Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

The Skyscraper Index offers an opportunity to look inside at the business cycle in action. Artificially low interest rates stimulate the demand for land, especially in central business districts. Higher land prices create an incentive to build taller buildings, and taller buildings require new technologies in building systems, such as air conditioning, plumbing, and elevators, as well as new building technologies such as lifting cranes and cement pumpers. Such processes permeate throughout the economy, not just skyscrapers. In this manner you see how central bank policy can have pervasive negative effects throughout the building as well as throughout the economy—Professor Mark Thornton

In this issue

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

-Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

-Emergent Divergences Exposes More Cracks on the Property Bubble!

-Expect GDP Week Volatility 

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

Trust not to appearances

Ne fronti crede “Trust not to appearances”—signifies a maxim attributed to the Roman poet Virgil (Publius Vergilius Maro)

Ne fronti crede can be applied to what’s going on in the Philippine financial markets.

For instance, the PSEi closed this week down by only .08%. While such largely insignificant number has accounted for a second straight week of seeming placid weekly performance for the headline index, it’s also the second week where internal volatility has been camouflaged by engineered attempts to cosmetically spruce up the Phisix.

Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

First and foremost, end session pumps and dumps again punctuated this week’s enhanced but ensconced volatility. Pumping contributed 18.79 points or +.26%, while dumping delivered 46.34 points or -.64% of the week’s outcome. In all, the PSEi 30 gyrated by .9% over the past week mostly from a two session pump and dump!

All actions have consequences. As incessantly explained here, while price fixing has been portrayed as a legitimate function out of technical reasons (specific volume required in defining “marking the close”), such convolutes the price coordination mechanism that works to foster imbalances. And market distortions have not been limited to the absurd mispricing of equity securities, but as prices, they project false signals into the economy.

Such false signals unduly and undeservingly nourish and feed on economic maladjustments—specifically the frenzied contest to seize market share through unbridled supply side expansion financed by credit.

Next, symptoms of divergences seem to have reemerged in this week’s trading session. 

 

  

The property sector, which astonishingly zoomed by 2.52% and partly helped by the service sector which was up 1.33%, essentially negated losses by industrials (-1.71%), finance (-1.27%) and holding (-.18%) sectors for the PSEi to close almost neutral.

The service sector’s rise was principally due to TEL’s +1.76. This emerged as losses of the lesser significant market caps GLO (-1.06%) and ICT (-1.66%) had been eclipsed by TEL’s gains

Of the PSEi 30 basket, 2.33 issues declined for every issue that rose. The skewness of the distribution of price changes can be seen in the upper right window.

An incredible THREE of the top 5 issues, which accounted for 40.09% of the PSEi’s market cap were up 2.5% and above. Or the average weekly return for the 40% of the PSEi’s market cap, or the top 5, was at 1.47%!!!

Meanwhile, since the top 15 of the PSEi basket accounted for 80.73% of the index market cap weighting, theaverage return for the top 15 collapsed to a NEGATIVE .29%. This means losses by most overrun gains of the top 5 based on the average.

Applied to the entire index, the average return dropped to a NEGATIVE .51%.

Essentially, because of the highly skewed market cap weighting system, SMPH, ALI and JGS neutralized the performance of the entire index!

That’s how the index can be or has been gamed or manipulated.

Nevertheless, the headline index, or its components, wanted to take profits, but invisible forces decided to repeal the laws of economics by virtue of selective or targeted asset pumping and price fixing!

Emergent Divergences Exposes More Cracks on the Property Bubble!

My initial impression to the panic bidding on property issues was to suspect some refreshing news in the industry. But seen from the overall performance of the sector, particularly from the 7 largest market cap, which comprised 95.64% of the property sector’s market cap (as of January 20), that’s hardly the perspective.

That’s because not only has the gains been limited to two of the biggest market weighted firms, in specific, SMPH and ALI, the other two much lesser PSEi market weighted property firms went into the opposite direction! Or, MEG and RLC suffered enormous losses -1.32% and -3.27% respectively!

Meanwhile, FLI was down -1.8% for the week, whereas DD and VLL were unchanged. In short, such vicious gains were restricted to only two of the biggest property firms!

Even more, divergent outcomes can be seen in the price trends of the components of the property index. The chart on the lower right reveals of the shocking disparity between record setting SMPH (blue) compared to the rest, all of which have been strenuously recovering from their December lows. Only DD has so far outperformed.

It remains to be seen whether momentum and leadership by SMPH will succeed, in the interim, to pull out her peers out of the morass. Or, if the underperformance of the industry will eventually weigh on SMPH.

Fascinatingly, last week I noted of the observation by Global Property Guide that high end residential property prices has been suffering from downside pressures: “In The Philippines, the average price of 3-bedroom condominium units in Makati CBD fell by 5.14% during the year to Q3 2016, in sharp contrast with y-o-y increases of 5.41% during the same period last year. Housing prices dropped 1.15% q-o-q during Q3 2016.” (Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2017

 

Data from the Bank for International Settlements has corroborated GPG’s findings.

3Q residential commercial nominal property prices (flats) in Makati plunged into negative territory (-2.99%) as shown in the upper left pane! BIS data here.

HIGH end user or consumer property prices have been in a sharp decline for the SIXTH consecutive quarter or from year end of 2015!

Paradoxically, the sharp fall has occurred even as the BSP launched a secret/silent Php 200 billion bond buying stimulus in the 1Q of 2016! In short, the BSP’s action has, so far, failed to reignite demand for end user properties.

Instead, it has been commercial land prices that have been energized by the BSP. Makati commercial land prices vaulted 24.78% in the 3Q 2016 (see upper right window)! In 2Q, the growth rate was 20.44%! That’s two quarters of 20% growth rate. BIS data here.

Makati commercial land prices troughed in the 3Q of 2015 and recovered (V-shaped) sharply coincidental when the BSP begun its stimulus in 4Q 2015 and greatly expanded this 1Q 2016.

Surging commercial land prices suggests that property developers and mall operators have been in a bidding frenzy to acquire properties for future inventories!

So while faltering prices suggest of relatively weaker demand to supply, property developers have engaged in a fierce competition to acquire land for future development! 

In short, such dynamics represents a splendid manifestation of the discoordination between demand and supply! The outcome of which will be to ramp up credit financed overcapacity!

Of course, all these have transpired as credit expansion continues to rocket!

The banking system’s loans to the property sector in the 3Q registered a blistering 19.16%! Though this has been lower than in the 1Q’s +23%, the pace of growth seems to be picking up anew (see lower left pane).

Yet the torrid pace of credit growth in the property sector has landed the Philippines in second place, after Mexico, in IMF’s 2Q “real credit growth over the past year” data for the world!

And here’s more. To reiterate, since falling prices means demand for high end properties has been overshadowed by supply, yet supply continues to roll unabated!

Proof?

The Philippines even captured the world ranking, fifth in terms of global skyscraper output for 2016 (lower right window)!  From Quartz.com: “In 2016 the world saw the completion of 128 skyscrapers, up from 114 in 2015, according to the US-based Council on Tall Buildings and Urban Habitat (it defines a skyscraper as being higher than 200 m, or 656 ft).” 

Such developments remind me of the “skyscraper curse”, see infographics from Visual Capitalist).

Skyscrapers can function as key symptoms of the business cycle in progress or “they are simply a very visible manifestation of the business cycle phenomenon brought about by artificially low interest rates.”* (Boyle, Engelhardt and Thornton 2016)

Additionally, like any malinvestments, they are caused by false price signals: “Skyscraper Curse would arise if the same psychological factors that lead to overvaluation in asset markets also lead to skyscraper construction”. Hence, skyscrapers can serve as a useful indicator of boom bust cycles. Or skyscrapers may symbolize “monument to the successes of the past and as a harbinger of the suffering that is to come.”

Interestingly, the deluge of supply of skyscrapers has simultaneously emerged in ASEAN majors, particularly Indonesia, Philippines, Malaysia, Singapore and Thailand.

*Elizabeth Boyle, Lucas Engelhardt, and Mark Thornton Is There Such a Thing As a Skyscraper Curse? The Quarterly Journal of Austrian Economics (2016)

 

As a final observation, even from the government’s own GDP data (3Q or first 9 nine months), the combined share of retail, real estate and construction to NGDP has been rapidly growing to account for nearly 40% (left window). 

The same industries accounted for 38.3% share of loans from the banking system as of November 2016. Real estate loans may be inaccurately reported due to the BSP’s regulatory caps.

Yet such is a clarion sign of mounting concentration risks!

The above excludes the banking share of NGDP and banking loans. Banks, after all, are the chief financiers of the present bubble!

This only reveals that such awesome price bidding frenzy on select property equity prices comes in the face of ballooning risks!

Expect GDP Week Volatility

By the way, the Philippine government is slated to announce 2016 GDP next week. GDP week has almost always been accompanied by pre-GDP volatility (mostly massive pumping see right window).

Since 2015, in 6 occasions the PSEi has been frantically pushed up 2-3 days prior to the announcement. If I am not mistaken, last week’s pump could be a precursor to the coming week.

Yet not all has been about pumping. There was a GDP week dump in 2015 when 2Q GDP was reported at 5.6% and 1H GDP at 5.3%. There was also a bizarre insouciance in 2Q 2016, even when GDP was reported at 7.0% 2Q and 6.9%1H! Could it be that there was no insider tip for the 2Q 2016???

So yes, expect GDP to serve as classical conditioning for the Pavlov dogs to wildly go on a pumping spree!

China Bubble Indicator: Chinese Buying of High Profile US Properties

While I often refer to the skyscraper indicator as one important gauge to appraise the whereabouts or the stages of the bubble cycle, there seems another potential bubble indicator: foreign buying of US high profile properties.

Recently a Chinese firm reportedly bought JP Morgan’s 1 Chase Manhattan Plaza

From the Bloomberg:

JPMorgan Chase & Co. (JPM) has agreed to sell 1 Chase Manhattan Plaza, the tower built by David Rockefeller, to Fosun International Ltd., the investment arm of China’s biggest closely held industrial group, for $725 million.

Fosun, which invests in properties, pharmaceuticals and steel, is buying the 60-story, 2.2 million square-foot, lower Manhattan tower, according to a statement it filed to Hong Kong’s stock exchange.

China’s developers and companies are expanding in overseas property markets as the government maintains curbs on housing at home to cool prices. Greenland Holding Group Co., a Shanghai-based, state-owned developer, this month agreed to buy a 70 percent stake in a residential and commercial real estate project in Brooklyn.

We have seen this phenomenon before, particularly, during the "Japan Inc" bubble era of the late 1980s. 

Japan's asset bubble eventually imploded in 1990

This 1996 article on Japan's US property acquisition from the Chicago Tribune resonates on today’s buying spree of US properties by the Chinese. [bold mine]

No property epitomizes failed Japanese investment in U.S. real estate more than New York landmark Rockefeller Center.

Mitsubishi Estate Co. paid the Rockefeller family $1.4 billion for an 80 percent stake in the complex in 1989 and 1990. By early 1995, Mitsubishi had lost more than $600 million on its investment and put the property under bankruptcy protection. Late last year, it decided to hand the property over to its lenders.

Aoki Corp. of Japan, which bought the Westin Hotels and Resorts chain in 1988, hasn't fared much better. In 1988, it paid United Air Lines' parent Allegis Corp. $1.35 billion for the company. It ended up selling the chain's North American and European operations and some other assets to two U.S. investment firms for $561 million in December.

Japanese real estate developer Minoru Isutani's purchase of the Pebble Beach golf resort is another famous case. In 1990, he bought the California championship golf course for $841 million. Isutani sold the property about 18 months later to two Japanese companies at a $340 million loss.

Again as one would note that during the peak of Japan’s bubble 1988-1990, Japanese investors went into a shopping binge similar to Chinese investors today. And 'Rockefeller' properties seem like a coincidence or has been a prominent feature of extravagant transactions.

More from a 1992 LA Times article (bold mine) 

The drying up of Japanese real estate money in California was even more dramatic. Total investment tumbled 83% to $976 million, a trend the study attributes to the state's steep recession. For the first time in four years, Hawaii attracted more Japanese real estate money than California. Los Angeles was eclipsed by New York and Honolulu as the cities of choice for Japanese real estate funds.

Orange County, once one of the top 10 locations in the country, fell 95% to $32 million. Los Angeles dropped 65% to $590 million as a city of choice for Japanese funds. Japanese real estate investment fell 87% to $138 million in San Diego, and 74% in San Francisco to $127 million.

The results signal an end to a shopping spree that began in 1985 when cheap capital, the yen's exceptionally strong buying power, and loose lending standards by Japanese banks prompted scores of Japanese to pay record prices for some of the most famous office buildings and hotels in California, New York and Hawaii.

Today we have a strong Chinese yuan and massive expansion of credit in China's formal and informal banking system that has been fueling a domestic property bubble.

Yet paying for “record prices for some of the most famous office buildings and hotels” in the US seems like a variant of the skyscraper curse. Instead of the building of grandeur projects to showcase overconfidence, foreigners buy signature edifices.

Again the sale of JPM’s 1 Chase Manhattan to a Chinese investor could signify a manifestation of such symptoms.

And paying for “record prices for some of the most famous office buildings and hotels” in the US, reminiscent of the 1980s, has been a du jour dynamic or trend, not limited to 1 Chase Manhattan.

From the New York Times last June [bold mine]

And yet in recent weeks, several big deals in New York City have set real estate circles abuzz. Zhang Xin, a Chinese business magnate and chief executive of the largest commercial real estate developer in Beijing, joined forces with the Safra family of Brazil to buy a large piece of the General Motors Building in Midtown. Dalian Wanda Group, a big Chinese developer, said it intended to build a luxury hotel in Manhattan. (Wanda is also planning to build a hotel in London.)…

For the moment, the Chinese government is encouraging the investments and even helping to finance them. The state-owned Bank of China has become the largest foreign lender in commercial real estate deals in the United States, replacing big European banks. Beijing is eager to diversify its investments…

The Chinese aren’t limiting themselves to megadeals. Some purchases have been relatively small by the standards of commercial real estate. Ms. Zhang, who is the chief executive of SOHO China and one of the richest women in the world, paid about $600 million in 2011 for a 49 percent stake in the Park Avenue Plaza, a Midtown Manhattan skyscraper. That same year, the real estate arm of the HNA Group, a Chinese airline company, saved an office building at 1180 Sixth Avenue from foreclosure for $265 million. HNA also bought the boutique Cassa Hotel in Times Square.

Chinese investors or firms have also bought large hotels in California, including the Sheraton Universal in Universal City; the Crowne Plaza in Burlingame, near the San Francisco airport; and the Hilton Ontario in Ontario. They have also purchased a riverfront parcel in Toledo, Ohio, and, earlier this year, an office building in Morristown, N.J.

Chinese firms and investors are also betting that the potential returns in American commercial property markets will be higher than in other areas of the world. The market for office, industrial and retail property appears to have bottomed out. Office vacancy rates have fallen and rent prices have stabilized amid signs of economic improvement. And while competition is heating up — three Manhattan office buildings have sold for more than $1 billion so far this year — many of the big bidders and lenders from Europe have pulled back as their home economies struggle.

So we see China’s homegrown bubbles spilling over in the form of diversification through increasing exposure on US properties. And these manic buying activities has been partly bankrolled by China’s state-owned bank. 

Finally, the Chinese property buying spree appears to be contributing to the Fed inspired reflation of the US property bubble.

A case of Déjà vu?

 

Yet there seems another angle from which the JPM property deal may have been made.

Since JP Morgan’s 1 Chase Manhattan Plaza has one of the “world’s largest bank vault” which houses the company’s gold holdings. This could be related to the Chinese government’s attempt to secure gold vaults worldwide.

The Zero Hedge speculates (bold original)

So, what the real news of today is not that JPM is selling its gold vault, we knew that two months ago, or that it is outright looking to exit the physical commodities business, that too was preannounced. What is extremely notable is that in one very quiet transaction, China just acquired the building that houses the world's largest gold vault.

Why? We don't know. We do know that China's gross gold imports from Hong Kong alone have amounted to over 2000 tons in the past two years. This excludes imports from other sources, and certainly internal gold mining and production.

One guess: China has decided it has its fill of domestically held gold and is starting to acquire gold warehouses in the banking capitals of the world.

For now the reason why is unclear but we are confident the answer will present itself shortly.

While the gold aspect has been interesting, the Chinese buying of high profile US properties seems as increasing, deepening and worrying signs of bubbles that are about to mature or are likely to burst soon.