More Signs of the Year of the PIG: The Incredible PHA! PhiSYx: BLOOM in, PCOR out, US Primary Dealers Panic Hoarding of UST Continues

In this issue

More Signs of the Year of the PIG: The Incredible PHA! PhiSYx: BLOOM in, PCOR out, US Primary Dealers Panic Hoarding of UST Continues

-More Signs of the Year of the Pig? Second-Third Tier Stocks Signal Late-Stage Rally, The Incredible PHA

-PhiSYex: Bubble Stock BLOOM Returns to the Index, PCOR out!

-4Q GDP and 2018 GDP Inflated: December Industrial Production Crashed, Consumers Went Slow on Spending

-Primary Dealers Still Panic Hoarding US Treasuries! 3M LIBOR Rates Crashed!

More Signs of the Year of the PIG: The Incredible PHA! PhiSYx: BLOOM in, PCOR out, US Primary Dealers Panic Hoarding of UST Continues

More Signs of the Year of the Pig? Second-Third Tier Stocks Signal Late-Stage Rally, The Incredible PHA

Figure 1

The PSE opened trading on the Chinese New Year of the Earth Pig with a fantastic surge! Panic buying prompted intraday gains to reach a high of 1.8% just before lunch break. When trading resumed, gains were sustained until the last hour when the PSYei 30 began to crumble. By the last 15 minutes before the market intervention phase, panic selling rule. The day ended with marking the close dump which forced the index lower.

The Phisix roundtripped by a stunning 3.74% on the post-New Year’s Day trade!

Has this been signs of the things to come in the Year of the Pig?

The manic performance of second-and-third tier issues has been amazing.

Figure 2

Particularly fascinating is how the market has been riveted by a Php 2-3 billion market cap issue, the Premiere Horizon Alliance (PHA). Though PHA plummeted by 22% this week, it remains in the top 15 in terms of peso traded volume. A Php 2-3 billion company in the league of the market cap heavyweights for 13 straight sessions! What a feat!

At its recent peak on January 28 and 29, PHA corralled 10.6% and 12.22% of the total board volume. As PHA plunged last week, its share of daily board volume dwindled to 7.85%, 3.15%, 3.23% and 1.98% on February 4, 6, 7 and 8 – yet still ranked within the top 15 most traded issues. (see figure 2)

That the market’s attention shifts to the second-third tier issues as the PhiSYex enters its late-stage rally is hardly appreciated. After the Phisix culminated at 9,058 in January 2018; the previous darlings, TBGI and MRC, climaxed. Both issues fumbled along with the PSEi and rallied alongside it.

PHA appears to be the cynosure de rigueur.

And for good measure, the furious rallies in select second-third tier issues have prompted the average daily traded issues to hit its third highest level.  

The average number of issues traded daily raced to the third highest level this week to 255.25, only marginally different from the July 21, 2017 peak at 256.8. The milestone high was at 269.6 set on January 19, 2018.

Though last week’s numbers haven’t reached the crest of January 2018, the common denominator appears to be the ardent belief that there is no way to go but up as highlighted by the excessive speculations!

PhiSYex: Bubble Stock BLOOM Returns to the Index, PCOR out!

And even more. The Philippine Stock Exchange announced changes on the major indices effective February 18.

Figure 3

The Phisix would bring about changes in its composite members. Enrique Razon owned casino firm Bloomberry Resorts (BLOOM) will replace oil refiner Petron (PCOR) in the index. 

Curiously, it would be the second return of gaming behemoth Bloomberry Resorts (BLOOM) to the Phisix. Its inaugural was onMarch 11, 2013. Three years later, or on September 12, 2016, it was substituted by Security Bank [PSE: SECB].

BLOOM's entry into the elite benchmark in 2013 must have been an outcome of its strong share price performance. Its 2016 exit also reflected on its share price decline. With BLOOM up 8.65%, this week for a 2019 return of 28.16%, the same pattern in the PSE’s selection process seems to be unfolding.

In an attempt to boost the index, the PSE selects big ticket winners and weeds out the underperformers. So these can be aligned with the blatant mark-the-close pumps.

With BLOOM’s entry, the service sector would have the second biggest representation (6) after holding firms (10) in the composite index.

The headline index becomes an abode for winning issues only. Forget the representation of industries which should reflect the economy.

The PSE also introduced a new index, last week, which would incorporate dividends, reinvested dividends aside from capital gains through its Total Return Index (TRI)

4Q GDP and 2018 GDP Inflated: December Industrial Production Crashed, Consumers Went Slow on Spending

I argued that the 4Q and 2018 GDP had been padded.

The Zeitgeist of 2018 GDP: The Record Deficit Spending, Was the Export Data Been Inflated?, History has Rhymed January 27, 2019

Figure 4

Industrial production by 9.3% collapsed in December (PSA).

From the Inquirer: The Philippine Statistics Authority’s (PSA) Monthly Integrated Survey of Selected Industries for December 2018 showed that the Volume of Production Index (VoPI) declined 10.1 percent that month. The drop in the December 2018 VoPI, a proxy for manufacturing output, was steeper than the 6.1-percent decline in December 2017. “Ten out of the 20 industry groups registered annual declines [in VoPI], with two-digit decreases noted in the following: printing (-79.4 percent), chemical products (-28.9 percent), tobacco products (-22.1 percent), food manufacturing (-17.8 percent), basic metals (-16.7 percent) and machinery except electrical (-12.6 percent),” the PSA said. In the meantime, the Value of Production Index (VaPI) slid 9.3 percent, also faster than December 2017’s 7.1-percent drop. The PSA said the following sectors led the decline of the VaPI in December last year: printing (-78.5 percent), chemical products (-28.2 percent), basic metals (-16.5 percent), food manufacturing (-15.8 percent) and tobacco products (-11.1 percent). (bold added)

Consumer credit and cash (M1) also stagnated in December. Credit card growth was marginally up 20.93% in December from 20.2% a month ago. Auto loans growth plunged to 11.96% from 13.13%. Salary loans contracted -2.66% against -1.71%. M1 was little changed to 9.48% from 9.47% over the same period.

Consumers didn’t go wild last Christmas. 4Q GDP and 2018 GDP had been inflated.

Primary Dealers Still Panic Hoarding US Treasuries! 3M LIBOR Rates Crashed!

As global stocks went into bidding orgy, I wrote about the panic bidding of USTs by Primary Dealers in the US.  

Mania at Phisix 8,050! Beware of the January Effect, Will 4Q GDP Be Lower Than the 3Q? January 20, 2019

Instead of going away, the hoarding only accelerated.

Figure 5

Panic hoarding by primary dealers are increasingly signs of collateral-liquidity hedging-issues by third parties served by the primary dealers. They maybe central banks (PBOC?) or European banks.

Next the astounding collapse of the 3-Month LIBOR.

From Marketwatch: Three-month Libor sees biggest drop since 2009 (February 7): “The three-month rate at which banks on average charge each other to borrow funds fell around 4.1 basis points to 2.697% on Thursday, its biggest one-day drop since May 2009, according to ICE Benchmark Administration. Trillions of debt and loans are benchmarked to Libor , or the London Interbank Offered rate. Some analysts speculated that the Federal Reserve's hints that it would keep rates on hold for the foreseeable future at its January meeting contributed to the fall in money market rates”

Based on the inversion of the Eurodollar futures curve, this could be a sign that the US Federal Reserve will be cutting rates soon.

Beware the Year of the PIG!

Global Liquidity Strains Intensify as Surging US Libor Rates Spur Global Financial Market Liquidations!

“It is in the nature of people to extrapolate from the recent past. In the recent past, stocks have been a one-way bet. Such is life under a regime of limitless liquidity and zero percent interest rates (or even lower). As for bonds, there is probably not a trader still toiling in a dealing room who has experienced anything other than declining rates during the entire duration of their career. This is not an environment conducive to the future stability of asset prices.”—Tim Price

Global Liquidity Strains Intensify as Surging US Libor Rates Spur Global Financial Market Liquidations!

Last week, sellers pounded the major US equity benchmarks back to their early February lows. The Dow Jones Industrials, the S&P 500, the Nasdaq Composite and the small-cap Russell 2000 hemorrhaged by -5.67%, -5.94%, -6.54% and -4.79%.

Media wires pinned the blame mechanically on Trump’s economic war against China and the Facebook-Cambridge Analytica scandal. For the latter, private data of some 50 million Facebook users were inappropriately shared with a political consultancy group reportedly for election purposes. To spice up on these popular narratives, Jerome Powell’s inaugural move as the US Federal Reserve Chairman was to raise Fed Fund Rates for the sixth time since the Great Recession. The Fed has been projected to hike its policy rates thrice this year.

Surging Libor: US dollar Liquidity Strains Fuel Global Risk OFF

Yet, the establishment paid little attention to what mattered most: US dollar liquidity flows.

From Bloomberg: “From Riyadh to Sydney, short-term funding markets worldwide are starting to feel the effects of soaring U.S. dollar Libor rates. The surge in recent weeks in this key global short-term financing indicator may have a mostly technical explanation, meaning it’s probably not flashing warning signals like it was during the credit crunch or the European sovereign debt crisis. Nonetheless, it’s still making funding more costly for some borrowers outside the U.S. The three-month London interbank funding rate rose to 2.27 percent Wednesday, the highest since 2008. The concern is that the Libor blowout may have more room to run, a prospect that borrowers and policy makers in various markets are just beginning to grapple with.” [bold added]

 

In March of 2017 or a just year ago, I warned about this: [See Has the Fed “Fallen Behind the Curve”? March 11, 2017]

LIBOR rates have been rising across the curve since 2015: overnight, 1-month, 3-month, 6-month, 12-month. Goldman Sachs estimated that $28 trillion of loans have been tied to Libor. While LIBOR rates are way off the highs 2007, the fact they are rising could be a sign of emergent hidden stress.

The same rising dynamic applies to the liquidity indicator the TED spread. 

Much of these had been blamed on the 2a7 reform, but today they seem as mostly imputed to prospective interest rate actions by the FED.

And yet, despite higher inflation expectations, yield spreads have been flattening. An example would be the 10-2 year spread.

Perhaps such has affected the rate of growth (% from a year ago) of commercial industrial loans, which at 6.7% in January, has tumbled to 2013 lows. 

The difference between then and now, current Libor rates have begun to bite!

And instead of improving, things have gone from bad to worse…

 

As of February, the year-on-year growth rate of Commercial and Industrial loans of All Commercial Banks have grounded to a near standstill at 1.6%!  The massive slowdown in bank credit expansion has spilled over onto money supply conditions. As of March 12, US M2 growth has slowed to a measly 3.9%! Both are headed towards recession levels.

There is more. The FED has embarked on normalization of its balance sheet, where it has trimmed some $41 billion (1.7%) of US Treasury holdings from October 25, 2017 to March 21, 2018.

The US dollar liquidity squeeze, which partly has been triggered by the banking system and by the FED’s downsizing of its balance sheet, has been ventilated through Libor rates!

And global “US dollar” liquidity strain have likewise been expressed via the spiking Yen and the plunging Hong Kong dollar (to 1984 lows!) has coincided with the recent risk OFF.

As an aside, to align with the US FOMC’s rate hike, the central bank of Hong Kong (HKMA) raised its base rate while China’s central bank (PBOC) increased its 7-day repo rate.

Philippine T-Bill Rates Spike!

Such liquidity crunch has likewise been evident in the domestic financial markets.

 

External factors appear to be compounding on internal dynamics.  Rising Philippine ROP 3-month and 6-month T-Bill yields have been accelerating.

The setting and publication of Phibor rates, the domestic counterpart of LIBOR, have been suspended by the Bankers Association of the Philippines, effective 15 April 2013, according to the Bangko Sentral ng Pilipinas (BSP).

Despite higher CPI, nascent symptoms of tightening liquidity could be one key reason behind the BSP’s decision to stay policy rates at present historically low levels last week.

The BSP has been trapped from their addiction to free money!

Well, easy money domestic policy in the face of US dollar liquidity strains should translate to a weaker peso. Hence, the USD Php surged by .89% to Php 52.39; a level last reached in 2006.

Both exogenous and endogenous forces will likely power the USD peso to new heights in the coming sessions.

Banks and Financials Bore Libor’s Brunt

The acceleration of global liquidity pressures has hit the global bank and financial stocks most.

Citing Credit Bubble Bulletin’s Doug Noland, “Deutsche Bank (DB) dropped 13% this week to a 15-month low. DB is now down 28% y-t-d. European banks (STOXX) sank 5.0% this week. Hong Kong (Hang Seng) Financials were down 4.9%. Japan's TOPIX Bank index fell 3.3%. In the U.S., banks (BKX) were slammed 8.0%, the "worst loss in two years." The Broker/Dealers (XLF) fell 7.3%.”

Down by 4.14% (-7.94% year to date), the Philippine Stock Exchange’s Bank and Financial index hemorrhaged the most among the 5 mainstream sectors.

Stocks, as I have rightly pointed out last February, would be the last to know.  Now all three forces have converged: the peso, bonds and lately stocks have been undergoing selling pressures.  [see Bullseye! Panicked BSP Slashed Reserve Requirements in the face of Meltdown in Philippine Bonds! February 18, 2018]

The receiving end of intensifying credit stress will be the stock market.

 

For now, a sustained rise in Libor rates will likely incite more uncertainty in the credit markets. Yields of Investment Grade (IG) corporate bonds have increased with Libor rates (with a time lag) along with global bank credit risk conditions.

And with the world inundated with trillions of US dollar liabilities, tightening liquidity conditions may spur a short squeeze or vicious rally in the US dollar (lower window).

Protectionism Will Add To Liquidity Strains; If Goods Don’t Cross Borders Armies Will

An escalation of Trump’s economic war would only aggravate the current liquidity predicament.

Much of media labels Trump’s trade barrier a ‘trade war’. But this is misleading. A trade war is self-contradictory. An act of voluntary exchange is not the same as an act of hostility. Trade affirms the sanctity of property rights. War destroys life, seizes properties and therefore, undermines property rights.

Nevertheless, should the US government make good on its threat to impose hefty tariffs, the effects would involve material changes in prices, resource allocation, productivity, production structure, economic output and people’s living standards.

This week, US President Donald Trump targeted China to impose $60 billion of expanded tariffs covering a multitude of goods.  In early March, Mr. Trump implemented sharply higher steel and aluminum import tariffs against major trading partners. And pending trade negotiations, several trading partners were temporarily exempted from this protectionist maneuver

On a global scale, aside from upsetting current trade and economic arrangements, it will undermine capital, investments and liquidity flows, as well as, most importantly, geopolitical relationships.

A reduction of global trade will mean less global liquidity.

Importantly, heightened geopolitical tensions translate to the rising prospects of the risk of war.

If goods don’t cross borders armies will. That’s a quote largely attributed to the great classical liberal, proto Austrian economist, Claude Frédéric Bastiat

This axiom should be highly relevant today.