Chart of the Day: Second Most Stressed Nation?

Chart of the Day: Second Most Stressed Nation?

Statistics about national happiness or stress should be taken with a pinch of salt since emotions are subjective and can be highly conditional and unpredictable to be quantified, and thereby, measured.

Nevertheless, here is a curious finding from the Gallup report on Global Stress as cited by Statista: The second most stressed nation in the world is the Philippines!

Stress comes in many different forms depending on where you live. In parts of the developing world, it can range from the threat of armed conflict to an unstable food supply while in more advanced economies, it can stem from negative thoughts about a difficult day in the office to difficulty paying bills. As part of its 2019 Global Emotions Report, Gallup set out to gauge stress levels in 143 countries, finding that just over a third pf people said they experienced "a lot of stress" the day before the polling was carried out. 

Given its recent economic hardships, it hardly comes as a surprise that stress levels remain especially high in Greece and 59 percent of people surveyed there said they are under a lot of stress. The Philippines and Tanzania had the second-highest stress levels with 58 and 57 percent respectively. The U.S. is also among the ten most stressed out nations on the planet with 55 percent of its population saying they experienced a lot of stress yesterday. That is the same share as three other countries - Albania, Iran and Sri Lanka. 

Over the years, previous editions of the report found lower stress levels among Americans. For example, in 2006, 46 percent said they were under a lot of stress, a number that grew to 47 percent in 2010. Stress levels grew steaduly to 53 percent in 2014 before dropping below 50 percent in 2017. The research found that younger Americans between the ages of 15 and 49 are the most stressed, along with the poorest 20 percent of the population.

Isn’t the Philippines supposedly been booming economically and financially? Isn’t the administration basking in popularity? So why the world’s second most stressed nation?  

Or, which may be close to being accurate, Gallup’s Survey or local media? Could geopolitics be behind these?

This Time is Different! PSE’s Property Index Soars to Record Highs as the PhiSYx Lags!

The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values—George Soros

In this issue

This Time is Different! PSE’s Property Index Soars to Record Highs as the PhiSYx Lags!

-Marked Divergence Between the PhiSYx and Property Index Surfaces

-The Property Sector’s Winner Take All!

-Bullish on Artificial Foundations? Property Sector Earnings Dependent on Credit Expansion and Politics Driven Overseas Chinese Buyers!

-Has ALI’s String of Special Block Sales Incited the Breakout? How Record Highs Are Forged

This Time is Different! PSE’s Property Index Soars to Record Highs as the PhiSYx Lags!

Marked Divergence Between the PhiSYx and Property Index Surfaces

For the first time since January 2018, the PSE’s Property Index vaulted to fresh record highs!

A 2.68% spike in the Property Index’s weekly returns, powered mainly by Ayala Land’s 3.19% and SMPH’s 3.28%, has set such a milestone.

But it has been different, definitely, this time around!

For the first time since 2007, a stark divergence between the property index and the PSYEi 30 has surfaced!  

Synchronous actions by the headline index and the property index have characterized the previous landmarks of 2013, 2015, 2016, and 2018: Both indexes set records and dropped from it at the same time. (figure 1 upper window)

The nuance between the previous episodes has been in the degree of participation and the leadership role of the composite sectors.

Figure 1

The property sector’s feat comes as the PhiSYx remains 13.14% off its January 2018’s apex.

And from the undulations since pre-Lehman era, though both moved in uniformity, the property sector trailed the Phisix until the climax of 2017. (figure 1, upper window; red line over the black line)

Moreover, in 2017 until January 2018, the property sector overlapped with the PhiSYx demonstrating its improved contribution to the latter.  

Since then until the present, the property sector has virtually outclassed the PhiSYx. The property sector has, thus, assumed leadership of the PhiSYx.

The Property Sector’s Winner Take All!

Year-to-date returns by sector confirm such developments.

As of April 26th, the property sector leads with a stunning 18.31% returns. Far next was services with 9.9%, the industrials with +4.07% and the holding firms with +2.64%. (figure 1, middle window)

Last but not least the Banks/Financials posted a 2.03% contraction! Banks have outperformed the PhiSYx in the run-up to 2008 and during the run-up to May 2013 peak. Ever since, banks have lagged the PhiSYx (figure 1, lower window)

It has been a winner take all for the Property index!

From a different angle, the headline index's 5.4% 2019 returns have been owed mainly to the property sector!

Not only does this signify the intensifying risks of concentration, but such divergence puts into the spotlight the dearth of participation of the broader members of the headline index.

Even worst, the banking sector, the country’s financial heart and the property’s sector foremost financier, has become a significant drag to the PhiSYx.

Bullish on Artificial Foundations? Property Sector Earnings Dependent on Credit Expansion and Politics Driven Overseas Chinese Buyers!

Of course, earnings and the introduction of the REITs, as popularly held, will supposedly play a significant role in the blossoming of the industry.

Figure 2

Because of the base effect, the PSYEi property representatives delivered a majestic 18.86% or Php 14.314 billion in annual net income growth last year.

Annual income grew by 25.5% or Php 25.6 billion based on the members of the property index.

The mainstream focuses on the brandished huge percentages and not on the nominal amounts.

Four firms, namely A. Brown, 8990 Holdings, Primex and Philippine Realty, have yet to disclose their annual reports. For the PSE, Alliance Global has yet to issue its 17Q even as 1Q earnings begin to roll in. Why the procrastination to publish their 17As by many firms?

But behind every benefit lies its corresponding costs.

Because Robinsons Land (RLC) deftly substituted a significant portion of its debt with equity, via stock rights, PSYEi property representatives’ debt grew by only 5.83% or by Php 28.8 billion last year.

Or, the property sector’s big four delivered Php 14.314 billion of marginal net income at the cost of Php 28.8 billion in marginal credit.  That’s a ratio of Php 2 debt for every peso earned. Again thanks to RLC, that number has been suppressed.

For the members of the Property Index, annual net income growth of Php 25.6 billion came at the cost of Php 68.044 billion in debt. That’s a ratio of Php 2.68 credit for every peso earned.

On the aggregate, the annual net income for the PSYEi property and the Property index had been at Php 90.15 billion and Php 126.124 billion, respectively.

On the other hand, the annual aggregate debt for the PSYEi property and the Property index had been at Php 523.04 billion and Php 786.9 billion, correspondingly.

That would signify credit intensity of Php 5.8 for every peso earned for the PSYEi property and Php 6.24 for every peso earned for the Property index!

That’s a lot of leverage involved, grounded, of course, on the perpetuation of the beneficial effects from easy money policies.

And that’s a lot of optimism that demand from foreigners, mostly from the Chinese, will continue to bolster Philippine real estate.

Back in the 1Q of 2018, this comment from a property developer reverberates, from Nikkei Asia (March 30, 2018): “The real estate arm of DMCI Holdings, a major condominium builder in Metro Manila, said over 50% of its international sales in the first quarter are from Chinese, with mainland investors snapping up units. "If we don't control them, it could go up to 90%. No kidding," DMCI President Isidro Consuji said early this month. DMCI has imposed a self-restriction of "one buyer, one unit." "Our worry is that if we have too many absentee residences, you might have what you see in Shanghai or Beijing -- totally sold buildings but nobody is living there. It's also out of our objective of selling to end users -- preferably local end users," Consunji said.” [bold added]

The highlighted statement signifies a STRIKING ADMISSION of an extant property bubble in the Philippines!

Due to the government’s conduct of its foreign affairs, the Philippines have been IMPORTING China’s bubbles, thereby aggravating the current conditions. And because of mass buying of overseas properties by Chinese have affected housing prices that have spilled over into domestic politics in Canada, New Zealand, and Australia, several of them have responded with a variety of curbs (Canada, New Zealand, Australia).  These experiences demonstrate the vulnerability of excessive reliance on overseas demand.

  

Whether about easy money or foreign buyers, demand for domestic real estate has originated from artificial foundations.

How about the unseen opportunity costs of speculating on real estate?

And given the arbitrariness of a considerable element of the published Financial Statements, the accuracy of the financial conditions of the industry hardly represents a certainty.

Even the books of property or any listed firms may conceal the actual exposures on leverage or gearing.

Nonetheless, as demand remains uncertain, debt should be fixed.

And notwithstanding the leverage exposures, Price Earnings Ratio (PER) for the two biggest record-breaking firms has remained extravagant. (see figure 2 lower window)

Has ALI’s String of Special Block Sales Incited the Breakout? How Record Highs Are Forged

Last week’s record run in share prices of the largest two property firms came at the heels of the announcement that Ayala Land would test the REIT market.

Media reported ALI’s “plans to raise about $500 million listing certain office buildings in Makati City through the REIT framework, which allows companies to spin off recurring income assets as publicly-traded vehicles on the Philippine Stock Exchange.” (Inquirer)

On Thursday, April 25th, Ayala Land announced that it intends to publicly list as a Real Estate Investment Trust ("REIT"), AyalaLand REIT, Inc. ("AREIT"), and seed AREIT with prime, Grade-A commercial office assets in Makati representing its offer structure.

The REIT’s basic business model: “The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders”. (Investopedia)

In contrast to popular wisdom, there’s no magic in REITs except that as shares held in a trust it pays out a larger amount of dividends.  

But ALI’s entry to the REITs may just be a part of the story.

Since April, significant amounts of Special Block Sales of Ayala Land shares have been reported almost daily by the PSE.  

With prices rising almost daily, it looked as if the string of Special Block Sales had been guiding the market’s pricing of ALI’s share upwards. Samples of them shown below (figure 3 upper window)

Additionally, the enormous almost daily Special Block Sales may have signaled the possibility of the unveiling of a significant event.

That event did materialize; ALI's entry to the REITs.

Figure 3

How do milestones occur on the PSE? The intraday charts of ALI, SMPH and the PSYEi on the 25th of April demonstrate this. (charts from colfinance and technistock)

With the market resisting any significant moves in the regular session, the index managers used the market intervention period to mark-the-close or “force up” prices of these issues to cement their record performance.

Since all actions have consequences, the serial pumping on the PSYEi’s real estate stocks have virtually pushed up its weightings relative to non-real estate PSYEi firms and relative to lesser weighted PSYEi real estate firms.

That said, the PhiSYx has become increasingly dependent on the sustained performance in the share prices of the two largest property firms.

So would this mean that such divergence represents a new normal for the PhiSYx?

Figure 4

Or, would these outperformers pull up the laggards to end the divergence positively? Or, what would happen if laggards should weigh on today’s market’s darlings? Will divergence transmute into negative convergence?

Figure 4 shows three of the four PhiSYx property stocks at records or near record highs in the backdrop of the recent rise of yields of Philippine treasuries (and inverted curve).

Truly interesting times!

San Miguel Corp’s Fabulous Trillions!

Should the American economy ever achieve permanent full employment and prosperity, firms should look well to their auditors. One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: ‘Every great crisis reveals the excessive speculations of many houses which no one before suspected’— JK Galbraith, The Great Crash, 1929

In this Issue

San Miguel Corp’s Fabulous Trillions!

-The First Trillion: Revenues

-The Next Trillion in the Making: Debt Hits Php 802 Billion in 2018!

-As the Poster Child of the Bubble Economy, SMC’s Share Prices Nearly Reaches Record Heights

San Miguel Corp’s Fabulous Trillions!

The low interest rate environment greatly encouraged the search for yield as greater risks were taken in exchange for higher returns—Financial Stability Coordinating Council, Financial Stability Report 2017

The First Trillion: Revenues

Mesmerized by a milestone, the CNN Philippines reported: “San Miguel Corporation (SMC) exceeded the ₱1-trillion mark in its 2018 revenues. Consolidated revenues form all its businesses, which include San Miguel Food and Beverage, Inc. (SMFB), SMC Global Power Holdings Corp., Petron Corporation, and SMC Infrastructure, reached ₱1.02 trillion last year, up by 24 percent from 2017. Factoring in expenses such as operating costs and taxes, resulted in a net income of ₱55.2 billion, up by one percent from 2017. "Income growth for the conglomerate was tempered by the sharp decline in crude prices resulting in inventory losses for its fuels and petrochemical business during the 4th quarter of 2018. This was compounded by forex translation losses for the year," SMC said in a statement. SMFB, which has subsidiaries San Miguel Brewery Inc., Ginebra San Miguel Inc. and San Miguel Pure Foods, had a net income of ₱30.5 billion. SMC also said that its big-ticket construction projects, which fall under SMC Infrastructure, remain on track, including the construction of Skyway Stage 3 and MRT-7.”

Sure, San Miguel’s (PSE: SMC) 24.07% or Php 198.9 billion revenue spike lifted 2018’s total to Php 1.025 trillion, doubling its 7-year CAGR to 5.6% from 2017’s 6-year CAGR revenue of 2.8%.

And despite such a marvelous headline number, the firm’s net income dropped 11.25% to Php 48.65 billion from 2017’s Php 54.814 billion and was 6.9% lower than 2016’s Php 52.24 billion.

Income growth was “tempered”, supposedly, from the sharp decline in crude prices, as well as, forex transaction losses.

However, as part of other income (charges), gains from dividend income and PSALM monthly fees reduction partially covered the forex losses of Php 9.714 billion. As such, including construction profits (revenues-costs) and gains on derivatives, other charges accounted for Php 5.628 billion reversing last year’s gains of Php 154 million. 

It was big, but not considerable enough to "temper" SMC's income growth. 

Figure 1

The spike in other charges (Php 5.474 billion) pales in comparison to the 27.39% surge in interest expense from Php 35.714 billion in 2017 to Php 45.5 billion or an increase of Php 9.8 billion last year. (see figure 1)

So what brought about the surge in interest rates?

The simple answer: SMC’s debt growth exploded in 2018!

The Next Trillion in the Making: Debt Hits Php 802 Billion in 2018!

Figure 2

As one can see in SMC’s Investor’s Briefing, Interest-bearing debt skyrocketed 45.92% to Php 802 billion last year from Php 549 billion! (figure 2 upper window)

Last year’s increase of Php 252 billion in marginal debt was 419% of published net income Php 48.65 billion! With net income lower by Php 6.16 billion last year, the corrosive effects of SMC’s soaring debt levels have become apparent in its bottom line.

It has been years since SMC has been borrowing far more than it earns. Since 2012, debt grew faster than published net income. Only in 2016 and 2017 did the debt-to-net income ratio fall below 100%. (figure 2, lower window)

Even without this year’s data, from 2012 to 2017 aggregate debt expanded Php 255 billion compared with an aggregate income of Php 253.5 billion.

That said, in my opinion, SMC may have been UNDERSTATING its debt servicing cost or interest expenses, thereby, OVERSTATING its bottom line.

With the incredible gorging of Php 252 billion of debt, it would be a complex and an extraordinary challenge for SMC to camouflage it on their Financial Statements.

Think about it, even without interest, the sheer scale of such debt acquisition should spur a proportional increase in amortizations of the principal unless offset by significant gains of revenues or margins. That’s not about to happen. It takes time for grand infrastructure projects to go online.

So the dramatic rocketing of debt has yet to reveal itself on SMC's interest expenses.

Furthermore, with the published capex doubling in 2018 to Php 109.07 billion from Php 51.925 billion a year ago, much of SMC’s massive debt expansion could be deduced as having been channeled to debt refinancing.

Like the banking system, not only will SMC’s insatiable desire for debt continue, it is likely to accelerate. Example, SMC’s Global Power launched a Php 30 billion offering this April.

To that end, the spectacular debt growth of 2018 means that SMC's forthcoming trillion peso debt would likely EXCEED its trillion peso revenue soon!

As the Poster Child of the Bubble Economy, SMC’s Share Prices Nearly Reaches Record Heights

Of course, SMC’s phenomenal debt expansion has been justified or rationalized on the populist political-economic theme of “build, build and build” to “connect, connect and connect” which has all been about “spend, spend and spend”.

Even if we assume that SMC’s massive infrastructure spending will deliver the expected revenue streams in the future, it won’t likely be sufficient to cover the carrying cost of debt servicing. 

And if such Panglossian expectations wouldn’t be met, what would happen next?

When a firm becomes entirely dependent on debt rollovers or asset sales because operating income has been insufficient to cover debt servicing, such is known as Ponzi Finance as conceptualized by neo-Keynesian economist Hyman Minsky.

If easy money has radically debased Jollibee's formerly solid business model, then SMC would qualify as the poster child of the nation’s credit bubble! See Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy, March 3, 2019

The maladjusted economy, embodied by SMC, has been stoked mainly by the easy money policies of the Bangko Sentral ng Pilipinas, and secondarily, the passionate embrace of the perverted interpretation of Say’s Law of "Supply Creates its Own Demand" as the nation's economic development model by the political leadership.

Before closing, a noteworthy development has been that share prices of SMC have almost hit an all-time high to close at Php 181.4 last April 12 on the same rationalizations of build, build and build. SMC’s record high was set on January 13, 2011 at Php 182.5.

Figure 3

Declining net income, rocketing debt and debt servicing have been all forgotten in the frantic chase for yields on San Miguel’s share prices. 

In their Financial Stability Report, the Financial Stability Coordinating Council admonished,

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 a Minsky 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.

Has part of the Php 252 billion of the 2018’s debt hoard been diverted to pump SMC’s share prices?

SMC’s soaring share prices have exemplified the striking misperception, the grotesque deformities in the pricing system, excessive and rampant speculation, possible price manipulations, and massive malinvestments.

The Lehman and Bear Stearns episodes show how wrong assumptions that sky-high share prices represent evidence of stability, soundness, and prosperity. (see figure 3, lower window)

The obverse side of every mania is a crash.