Monday, November 23, 2015

Phisix 6,900: 3Q OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will G-R-O-W-T-H Come From?

Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him.—Nassim Nicholas Taleb
In this issue
Phisix 6,900: 3Q OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will G-R-O-W-T-H Come From?
-The Economics of Philippine OFW Remittances Redux
-3Q OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will Household Consumption Spending Come From?
-Which Sectors will Deliver G-R-O-W-T-H to Buoy 3Q GDP?
-More Fissures in the Real Estate Industry: Phil Realty and Rockwell Land; GTCAP’s Massive Leveraging!
-Will There Be A Pre-GDP Play Next Week? PSEi Backs Off Support Breakdown, Storms Back to 6,900

Phisix 6,900: 3Q OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will G-R-O-W-T-H Come From?
The Economics of Philippine OFW Remittances Redux
Remember what I wrote last month1?
Personal remittance for 1Q 2015 5.07% and for 2Q 5.4%. July and August’s growth rates were at .5% and -.8% respectively. So to achieve 5% September remittances should spike by an astronomical 15.45%!
Anything below that number would entail for a remittance growth rate of below 5%. Yet even at 5%, 2015 will be way (27%) below the 6.86% annual average!
The Bangko Sentral ng Pilipinas and bootlicking media were relieved to announce that OFW remittances bounced back last September: at $20.4 billion, personal remittances expanded by only 3.9% year on year and at $2.2 billion cash remittances likewise added only 4.3% over the same period.
As one would note from the above charts, the rate of growth for personal and cash remittances has already reached an inflection point. Since 2013, the rate of growth for remittances has largely been in decline.
OFW remittances are clearly being affected by the law of diminishing marginal returns.

Instead of good and service exports, the slomo boiling frog effects of the swooning peso through the inflation tax, has only impelled for the export of residents. Remittances, thus, has accounted for the subsequent incomes from such diaspora. Yet considering the scale of volume attained from sustained years of people exports, its growth rate dynamic has been falling.


A simple back of the napkin illustration: (based on all things being equal) Back then for every 100,000 new OFWs, given a 1,000,000 OFW stock, new OFWs represents 10% growth. Now for every 100,000 new OFWs given a 10,000,000 OFW stock such would represent a 1% a growth. So every additional 100k new OFWs which add to the 10 m stock would see growth rates going down.
Economics have the principal factor that determines the incentives by residents to work abroad, as well as, the incentives by foreign employers to hire domestic workers.

Applied to the current slowdown in remittance growth, as example, a domestic economic boom should lower the incentives for local citizens to work abroad.


Mexico’s emigration dynamics have partly manifested these.

Net migration to the US from Mexico has been in a decline from 2009-14 (see left). Mexican immigrant population in the US also has been shrinking (right). This means that not only have Mexicans refrained from moving to the US, more Mexicans have been returning to their homeland.
Reason? According to Pew Research2, (bold added) The views Mexicans have of life north of the border are changing too. While almost half (48%) of adults in Mexico believe life is better in the U.S., a growing share says it is neither better nor worse than life in Mexico. Today, a third (33%) of adults in Mexico say those who move to the U.S. lead a life that is equivalent to that in Mexico – a share 10 percentage points higher than in 2007
And of the 1 million Mexicans who voluntarily returned to Mexico between 2009-14, the survey noted that “six in ten (61%) return migrants – those who reported they had been living in the U.S. five years earlier but as of 2014 were back in Mexico – cited family reunification as the main reason for their return. By comparison, 14% of Mexico’s return migrants said the reason for their return was deportation from the U.S.”
In other words, when the perceived economic feasibility/advantage from the emigration-work abroad option has been reduced, other factors, such as the importance of the family, takes precedence in the shaping of the average citizen’s decisions to stay home, or for migrants or overseas workers to go home.

Such has spurred the repatriation and the reversal of immigrant flows to the US from Mexico.
This goes to show that an economic boom and increasing OFWs are essentially incompatible. Because a real economic boom should produce an abundance of economic opportunities, as manifested by copious jobs and the adequacy of wages and/or earnings levels, residents would choose to stay and work from home rather than move overseas at the cost of leaving their families.
So when media, mainstream experts and the government babble about an economic boom anchored on OFWs, they are really confused about the economic and social dynamics of OFWs.
Also other economic factors such as slowing global economy should diminish the incentives by foreign employers to hire.

Changes in real exchange rates between the Philippines and host nations of OFW employers also significantly contribute to OFW dynamics.

Considering that the USD have been flat or marginally weaker last September, as exhibited by the US-Asia JP Morgan Bloomberg ADXY (see box), or that the USD peso was unchanged in September, the foreign exchange effects from a flat or slightly infirm USD have partly buoyed September’s remittance numbers.
The BSP further noted that3: Preliminary reports from the Philippine Overseas Employment Administration (POEA) indicated that for the period January–September 2015, total job orders reached 663,112, of which 41.6 percent have been processed. These job orders were intended mainly for service, production, and professional, technical and related workers needed in Saudi Arabia, Kuwait, Qatar, Taiwan, and Hong Kong
Since the BSP gave no growth rates or comparison from previous records, one is left hanging as to where September’s OFW activities came from. The BSP just wants everyone to take at face value their statements. They think that everyone’s brains have been addled.
Politics could also serve as a non-economic force that could influence migration and OFW flows. Any increase border controls or in labor protectionism could limit or reduce OFWs and or emigration.
3Q OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will Household Consumption Spending Come From?
This brings us to 3rd quarter standings of OFW remittances.
This week is GDP week or the week where the government will announce 3Q GDP. (That’s on Thursday November 26)
Given that HFCE, Household Final Consumption Expenditure, accounts for over 60% of expenditure GDP (66% in 2Q 2015), the biggest factor in determining changes in statistical GDP will be consumer spending.

So OFWs flows SHOULD play a vital role in ascertaining the government’s estimates of HFCE.
Get this: September’s data represents only a month. Yet September’s paltry recovery fails to boost, in any significant manner, the stagnant growth in July and August.

3Q cash remittances growth rate at 1.6% have even been LOWER than the Great Recession era in 2008-9 (see green arrow)!!! On a quarter to quarter basis, remittance growth has virtually collapsed!
Growth of cash remittances in 1Q 2009 and 2Q 2009 were at 2.07% and 3.7%, respectively. GDP (at current prices) over the same period registered 5.5% and 2.8%, correspondingly. 3Q 2009 GDP was at 1.4%!
The impact to GDP from a quarter of weak remittances during the Great Recession spans the period where weak remittances took hold, as well as, a spillover to the next quarter
So if past should somehow mirror the present, the impact from this quarter’s 1.6% remittance growth will likely weigh on 3Q GDP, and more importantly, this will possibly become pronounced in the next or in the fourth quarter!


3Q 2015’s 1.6% cash remittance growth marks the third weakest remittance growth level since 2002!
During the new millennium, the correlation between remittances and GDP were not as strong as today. Yet cumulative cash remittances at US$18.41 billion in September 2015 have been 205% bigger than the US$6.031 billion at the end of 2001. This just demonstrates of the significance of remittances to the Philippine GDP.
Aside from the size, the entire consumer bubble complex today (shopping mall, casino—hotels, vertical condos and other property projects) has been built on the assumption of the linear trajectory of OFW remittance growth. BPOs have been seen as an additive.
Mainstream experts continue to blubber or blurt about 6+% GDP on supposedly domestic demand based on “strong consumer spending”.

Yet ironically OFW remittances, which were once what the mainstream mainly blustered about, appear to have fallen into a vacuum.
Not even government statistics seem to matter at all. Everything seems to be a showcase of articles of faith!

The government’s estimates of general retail prices in September have been on a steady downtrend (left).
From the Philippine Statistics Authority4: (bold mine) The annual General Retail Price Index (GRPI) in the National Capital Region (NCR) at 0.4 percent September was the same rate posted last month. In September 2014, it was recorded at 3.2 percent. A higher annual growth was seen in the index of the heavily-weighted food at 2.1 percent. Slowdowns were however, noted in the annual increments of the following indices: beverages and tobacco, 3.6 percent; chemicals, including animal and vegetable oils and fats, 1.2 percent; and miscellaneous manufactured articles, 1.5 percent. Moreover, the indices of mineral fuels, lubricants and related materials and machinery and transport equipment  continued to register negative annual rates at -19.2 percent and -0.6 percent, respectively. No movement was observed in the index for manufactured goods classified chiefly by materials. while that for the index of crude materials, inedible except fuels remained at 2.9 percent.
Given that food represents the biggest weighting in the average consumer’s basket, then higher food prices implies of greater demand for food that have led to diminished demand for other items, thus falling prices.
And this by no means is just a month’s performance: retail prices have been dropping from a year ago!
The same applies with government’s estimates of general wholesale prices in August, where the wholesale industry has seemingly been sucked into a deflation vortex, since December 2014!
So if there has been a demand boom then why the sustained fall in retail-wholesale prices? Too much supply?

Even the government’s measure of CPI has been dropping like a stone.

Except for prices of food and alcoholic beverages, non-food items based on BSP’s October table have been in a sharp downtrend.
October’s CPI has equaled September. Has October’s CPI hit an equilibrium level? Or has this, like in February, signified a hiatus?

While personal savings was flat in September month on month, it has been up by about a hefty 9.8% from October 2014 and higher by about 5.6% year-to-date.

If many (with bank accounts) have been saving then just how can the same parties be spending? Spending based on manna from heaven?

Again why are (retail, wholesale and CPI) prices going down? Based on the law of demand, the answer is because demand curves have been sloping downward. Said differently: “at higher prices, the quantity demanded is less than at lower prices”. (chart and quote sourced from Economics Online). Or prices have yet to reach market clearing levels from which demand would offset supply.
In short, what the mainstream expects and conditions the public runs contrary to rudimentary economic logic. They go against not only against economic reasoning but also on empirical data provided by the government from OFW remittances to the prices in the real economy.
This is NOT about economics.

So unless government’s numbers have been blatantly inaccurate, then all these 6+% 3Q projections have been nothing but intended to sell hopium or have been part of the propaganda to condition the public for another statistical fabrication on the Philippine economy.
Of course for the mainstream institutions, conditioning means to line up the pockets of these institutions at the expense of the public who will take on the risks from resource transfers encouraged by financial repression policies.
And for government to live up with its hype, the statistical Sadako will come in very handy.
Which Sectors will Deliver G-R-O-W-T-H to Buoy 3Q GDP?

And that’s from the expenditure side. How about the industry side?
The government’s PSA says agriculture performance stagnated in 3Q to grow by ONLY .04%!

The government’s estimates of the price trajectory of retail construction materials have been negative in four out of five months based on last September.

Prices of construction materials at the wholesale sector have likewise been negative since December 2014 through October 2015!
If there has been a demand boom in the construction sector, then why have prices been falling?




I have written how manufacturing sector’s value and output have not only been in doldrums but also suffer from signs of credit deflation. Or bank lending activities to the biggest sector in the statistical GDP has more than collapsed; it registered a contraction last September!
Why would banks stop lending to the sector if the sector has been growing? Has there been little demand for credit by the sector? How will the sector finance its working capital or capital expansion?

And based on annual change, current rate of losses in value by the manufacturing/industrial production seem at a critical juncture (lowest window). Any deeper loss on the said sector will most likely considerably weigh on GDP similar to 2008-9 (green boxes).
Also, based on nominal levels, any further drop on exports from current levels will also serve as a severe headwind for manufacturing, and subsequently, the GDP. That’s if 2008-9 will rhyme (see middle window).

In 2011, when exports dropped below today’s critical levels, manufacturing growth while still positive, materially subsided (green boxes at the middle). And the decline of both exports and manufacturing were likewise reflected on GDP.
And don’t forget, remittance activities resonated with the manufacturing and the export downturn in 2008-9.

Fascinatingly shades of 2008-9 have emerged, yet mainstream experts continue to shout G-R-O-W-T-H!
If the performance of major industries have been sluggish and OFW remittances as backbone to HFCE or consumer spending has been materially down, then just where will G-R-O-W-T-H come?

Again from Sadako???
More Fissures in the Real Estate Industry: Phil Realty and Rockwell Land; GTCAP’s Massive Leveraging!
Yet more clues on why the media went on a seeming orchestrated publicity blitz to promote the property sector last October.
Find the following clips from 3Q 17Q reports of select companies with some quick numbers…


Philippine Realty [PSE: RLT]. Though through 9 months real estate sales spiked by 18.19%, 3Q real estate sales and rental fell 27.36% and 30.53% respectively. The huge decline in rental revenues has led to a 15.22% drop in 9 month performance.



Rockwell Land [PSE: ROCK]

3Q real estate sales slumped by 29.03%! 3Q performance has dragged down 9 month performance to a negative 19%!

GT Capital Holdings [PSE: GTCAP] has a different picture.

Real estate sales up 50% in 3Q was a blast!
GTCAP’s 3Q profit story was almost entirely about real estate.

As a side note, in contrast to record after record auto sales as broadcasted by media, curiously GTCAP’s automotive revenues grew by only 2% over the same period! [UPDATED to add: Another irony: Toyota Motor Philippines controls 45.2% of market share, the largest among domestic car producers, based on record national automotive September sales, according to CAMPI. Meanwhile, GTCAP's 17Q report indicates of ONLY 2% growth of TMP sales for the quarter. This hardly squares with what has been reported by the industry and by media]
Yet Php 440 million out of the Php 534 million (or 82%) generated by other income segment came from Federal Land’s land asset swap, real estate forfeitures and other income. So to add ‘other income’ with ‘real estate sales’, about 61% of overall 3Q revenues came from real estate.
That’s the wonderful part.



Yet those huge sales numbers have been accompanied by an equally phenomenal (+70%) skyrocketing of receivables where Php 11 billion was accrued by real estate subsidiary Property Company of Friends, Inc. (PCFI) and Php 5.1 billion from Federal Land.
Both Fed Land and PCFI contributed to 89.5% of inventories which surged by an incredible 119%!
So supply has grown even faster than demand!
Unfortunately, like her other bigger peers, those enormous growth sales numbers that led to accrual accounting profits have hardly been generating sufficient cash.

So again like her big named contemporaries, GTCAP resorts to massive leveraging from short term debt to long term debt!

In case one wishes to know where these levered funds had been and will be used, here’s the GTCAP report.


Aside from sizeable funding for her real estate firms, a lot of these funds are juggled on an intercompany basis!
These developments represent a big NO NO or a red flag for Warren Buffett’s mentor Ben Graham. That’s because GTCAP’s monumental leveraging leaves virtually no margin of safety from the risk of errors. GTCAP’s gambit essentially represents a one way trade.
From Ben Graham’s classic the Intelligent Investor5… (bold mine)
The first and most obvious of these principles is, “Know what you are doing—know your business.” (circle of competence). For the investor this means: Do not try to make “business profits” out of securities—that is, returns in excess of normal interest and dividend income—unless you know as much about security values as you would need to know about the value of merchandise that you proposed to manufacture or deal in.
All these immense leveraging has been designed to generate “returns in excess of normal interest and dividend income”
More warning from Mr. Graham,
A third business principle: “Do not enter upon an operation—that is, manufacturing or trading in an item—unless a reliable calculation shows that it has a fair chance to yield a reasonable profit. In particular, keep away from ventures in which you have little to gain and much to lose.” For the enterprising investor this means that his operations for profit should be based not on optimism but on arithmetic. For every investor it means that when he limits his return to a small figure--as formerly, at least, in a conventional bond or preferred stock—he must demand convincing evidence that he is not risking a substantial part of his principal.
Unfortunately, GTCAP’s outsized leveraging represents positioning based on optimism and not from arithmetic, thus risking a substantial part of the company’s, as well as, creditor and investor’s principals from tail events.
The real estate industry has been highly leveraged from the front end (sales) to the back end (inventory) as well as to the network chain of firms from different industries attached or dependent to it.

And yet a failure to meet such Pollyannaish expectations will signify a recipe for disaster that should have a ripple effect.
With so much at stake for the biggest names or ‘blue chips’, now it seems much clearer why the torrent of press release masquerading as news reports last October.
Will There Be A Pre-GDP Play Next Week? PSEi Backs Off Support Breakdown, Storms Back to 6,900
Will there be a pre-GDP play next week?
There was a pump before the 4Q GDP 2014 announcement. There was also a dump prior to 1Q GDP 2015 announcement. The chart can be seen here.
Unfortunately the 2Q GDP announcement was washed over by the August 24 crash, so whatever front running or insider play that was supposed to have taken place might have been overwhelmed by the crash and the subsequent response to it.
Nonetheless I expect sharp volatility to highlight the pre-GDP announcement.
Perhaps it may have already started last week.


On Monday, November 16, the Philippine benchmark, the Phisix (PSEi) broke below critical support levels. The PSEi plunged by 1.81% to close at 6,772.92. The loss could have been larger if not for a late afternoon delight pump.
However, the one day breakdown had immediately been countered by two successive days of steep low volume rallies on Tuesday November 17 (+.77%) and November 20 (+1.57%).

Yet about half of Friday’s gains came from a combination of a late afternoon delight pump PLUS marking the close (see lower window).
What would be of Philippine stocks without price fixing measures/ market manipulation conducted by unseen faces?
The two day rebound effectively erased Monday’s losses to end the week up .51%. Year to date, the PSEi still posted a 4.12% deficit.
Monday’s losses not only signified a breakdown of the three month rangebound trend or from the rectangular pattern, it broke below the intermediate price channel formed from late October.
The breakdown, or if not the test of the support, has somewhat mirrored 2013’s gap filling actions. In 2013’s taper tantrum, the gaps from two incidences of 6% crashes were filled. But the two rallies faltered and the PSEi eventually found deeper lows. The chart can be seen here.

Monday’s new lows partly resonated with the 2013 dynamic but needs further confirmation.
Yet the jury is out whether Monday’s actions represent an anomaly, a bottom, a reinforcement of the trading range or a fulfillment of 2013’s gap filling actions.
Last week’s activities revealed of imbalanced activities.

The two day 2.34% run by the PSEi had been heavily tilted towards the property sector (+2.31%). The property sector was mostly powered by Ayala Land +5.34% and Megaworld +2.75%.
The service sector came second largely on the rebound by PLDT (+1.52%) and ICT (+4.03%). Gains by the financial and holding sector were muted. Nonetheless, the Industrial and the mining sector posted losses.

Market breadth was mixed.
Component issues of the PSEi were marginally predisposed towards losers. Losers edged out gainers 15 to 14 with one unchanged.
At the broader markets, the advancing issues eked out losing issues by a slim 31 differential (left).
Peso volume continues to ebb. This week’s volume accounted for the third lowest for the year (right).
Essentially despite this week’s gains, a volumeless rally reveals of little conviction behind the recent push.
Additionally, with a net foreign selling of Php 1.568 billion, this week’s activities had largely been driven by domestic participants.
Finally, the peso was traded only in one day during the week.
The USD peso officially closed the week at Php 47.14 or .19% up based on November 13’s close.
Over the interim, the USD peso looks like in a rising wedge pattern, whereby a breakdown may signal a temporary reprieve from current uptrend.

Last week’s rally in Asian currencies will likely prompt the peso to open on a firm note—46.95 to Php 47.

However over the medium term the USD peso looks likely headed higher. Current uptrend support is at PHp 46.70
Given the mounting signs of economic imbalances here and abroad, deepening market divergences (negative swaps and soaring yields of junk bonds) and rampant disinformation and misperceptions (everywhere), the USD, cash and gold should serve as lightning rod against potential shocks.
_____

2 Pew Research More Mexicans Leaving Than Coming to the U.S. November 19, 2015
5 Benjamin Graham, Chapter 16: “Margin of Safety” as the Central Concept of Investment, The Intelligent Investor, p 249-250 Harper Business ValueWalk.com
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