPERFORMANCE of the majority of PSEi components!
When the PhySYx ascended to hit its milestone high of 9,058 in January 29th 2018, paradoxically, the broader market had been serially sold off. That the general market didn’t participate shows how skewed gains were to the big six.
And SY owned issues, have dominated the big six, which is why I write of the PSYei or Phisyx rather than the PSEi/Phisix.
And these issues have been major beneficiaries of VLL type end-session pumps (but much milder though frequent)!
Since actions have consequences, the most expensive of the issues in the PSYEi 30 has been the most crowded trades or the big six and their flanking support members within the top 10!
The mainstream always publishes about the net income growth or eps of the PSYei, but that’s apples to oranges. Those are aggregate, and not market weight distributed numbers. The PSYEi 30 is market cap share distributed.
And because there is no free lunch, concentrated pumping has led to concentration risks. Anytime bad news should hound the big six, which incidentally are among the most leveraged issues, these are going to drag not only the index but the PSE universe with them.
Fun times, right? Yet, ironically, the long-term sub-performance of retail investors.
The Foreign Money Scarecrow, Maximum Pain on Maximum Participants
And must foreign policies, thereby, foreign money be blamed for such marketplace volatility and subsequently, underperformance?
Figure 5
In reality, foreign money has neither been correlated nor causally related to the direction of the PhiSYx and its subsequent returns.
For instance, foreign money bought into local equities (USD 1.204 billion) in 2018, but returns were negative (-12.76%)! Foreign money sold (USD 205.03 million) domestic equities in 2017, but the PhiSYx rocketed (25.11%)! So what happened to the supposed influence of foreign money on the index?
The fate of the index was determined by local (mainly government) money in the past two years.
In 2015, foreigners sold (USD 600.3 million) as the PhiSYx contracted (-3.85%).
2015 was the only recent year where actions of foreign money coincided with the returns of the PSYEi.
The Market has but one objective: To inflict the maximum amount of pain on the maximum number of participants.
If at 8,000, retail participants are already showing signs of pain, what more when the crash happens?!
Won’t happen?
Don’t take it from me. From the BSP-led Financial Stability Coordinating Council’s Financial Stability Report: (p 47)
Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is aMinsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution
Minsky moment.
The Market has but one objective: To inflict the maximum amount of pain on the maximum number of participants.
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