Economists are like soldiers selected and trained for only rituals and parades. But they are very good with rituals and parades—Nassim Taleb
In this issue
Are Philippine Stocks a Buy in 2020?
-Are Stocks a Buy? The Illusion of Economic Elixir from Political Spending!
-Lower CPI Equals Consumer, GDP and Stock Boom, Really? Ignore the Mounting Liquidity Risks, and Conflict of Interests
-Are Stocks a Buy? Returns in 9-Year Downtrend, Decaying Market Internals and Cascading Volume!
-Are Stocks a Buy? Marking-the-Closes Gone Wild!
-Are Stocks a Buy? Philippine Treasury and Peso Gains From Financial Tightening
-Are Stocks a Buy? With 2009 Trend Line Under Pressure, Index Managers ‘Do Whatever It Takes’ to Save It!
-Again, Excerpts from the BSP’s 2017 and 2018 Financial Stability Reports, Conclusion: Selective and Limited Opportunities
Are Philippine Stocks a Buy in 2020?
Are Stocks a Buy? The Illusion of Economic Elixir from Political Spending!
The advent of 2020 should trigger a barrage of establishment memes on "WHY YOU SHOULD BUY STOCKS"!
They shall preach that the attractive returns from G-R-O-W-T-H will justify ownership and trading of stocks.
We shall be told that unlike spending obstacle from 2019’s budget impasse, the economy will be mechanically bolstered by the National Government’s acceleration of build, build, and build programs.
Beneficial effects, we would be lectured, can only accrue from political spending.
Regardless of what theory and data tell us, economic salvation, as we shall be reminded of, can only materialize through the increased centralization of the political institutions, which will sagely and fairly command, control, and dispense of economic opportunities to their subjects.
Figure 1
We must continue to ignore downbeat data as false news.
Despite the rising share of public expenditures to GDP, which accelerated when the incumbent administration assumed office 3-and-a-half years ago, headline GDP has been southbound. (Figure 1, upper window)
We must believe that the survey econometric modeled GDP and the CPI have been constructed without prejudice and accurately represents the general conditions.
We must put faith in political miracles, which will emerge from burgeoning fiscal deficits, in spite of the data issued by government institutions that have been diametrical to this. (Figure 1, middle window)
With debt payments racing to record highs (as of November), we must trust that escalating debt poses no risks and obstacles to the economy, the capital markets, the National Government, and the financial system.
We must also share in the conviction that the Philippine economy should be immune, or decouple, from untoward developments in the global economy!
This logic tells us that the nation operates as an autarkic state in spite of remittances, FDIs, exports and imports, tourism, and as a retirement haven, and capital market flows.
Lower CPI Equals Consumer, GDP and Stock Boom, Really? Ignore the Mounting Liquidity Risks, and Conflict of Interests
Figure 2
We shall likewise be reminded that falling CPI should be a boost to consumers, the GDP, and stocks. We must also dismiss data that shows the opposite; depressed CPI from a liquidity squeeze has led to LOWER not higher consumer spending and GDP. (Figure 2, upper window)
We must also disregard the data that exposes the fact that the main equity benchmark has been boosted by RISING, and not falling CPI. (Figure 2, middle window)
And we must continue to believe that the banking system is healthy, and blessed with copious liquidity and capital, thereby, the 400 bps cuts on the Reserve Requirement Ratio in 2019, aside from the 200 bps cuts in 2018, are about “stimulus” than about the plugging of a liquidity black hole in the industry.
We must forget that because of falling cash reserves and deposit liabilities (Figure 2, lowest window), banks have been aggressively raising funds in competition with the NG for access to the public’s savings.
As such, we should bury underground the critical risks raised by the Bangko Sentral ng Pilipinas on its 2018 Financial Stability Report: (bold mine) p.19
If there are risk issues to raise, it will have to be the prospects of managing liquidity. Aside from simply having more loans versus deposits, using liquid assets as a source for funding more earning assets needs our attention. However, the bigger issue will be that continuing on the path of being a bank-based financial market means that the provision of credit will require taking on mismatches in tenor and in liquidity. As more credit is dispensed, such mismatches will only increase. Certainly, the banking industry has been able to sustain itself despite these mismatches but moving forward, there is value to providing other avenues to alleviate the pressures on the banking books.
Therefore, we must countenance the publication of asymmetric information presented by financial institutions as gospel truth.
We should disregard the principal-agent problem. Because these institutions are raising or soliciting funds from savers, alongside, and in completion with the NG, they must always reinforce positive perception than to tell the objective truth.
Are Stocks a Buy? Returns in 9-Year Downtrend, Decaying Market Internals and Cascading Volume!
Figure 3
The establishment media and experts shall also frame this year’s returns as an improvement from last year, therefore we must reject data that suggests the opposite.
True, this year’s 4.68% return should be better than 2018’s -12.78%, but this has been dwarfed by 2017’s 25.11%. Adjusted for the estimated annualized CPI, this year’s PSYEi 30 return was a measly 2.28%. Such doesn’t even count the skewed construction of the index.
The fact is that returns, nominal or real, has been on a DOWNTREND since 2010! (Figure 3 upmost pane) So should we defy the trend and hope for a reversal?
Isn’t hope a poor strategy?
We shall be presented too with statistics that have been intended to boost institutional sales.
For instance, with an average return of 4.1%, 1Q returns have been impressively robust in the four of the last five years.
That is what is seen.
This is what is not seen.
Over the same period, except in 2016, the market breadth, represented by the aggregate advance and decline differentials have been NEGATIVE!
In short, we must reject the fact the broad market HAS NOT been participating even at its STRONGEST seasonal performance during the last 5-years!
We must also pooh-pooh the relationship between volume and the struggling equity index.
Because the establishment fails to see the peso trading volume in the prism of money (particularly, savings or credit), they cannot explain the difficulties of the broader market in generating positive returns since 2013. Hence, the lack of illumination must be presumed as a phenomenon occurring at random.
While the annual peso volume improved marginally by 6.83% to Php 1.846 trillion in 2019 from last year’s Php 1.728 trillion, broad market volume slipped 1.29% to Php 1.516 trillion from Php 1.536 trillion. Hence, special block sales, and not board volume, was the source of the volume expansion.
Are Stocks a Buy? Marking-the-Closes Gone Wild!
Because actions in the Philippine Stock Exchange must be measured by its principal index, the PSEi 30, we must overlook the increasing manipulation of it, mainly through marking-the-close.
Figure 4
Yet, this year’s positive return can be construed fundamentally as a product of the fantastic rescue on Friday, December 20th*! With another crucial end-session pump of 79.59 points or 1.02% last Monday, December 23rd, gains for the year had been sealed.
*Plunge Protection Team Rescues Index with December 20’s HISTORIC Magical Pumping! BSP’s Consumer Survey versus the CPI December 22, 2019
The four cumulative mark-the-close pumps totaled 2.98% or an astounding 63.7% of 2019’s annual returns. (Figure 4, upmost window)
And because of the forced moves to shore up the index, the distortions in many aspects, such as % share of market cap, returns, and the varying measures of valuations among others, continue to mount.
The 4.68% returns have fundamentally been from the massive pumping on the top 5 issues, which has now accrued a whopping 49% of the share of the free-float market cap! (Figure 4, middle window)
SM Prime closed 2019 at a record high even as the headline index drudged to maintain the 7,800 levels.
And this year’s returns have principally been a function of the outsized gains of the top 5 issues, namely SM (+13.68%), SM Prime (+17.6%), Ayala Land (+12.07%), BDO Unibank (+20.8%), and JG Summit (+45.06%). (Figure 4, lowest window)
So we must continue to believe that the intensifying skewness in the dispersion of performances from sustained manipulation may continue not only to buoy the index but also would have little or no unintended consequences to the financial markets and the economy overtime.
Seen from a different lens, using the equity index to compare with economic data translates to 5 issues having so much influence on the statistical economy; this we must accept as the Real McCoy too!
Are Stocks a Buy? Philippine Treasury and Peso Gains From Financial Tightening
Figure 5
The firming peso, the first since 2012, has magnified the annual returns of the 5-issue powered headline equity index to 8.7%. (Figure 5, upmost window)
Despite the diminishing flow of remittances and services exports, and trade deficits, we must believe that the peso’s strength has reflected on the general economy, even when the National Government has embarked on massive repo transactions with US banks to magnify the perception of its ‘growing’ US dollar cash hoard.
Even more, we must dismiss the regional influences from the carry trades brought about by negative yields that strengthened the Thai baht (up 6.7% as of December 27) and the Indonesian rupiah (3.06%) along with the peso.
Also, we must disregard the relative scarcity in financial liquidity as having influenced the peso’s strength. Yields of 10-year Peso bonds continue to outperform its US counterpart in 2019. (Figure 5, middle window)
Finally, the performance of domestic treasury markets must also be seen in the light of G-R-O-W-T-H.
The plunge in the growth rates of bank credit and money supply, which caused an inversion of the yield curve in the 2Q, the first in decades, prompted the BSP to chop RRRs by 400 bps, alongside the paring of 75 bps in its overnight lending rates and the sending of its QE to record highs.
For an economy that has been sold as ‘sound’, we should not question the drastic need for monetary and fiscal stimulus.
Yet, how sound is an economy that depends on or has been addicted to the continued entrenchment of emergency monetary stimulus, which has been instituted since 2009?
The sharp rally in Philippine treasuries artificially boosted the bank assets, and profits in 2019.
Yields of benchmark the 10-year, 2-year, 1-year, and 1-month Treasuries fell 256.3, 316.3, 327.3, and 213.7 bps, respectively, in 2019.
That honeymoon may have climaxed. The ensuing steepening of the curve, which heralded the rise of inflation, in response to the BSP’s rate cuts, appear to have reached an inflection point as short-term yields gradually ascended. Presently, the curve appears to be flattening. (Figure 5, lowest pane)
With the NG’s cash siphoned off to pay surging debt levels last November, the recent increases in short term yields may be a sign of expanded demand for short-term liquidity. And if the yield curve flattens to signal renewed financial tightening, how should this translate to G-R-O-W-T-H?
According to the experts, none of this matters. Trust the experts. Have faith in the National Government and the Financial System. Buy Stocks!
Are Stocks a Buy? With 2009 Trend Line Under Pressure, Index Managers ‘Do Whatever It Takes’ to Save It!
Such massive index manipulations can be seen in the light of the trends set from the 2009 baseline.
Figure 6
Three major trend lines forged from 2009 had been broken, two of which were busted in 2018.
A fourth trend line, likewise shaped in 2018, became its base. Beginning in December 2018, the index managers mounted a campaign to recover the third trend line. However, that momentum appears to have recently lost ground.
The second trend line has proven to of vital resistance, which index managers attempted to breach throughout 2019. Unfortunately, not only have such tries been rendered futile, but most importantly, the third trend line was breached anew in September, and likewise, this December.
A successful breakdown of this trend line would push the 5-issue dependent index to test its fourth trend variety. If this fails, all hell could break loose.
Ergo, the relentless, do-whatever-it-takes, defense of the third trend line!
Oh, let us not forget that many of these domestic fund managers have been oriented and are hooked towards momentum trades.
So must we believe too that entrenched trends, market, and economic processes would be reversed in 2020?
Again, Excerpts from the BSP’s 2017 and 2018 Financial Stability Reports, Conclusion: Selective and Limited Opportunities
As a postscript. To get some clues, please allow me to use the logical fallacy known as the appeal to the authorities by re-quoting their insights. All bold highlights mine.
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
Based on the audited financial statements of the 148 Philippine Stock Exchange (PSE)-listed non-financial corporations (NFCs), the growth of interest expense (IE) has outpaced the rise of earnings before interest and taxes (EBIT) (Figure 2.3). In addition to the rate of growth, the ratio of IE to EBIT shows a rise from 14.5 percent at the start of the first quarter of 2016 to 22.6 percent as of March 2019, with a high of 27.8 percent in December 2017 (Figure 2.4). The same companies have also reported lower profitability with respect to return on assets
Yet according to the mainstream: Buy! Buy! Buy!
To conclude, despite the many fundamental and technical factors pointing to magnified risks on expanded exposures to stocks, there should be selective but limited opportunities on it.
For one, the tilt should be towards short term risk exposure rather than long-term positions.
Another, there may be beaten down defensive issues, which could be influenced by abrupt changes in the external financial and monetary environment.
Or, shun the popular, go for the unnoticed, most detested issues.
“Avoiding loss is the most important prerequisite to investment success” Seth Klarman of Baupost Group
