Following Gokongwei, Ty Family Unloads $172 Million Worth of GTCAP shares!

Wow, billionaires look as if they are showing the way.

From the Inquirer:

THE TY family placed out $172 million worth of shares in conglomerate GT Capital Holdings, boosting stock market liquidity.

The shares were sold by the Tys’ Grand Titan Capital Holdings to institutional investors at P1,539 per share in an oversubscribed deal arranged by investment bank UBS.

The mere act of selling of the shares of the Ty's flagship firm signifies a revelation of their subjective choice. Such choice reflects on their priorities, preferences and values.

This apodictically means that the Ty family prioritizes cash rather than their shares.

What becomes subject to interpretation are the possible WHYS of the sale?

Was the sale merely a windfall which the family will spend for personal use? If so why such a huge amount? Wouldn't it be better to sell when in need, especially if share prices will continue to skyrocket?

And wouldn’t it be an irony considering the astounding 66% surge in eps growth by the GTCAP in the 1H of 2016, then why sell at all?

Or could it be perhaps that such magnificent eps growth had been more about accounting gymnastics, or income statement inflation mostly due to recent acquisitions, the Property of Friends, and MPIC, as with recent merger, Toyota Marina Bay and Toyota Cubao? And could it be that the said sale merely reflected on the what they might have thought as excessive valuations?

As with the $250 million JGS sales by the Gokongwei’s, it is very unlikely for any magnate/tycoon to admit that their shares are overvalued for the reasons that I have previously cited: for prestige, for collateral values (for loan purposes), for moneyness of their shares (for deals) and or for political capital purposes (for political deals).

With an estimated $4.6 billion in wealth, the patriarch George Ty has been ranked 421 in the world and fourth in the Philippines according to the Forbes.

So the sale would constitute around 3.7% of the Ty’s wealth.

 

Or could the Ty’s have been signaling ‘disciplinary actions’ to the speculative community that they will be sellers if prices continue to soar vertically.

Or could it have been that the Ty family sees developing uncertainty in the incumbent political economic climate for them to raise not only cash, but cash in USD holdings? Buyer/s must have either been foreigner/s or overseas based entity/entities as indicated by the PSE quote today. GTCAP stumbled by 4.07% today.

Yet has the proceeds of the sale been kept abroad? 

After all, the current administration has opened a new war front against ambiguously defined ‘oligarchs’.

Or could they have begun stashing cash as insurance against perceived risks?

Yes world billionaires have reportedly been hoarding cash.

From the CNBC:

The world's billionaires are holding more than $1.7 trillion in cash — the highest amount since one firm began recording the measure in 2010.

Because of what they perceive to be growing risks in the economy and world, the world's 2,473 billionaires are keeping 22.2 percent of their total net worth in cash, according to the Wealth-X Billionaire Census.

If this trend percolates here, then the Ty's and the Gokongwei's could be future sellers.

Whatever the reason/s, one thing has been clear, like the Gokongweis, the Ty’s has signaled preference for cash with the latest sale. 

And perhaps they could be sellers anew if share prices continue to behave irrationally.

History is in the making.

Quote of the Day: 'Angry Votes' and Populism: Will History Rhyme?

A short breadth of the past political leadership: (bold mine)

With the demise of the Marcos regime, oligarchical democracy was quickly restored in the Philippines, with a new Constitution and congressional elections in 1987 returning established provincial landowning and business families and major Manila-based corporate interests to positions of control over both houses of Congress (and, after the 1988 local elections, mayoral and gubernatorial positions across the archipelago). A US backed counter-insurgency campaign, featuring aggressive military operations against the NPA and anti-communist vigilante mobilization against activist in urban and rural areas alike, helped to decimate the left, even as the restoration of electoral competition and turnover prompted a broader demobilization of extra-electoral political participation among the population at large. By 1992, when presidential elections were held, Aquino’s anointed candidate, (Ret.) General Fidel Ramos, won a narrow plurality, in large measure thanks to the advantages of the incumbent administration backing and business support. The elevation to the presidency of a long time senior military officer from Marcos years signaled strongly the enduring conservative constraints on democracy in the Philippines.

Yet the restoration of the oligarchical democracy in the Philippines has not gone unchallenged. The 1998 presidential elections saw the landslide victory of Joseph “Erap” Estrada, an action film star whose Partido ng Masa (Party of the Masses) campaign enjoyed tremendous popular support across the archipelago and was inflected by decidedly populist undertones. Once in office, Estrada proceeded to alienate the establishment business community, the conservative Catholic Church hierarchy, and “respectable” elements of the middle classes, with increasing media attention and growing street demonstrations focusing colorful stories of corruption and abuse of power, alcohol consumption and incoherent policymaking, philandering and favoritism in the allocation of the public posts, patronage and power. By late 2000, the House of Representatives voted to impeach Estrada, as Estrada’s allies in the Senate engaged in stalling and subterfuge to sabotage further judicial proceedings, “People Power” once again mobilized on the streets of Manila, with strong business and Catholic backing as in early 1986 (Hedman 2006). In January 2001, Estrada was forced out of the office, arrested, and imprisoned to face a range of corruption charges against him, even as his vice president, Gloria Macapagal Arroyo, was sworn in as his successor, winning a second, full year (six year) term in 2004 of office in the elections of 2004.

This is from the Routledge Handbook of Southeast Asian History p.124-125. There is a lot to comment from this insight but I’ll leave it as it is.

Infographic: The US Banking Oligopoly in One Chart; The Roots of Too Big to Fail

How "too big to fail" (technical vernacular: Systematically Important Financial Institutions/Banks) US banks emerged as summarized  by the following infographic

First, a few remarks from the provider of the image Visual Capitalist

The “Big Four” retail banks in the United States collectively hold 45% of all customer bank deposits for a total of $4.6 trillion.

The fifth biggest retail bank, U.S. Bancorp, is nothing to sneeze at, either. It’s got 3,151 banking offices and employs 65,000 people. However, it still pales in comparison with the Big Four, holding only a mere $271 billion in deposits.

Today’s visualization looks at consolidation in the banking industry over the course of two decades. Between 1990 and 2010, eventually 37 banks would become JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup.

Of particular importance to note is the frequency of consolidation during the 2008 Financial Crisis, when the Big Four were able to gobble up weaker competitors that were overexposed to subprime mortgages. Washington Mutual, Bear Stearns, Countrywide Financial, Merrill Lynch, and Wachovia were all acquired during this time under great duress.

The Big Four is not likely to be challenged anytime soon. In fact, the Federal Reserve has noted in a 2014 paper that the number of new bank charters has basically dropped to zero.

From 2009 to 2013, only seven new banks were formed.

“This dramatic reduction in new bank charters could be a concern for policymakers, if as some suggest, the decline has been caused by increased regulatory burden imposed in response to the financial crisis,” the authors of the Federal Reserve paper write.

Competition from small banks has dried up as a result. A study by George Mason University found that over the last 15 years, the amount of small banks in the country has decreased by -28%.

Big banks, on the other hand, are doing relatively quite well. There are now 33% more big banks today than there were in 2000.

So zero bound rates helped shift the balance of the US banking landscape, viz the erosion of small banks in favor of "too big to fail" oligarchy 

Courtesy of: Visual Capitalist

Is Hong Kong’s Free Economy a Myth?

Hong Kong has been known as the freest economy in the world.

But skeptics argue that such claims may not be accurate as Hong Kong’s capitalist political economy may have been shadowed by cronyism.

Writes Eddie Leung and Pepe Escobar at the Asia Times,

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".

Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive…

We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".

As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".

Read the rest here.

Hong Kong has certainly not been an ideal laissez faire economy as no country in this world has been.

But rankings of economic freedom, whether by Heritage Foundation or by the Fraser Institute, has been relatively established and have not been measured on absolute terms.

It is also important to note that for as long as the distribution of any resources are politically determined, the natural outcome will be one of collusion, horse trading, favoritism and corruption.

Virtuous or moral government is an illusion more than Hong Kong’s free economy is a myth.

Government officials are human beings too limited by knowledge problem, cognitive biases, value preferences (determined by education, religion, culture, ideologies, family values and etc…), peer pressure, social standings, career ambitions and etc...

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

Also Asia’s increasing social mobility has been an influence to Hong Kong’s property market.

Hong Kong has been the second hottest property market in the world according to MSNBC.com

The growing wealth of mainland Chinese, coupled with China’s property restrictions, has led to an influx of mainland buyers into Hong Kong’s residential market in recent years. According to industry estimates, three in 10 deals in Hong Kong’s luxury property markets are done by mainland Chinese buyers.

Property restrictions too add to the politicization of Hong Kong’s real estate market.

Finally the above authors seem to have misunderstood the meaning of competition by which they ascribe to flawed neo-classical concepts of oligopolies and monopolies through “captive markets” or “limited competition”.

Let me quote the explanation of Austrian economist Dr. George Reisman (bold emphasis mine)

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of "pure and perfect competition." It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won't be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat's world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to "marginal cost" or their day by day, minute by minute adjustment to the requirements of "rationing scarce capacity." It is the setting of prices perhaps only once a year — by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P — not a microscopic-sized wheat farmer or sharecropper — that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men's toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of "pure and perfect competition" have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

I agree that there have been accounts of cronyism in Hong Kong. But Hong Kong’s largely open economy has also been materially influenced by external forces (monetary transmission and mainland immigration and or speculation), focusing on one at the expense of the other only exposes of analytical bias and would signify a big mistake.

Thus to conclude that Hong Kong’s political economy has veered towards an oligarchic-monopolistic environment would “currently” seem exaggerated as there has been little evidence of the deficiency of price competition in the context of the promotion of efficiency, competence and ability.

I say “current” because Hong Kong seems to have taken the slippery slope towards China’s mixed economy (by the introduction of minimum wages) which may change the incumbent political economic setting.

Hong Kong may not be a laissez faire or classical liberal paradise, but relatively speaking, I don’t think that Hong Kong’s free market has been a myth, especially not when compared to the Philippines.

Diesel Roll Back For PGMA’s Sona, MV Princess of the Stars Tragedy, Economic Realities of Cagayan’s Used Car Trade

``Beliefs have a social as well as an inferential function: they reflect commitments of loyalty and solidarity to ones coalition. People are embraced or condemned according to their beliefs, so one function of the mind may be to hold beliefs that bring the belief-holder the greatest number of allies, protectors, or disciples, rather than beliefs that are most likely to be true. Ideological beliefs are obvious examples.”- Steven Pinker, Department of Psychology of Harvard University

Some political economy notes and observations.

1. Diesel Roll Back For PGMA’s Sona.

Political accommodation feeds on the dangerous impression that oil companies have been “obscenely” profiting at the expense of the people.

Since almost all of the oil requirements of the Philippines are imported, this means that domestic oil companies essentially import all crude oil for domestic refining taking with it the risk of inventory storage, currency, political pricing aside from other risks relevant to the industry. Thus, profits are realized because of successful risk taking endeavors and not from price gouging as peddled by some politicians.

Refining companies earn from crack spreads (wikipedia.org)-“differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products)”, which means profit can only materialize if they are able to passthrough their products to the consumers tacked with some margins. If oil companies are not able to do so they will incur losses. Vested interests see only the profits (survivorship bias) and not the risks or the potential losses.

The basic reason why oil companies can afford to roll back prices is mainly due to the significant fall in world crude oil prices. This essentially allows oil companies larger margins if sales are to be maintained based on present retail prices. Present retail prices covers inventory accumulated from recent crude purchases. However, a sustained decline in world oil prices should also translate to more rollbacks in the future.

Those arguing that the country’s oil deregulation as the main culprit to high oil prices should look at the Vietnam and China experience.

Both countries whose oil companies are state owned increased prices significantly (Vietnam 30% and China 18%) primarily not because of fiscal problems (although it has an influence) but mainly because losses in state owned firms have reduced or lessened supply output which has led to rampant smuggling, vast shortages and rationing.

Given the precarious state of the Philippine fiscal position, the idea of nationalized oil companies will only placate near term desires but at the expense of greatly higher prices in the future. The fundamental problem of oil prices comes from sustained government intervention around the world.

Oil companies ought to be more transparent with the public by communicating on the risk-reward aspects than simply accommodating politicians.

2. The MV Princess of the Stars Tragedy

It is a peculiar development why despite the repeated accidents by the same shipping company, consumers continue to patronize such private entity. The answer is the lack of choice.

None in the media has brought out the fact that the domestic shipping industry is a very tightly regulated industry.

Imagine, aside from 5 agencies that directly supervise the industry; namely, Maritime Industry Authority, Philippine Ports Authority, Bureau of Customs Bangko Sentral ng Pilipinas and the Philippine Shippers Bureau, there are another twenty six (26) other agencies directly or indirectly regulate the inter-island freight shipping industry (NEDA’s Philippine Institute for Development Studies). Incredible red tape!

With all these bureaucracy given the prevailing idea that government knows best, it is an oddity why the seemingly regular recurrence of the undeserving life losing tragedy.

Yet, media and the political circus continue to feed on the masses for more government intervention. Are 31 agencies not enough? Maybe Pagcor should be included as a regulating agency to allow bets on the next mishap? Why not nationalize? Hahaha.

It is quite evident that such choking bureaucratic entanglements represents by itself a significant barrier to entry which would naturally discourage potential rivals and limits challengers to the stalwarts, thus, the oligopoly or economic rents concentrated to a few inefficient sellers or providers.

Myrna S. Austria’s observation in her paper “Liberalization and Deregulation in the Domestic Shipping Industry: Effects on Competition and Market Structure captures the essence of the inefficiencies in the sector, ``Nonetheless, substantial competition exists in only a small percentage of the routes. A greater majority of the routes are still effectively monopolized, or experienced only mild competition. The top three or five companies in the industry effectively dominate the different routes. What is more striking is the large increase in cargo and passenger rates after the implementation of the reforms. The cartel-like arrangement that is observed to exist in the industry may have contributed to this.”

As we discussed in It’s Less About Oligarchy and More About Bureaucratic Crony Capitalism or in Philippine Politics: Systemic Defects of the Pork Barrel Political Economy, the major defects of the present economic system lies in the web of laws that shields competition on the turfs of the oligarchs. These oligarchic structure breeds inefficiency and continues to add up statistical fatalities in the domestic shipping industry, yet we never seem to learn.

3. Economic Realities over the Controversial Cagayan’s Used Car Trade

The recent ruckus over the used car imports gives some important economic realities.

One, imported used car has a thriving market, probably due to lower costs (reduced taxes due to export zone privilege?).

Two, laws meant to protect certain industries or interests have unduly created market inefficiencies resulting to higher domestic car prices. Thus, the price gap between the foreign owned local manufacturers and the imported used cars in the Cagayan Export zone has resulted to the underlying demand for the imported used car market.

Three, legal loopholes creates economic opportunities especially for those in power. The Cagayan Export Zone has used its privilege to go around the Executive Order (156) banning the importation of used car vehicles for resale in the country.

Fourth, politicians advance and protect their self interests and or vested interest groups other than those of the public.

In this case, it isn’t hard to qualify.

One, trade restrictions benefits car manufacturers at the expense of consumers, through higher prices caused by high taxes (seems like a modus operandi- taxes in exchange for protection from competition). Thus, the national government’s Executive Order is meant to “protect” the narrow interest groups allegedly for the benefit of the economy.

Some would probably argue that taxes serve the interest of the people. No, taxes pay for politician’s boondoggles and some of the people and NOT for the majority of the people (think Pork Barrel). People pay for the politician’s boondoggles directly through higher taxes and indirectly through higher cost of living, lower capital investments and unemployment.

Two, the key proponent of the Cagayan Export Zone (CEZ) has been an important ally of PGMA in the Senate hence the moxie to defy the law; another case of patronage politics.

Besides, here it is evident that politicians make their hometowns as “turfs” or “little kingdoms/dynasties” which make use of laws for the perpetuation of their political and economic regimes…hence more signs of oligarchy.

Another, the recent pieces of the political puzzles are falling into place…the motives behind the excoriation of the foreign chamber of commerce in early June has apparently been made evident. Aside, we now sympathize with our Supreme Chief Justice’s remonstration of "economic colonizers".

The Philippines needs to understand the functional benefits of well developed markets than relying on politicians for advancement. We need more economic freedom and less government intervention.