Markets and the global economy are moving closer to an inflection point: Either the growing global economic malaise, accentuated by a structural increase in financial market volatility, will be a wake-up call to policy makers, or the global economy will slip deeper into a self-reinforcing malaise, making it very hard for the central bank to contain financial volatility.—Mohamed A. El-Erian
In this Issue:
PSEi 6,850: Crashing PSEi Behemoths: Signs of Skeletons Emerging from the Closet?
-Has the Stock Market Boom Effaced History’s Relevance?
-Phisix 6.850: A Product of Marking the Close
-PSEi 6,850 Leaves The 6,790 Support Open For A Bear Assault
-Why are the PSE Behemoths PLDT, ICT and AGI Crashing?
-Philippine Casino Bubble Represents Only The Tip Of The Iceberg
-Domestic Liquidity Jumps as Benchmark Yield Curve Dramatically Flattens
PSEi 6,850: Crashing PSEi Behemoths: Signs of Skeletons Emerging from the Closet?
Has the Stock Market Boom Effaced History’s Relevance?
Deeply held misperceptions about reality are especially magnified at the critical juncture of markets or at market inflection points.
To show some examples based on market tops[1]:
"We will not have any more crashes in our time." - John Maynard Keynes in 1927"There will be no interruption of our permanent prosperity." - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928"There may be a recession in stock prices, but not anything in the nature of a crash." -Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." - Irving Fisher, Ph.D. in economics, Oct. 17, 1929Stocks were undervalued in the 1980s and early 1990s, and they are undervalued now. Stock prices could double, triple, or even quadruple tomorrow and still not be too high… Stocks are now, we believe, in the midst of a one-time-only rise to much higher ground—to the neighborhood of 36,000 for the Dow Jones Industrial Average. James K. Glassman and Kevin A. Hasset, Dow Jones 36,000 September 1999, The Atlantic
These were signs of overconfidence.
And they were signs of times.
But they were all wrong.
Of course, such extreme misimpressions apply not only to market tops but also to market bottoms.
But what I would like to emphasize here is that being wrong has not been without material and psychological consequence.
For iconic economist John Maynard Keynes’, “In the year of the 'terrific decline' which had started in the spring of 1937, notes Keynes biographer Robert Skidelski, “he lost nearly two-thirds of his money.”[2]
Meanwhile, for contemporary economist Irving Fisher, the Wikipedia notes that “The stock market crash of 1929 and the subsequent Great Depression cost Fisher much of his personal wealth and academic reputation.” Mr. Fisher did not just lose money, for his brazen cheerleading he was discredited.
Why do I bring this up? Well last week, I received a stunning feedback. In pushing back my counsel to use history as guide to investing, I had been told that since stock markets always comes back, therefore history has been rendered irrelevant!
This means that declines in the stock markets have been reckoned as fleeting events where recovery has been set on the stone. In short, stock markets can only go up up up and away!
Of course, such statement signifies a red herring.
But it’s not only that history has been denigrated and condemned as useless and impotent pointer for investing and of understanding reality, more importantly, factors such as time, valuations, and risk-reward tradeoffs have been made to exist in vacuum.
Neither financial nor economic substance has been incorporated into such purview, but instead financial markets have been seen as proclamations of faith through proof by assertions.
Yes, the stock market has become a religion!
Well, have stocks really been a one way street as so claimed?
Let me use the US technology weighted Nasdaq as example.
The Nasdaq was the epicenter of the US stock market dotcom bubble during the new millennium. On March 10, 2000, the Nasdaq posted an intra-day high of 5,132.52. The same day, the index closed at an all-time high of 5,048.62.
Fast forward FIFTEEN YEARS…today.
In April 23 2015, the same index, according to the Wikipedia, broke through the record of 15 years earlier and set a new high for a daily close at 5,056, though it was still just short of the all-time intraday high set in 2000. At Friday’s 4,707, the tech weighted index has been off 6.9% from the April highs.
In gist, FIFTEEN YEARS after the 2000 highs, a successful (sustained) breakout has yet to be accomplished! Some comeback eh?
This means that anyone who bought into the index at the peak FIFTEEN YEARS ago and held it through to today would have suffered similarly FIFTEEN YEARS of nominal losses, inflation adjusted or real losses, opportunity costs and psychological angst.
Of course, the Nasdaq index today is alot different than the Nasdaq of yesterday in terms of composition.
For instance Cisco and Oracle (NYSE ORCL) were among the top 10 biggest Nasdaq issues in 2000. Today, it is only Cisco (Nasdaq CSCO) on the top 10. ORCL has left the Nasdaq in 2013. Yet both issues have remained significantly distant from their respective price highs in 2000. So anyone who bought ORCL or CSCO in 2000 have yet to recover their losses after FIFTEEN YEARS!
Yet some companies never made it back alive, post dotcom bubble bust. Issues like Pets.com, Boo.com and WebVan endured bankruptcy. Enron can be added to the list. And so with Lehman Bros and Bear Stearns for the posterior 2008 crisis version.
These bankrupt or ‘dead’ issues became equivalent to Wallpapers, like some of my father’s legacy to me.
Now if the current attempt to breakout from the previous high fails, then the current state of the NASDAQ’s chart formation, for technicians, would be equivalent to a DOUBLE top. If this should materialize, then more time consuming miseries await all those who bought at the top in 2000 and to the 2015 “greater fool” recruits!
There are no shortages of examples to disprove such absurd claims.
After TWENTY FIVE years, Japan’s Nikkei 225 has even yet to reach HALF of the 1990 highs.
Thailand’s SET resembles the NASDAQ, it has almost reached the pre-Asian Crisis highs this year. Unfortunately, recent developments have sent the SET back down to touch bear market levels. The recent failed breakout could be portentous for the SET.
It’s no different for the French CAC 40 which remains afar from the highs attained FIFTEEN YEARs ago!
The Philippines experience has been no stranger to this.
The bubble during my father’s eon (1970-79) saw the Phisix culminate in 1979. Subsequently the same benchmark crashed 81% through 1985. The 1979 high was only recovered and surpassed in 1987 or eight year later.
The high of the pre-Asian crisis was redeemed and breached after TWENTY years.
A swift reinstatement and breakout of the previous 2007 highs occurred in 2010 or 3 years after.
But again conditions from the three episodes were vastly different. The previous two episodes (1970-1979 and 1994-1997) were full-blown bubbles.
In late 2013, I cited a study by the international investment firm Vanguard Group to show that investments made in the Phisix during 1970 through 2012 produced negative real returns[3]:
From 1970-2012 real returns by the Phisix has been NEGATIVE despite the recent boom. I would add that considering suppression of inflation rates and constant changes in the Phisix components favouring the high flyers, real returns based on original construct must be even lower.
So two bubble cycles have effectively neutralized whatever nominal gains that occurred in FOUR DECADES!
Yet we see establishment experts sell the baloney that, at present exorbitant price levels, domestic stocks represent as “perfect time” for investments. It’s more about “perfect time” to line up their pockets from fees than comes at the cost of amplified risks taken by gullible depositors.
This only shows how the lessons of history have been tossed to the dustbin.
All because of the worship of inflation (invisible redistribution).
The billionaire crony George Soros makes an important insight on the psychological character of the different stages of the boom bust cycle[4]:
1. The unrecognized trend2. The beginning of a self-reinforcing process3. The successful test4. The growing conviction, resulting in a widening divergence between reality and expectations
5. The flaw in perceptions6. The climax7. A self-reinforcing process in the opposite direction
Apparently, when the establishment oozes or exudes with overconfidence they account for the transition from “The climax” that had been pillared from “The flaw in perceptions” to the “self-reinforcing process in the opposite direction”.
In the same way top intellects during the Great Depression feverishly raved in defense of bubble of their era, which meant that they had swilled too much of central banking Kool Aid, the lesson has been that misperceptions about reality can lead to financial devastation.
At the end of the day, American financier, stock investor, philanthropist, statesman, and political consultant Bernard Baruch was SPOT ON:
The main purpose of the stock market is to make fools of as many men as possible.
Phisix 6.850: A Product of Marking the Close
Related to this climax predicated on the massive flaw in perceptions have been the ongoing stock market manipulations at the Phisix.
Last week I said that actions of stock manipulators may be losing significance. That may have been too early.
The Phisix closed the week down by .97%. But the headline doesn’t tell the story to what lead to this weekly outcome.
I regularly monitor intraday activities of the stock markets of Asia, and their major European and American contemporaries and I have not seen anything to closely proximate the actions at the Philippine Stock Exchange.
Even in stock markets where authorities have declared direct support (China, Japan and Malaysia), there has hardly had the same pattern or frequency in the trading dynamics as the PSE.
Last week’s outcome was essentially shaped by “marking the close”.
Marking the close was responsible for about 51% of the September 28 session’s 1.47% loss. Marking the close was responsible for 45.84 points of the September 30’s 34.69 points or .51% gains. So marking the close has not only been responsible for magically transforming the Phisix from loss to gain, but accounted for 100% of the day’s output in terms of gains! Marking the close was responsible for shaving 41% of the October 1’s losses.
As I have been documenting here, these manipulations have serious financial consequences.
These “marking the close” activities represent price fixing of the index close.
These contribute to the deformation of the pricing discovery mechanism which essentially impairs on the fundamental function of the stock market.
Moreover, manipulations designed to maintain the status quo is a sign of “self-reinforcing process in the opposite direction”
Manipulations may be ignored by establishment and by authorities, as some of them may be complicit to such dynamic. But in the future, I believe when people look back to study how today shaped tomorrow, market manipulations could be added to their insights. Put bluntly, history will not be complete without the role played by price fixing on the index in the shaping outcome.
And because market manipulations contribute to the serious “misalignment of prices”, they have real economic effects. The BSP’s zero bound induced credit powered artificial (borrowing from the future) boom has diverted much of the public’s valuable resources in support of malinvestments (unproductive speculative activities). Such has been abetted by the promotion of the farcical boom by media which has been bolstered by the price fixing of the PSEi index of the other markets (bonds and currency).
This means that since many have been seduced and or enchanted by pseudo boom to have committed much of their resources to the malinvestment formation process, many will suffer capital losses from the reversal of the boom.
And the reversal of the boom will be manifested by the surfacing of excess capacity, financial losses and balance sheet impairments that will be transmitted as liquidations, asset price deflation and cash and liquidity pressures which will feedback with the former.
And such action-response looping mechanism will extrapolate to reduced economic activities that will be reveal as reductions in capex and as job, wage and income losses or to an eventual GDP and real economy contraction that may even spread into material insolvencies in many firms within several industries.
And NO amount of manipulation and media’s yelling or recital of statistical talismans, on how allegedly sound the financial-banking system is, will prevent the unraveling of excesses. Many of those statistics have signified as accounting magic, and statistics that barely covers or touches on the many off-balance sheet credit activities in the system.
PSEi 6,850 Leaves The 6,790 Support Open For A Bear Assault
In spite of the manipulations, it’s interesting to see how the Phisix has been reacting to the low volume trading activities that seem to have tilted the playing field in favor of sellers.
As I have been repeatedly saying here, for as long as the bids remain thinly supported by peso volume, the balance of risks will favor the bears. That’s because volume will have to be found on the lower spectrum of the bids.
In plain English, those who want to sell may find buyers at lower prices.
The average daily peso volume (weekly averaged) has been diminishing since June (lower window). The reduction in the support of the bids has made the Phisix vulnerable to a major move incited by a headline event, hence the August 24 meltdown.
The average daily peso volume for this week was at Php 6.7 billion.
If one notices, those previous wild afternoon delight pumps that usually ended with the “marking the close” while occasionally still happens, has vastly been reduced. Thus the attempts to price fix the index close have now mainly become dependent on “marking the close”.
This is a sign of how manipulators have most likely been running out of resources.
Perhaps a lot of their resources have been tied to prices at very high levels (PSEi 7k-8k). Consequently, this means that such deficits have been affecting their balance sheets too. And this balance sheet constrains may have already reduced their access on resources for the index pump.
So these entities would have to rely more on inducing deposits from the susceptible public—mainly through media brainwashing or advertising or from hard selling on clients (if private), or more tax revenues (if public) or an improved external environment to attract foreign money.
Yet last week, the .97% deficit, brings the PSEi closer to test the August 24 closing low at 6.790. (upper window)
And without any substantial improvements in peso volume, the PSEi will again be highly sensitive to a major downside move that may or may not be impelled by a headline event.
Curiously the repeated maneuver to pull the Phisix away from the support at 6,790 has only driven it closer.
The mini rectangular support of 6,890 has been broken last week. This makes the rectangular support at 6,790 the next in line.
Said differently, PSEi 6,850 leaves the 6,790 support open for an assault.
Of course, manipulators and the bulls may pullout another raid, but unless volume accompanies any rebound, they are likely to be interpreted as dead cat’s bounce rather than a recovery.
As a side note, external environment may indicate of an interim bounce on PSEi and global stocks.
Friday’s dismal US jobs reports fueled speculation that FED may once again defer from a “liftoff” this October. Steroid addicted stock market bulls, who sensed blood from the FED’s extended provision of monetary cocaine, went for the kill. So from a massive selloff at the opening bell, the realization of the provision of more monetary narcotics, prompted for an astounding reversal. US stocks closed significantly up Friday while Asian currencies rallied strongly too. The peso was unofficially quoted at 46.60-46.65. This may just juice up a relief rally in Asian stocks, as well as, the PSEi next week.
But as reminder, bad news doesn’t just involve the September jobs report which included major downside revisions during the past two months, but also burgeoning job cuts that, aside from energy, has spread to include other industries such as retail, technology and industrial goods!
This is aside from a CONTRACTION in all 6 of the US FEDERAL RESERVE’s regional manufacturing survey! Add to this, Friday’s decline factory orders. And along with this, the 3Q GDP estimates from the US Atlanta FED’s real time GDPnow has abruptly been chopped by half to .9% from 1.8% based on deterioration in external trade. All these I covered here[5]
The point is, if the US economy stalls or even falls into a recession, where the FED may NOT hike but instead even EASE (via renewal of QE or adaption of negative rates), the issue will shift to magnify extant USD dollar liquidity strains, which are symptom of hidden insolvencies within the system. Given today’s heavy reliance on money supply growth as driver for GDP, recessions are inherently deflationary (marked by contraction of credit activities), thus, the US dollar relative to Asia and other emerging markets should soar!!! This will be accompanied by a risk OFF volatility around the world.
What do you think all these central bank measures of zero, negative bound and QEs have been about??? Yet despite all the media pronouncement of G-R-O-W-T-H, why can’t they give up on all these debt subsidies???
Back to the Phisix, it’s likewise been interesting that all measures employed to buoy the Phisix has only led to divergences.
The selective index pumps during the week have been underscoring these.
Based on the weekly sectoral performance (left), the property sector was up, while the rest was down. But the decline in the service sector was the fundamental reason why the PSEi was down by .97%.
Be reminded that sectoral indices include non-PSEi issues. So their output may not be similar to that of the PSEi.
Let us tackle the headline index.
On a weekly basis, of the 30 composite issues, 11 were up, 17 were down while two were unchanged.
Yet of the 11 that were up for the week, 6 came from the top 15 with all 6 posting significant gains: namely AC +2.16% (fourth ranked, index weight 6.06%), SMPH +3.3%, (fifth, index weight 5.94%), JGS 1.75% (seventh, 5.83%), BDO 1.94% (eight, 5.45%) GTCAP 5.16% (twelfth, 3.29%) and JFC 3.1% (thirteenth, 2.8%).
With a combined market cap of 29.37%, these 6 issues have mainly kept the PSEi from a larger rout. Some of them were the objects of the end minute pumps.
Yet a glimpse of the market breadth or the advance decline spread that for the week shows us that the bears ruled the week with an aggregate margin of 92.
Bears dominated 4 of the 5 trading days. This includes the 2 days, particularly September 29 (adv 72-dec 109) and 30 (adv 80- dec 96) where the PSEi posted gains. In short, the two days where the index rose had barely been supported by the broadmarket.
Again selective pumps only have caused divergences to exist and imbalance to accrue.
Why are the PSE Behemoths PLDT, ICT and AGI Crashing?
And where it gets interesting has been in the selloff at the service sector. The Phisix was down this week largely because the third largest issue, PLDT, which tanked by 5.9%.
Could this be due to the combination of weakening G-R-O-W-T-H in the face of the firm’s considerable US dollar based liabilities? A report on the US dollar liability headaches of Anthoni Salim, the Indonesian billionaire who controls First Pacific, parent of PLDT, includes “$1.8 billion of dollar-denominated borrowings as of June 30”. Of the $1.8 billion, “PLDT, had revenues that were either denominated in, or linked to, dollars of more than $700 million last year”[6]
Charts of both First Pacific and PLDT seem to share the same dynamic: They have been in a freefall!
It’s not just for only this week but for several weeks. First Pacific reached its zenith in May 17 at 11.48 while PLDT’s acme was on September 5 at 3,422. This means that in just over FOUR months First Pac has more than HALVED or lost 57.75% while PLDT has lost nearly two fifth or 37.6% in just over a MONTH! Truly awesome illustration of a crash!
Yet why the crash? Has the USD debt of these companies been larger than publicly known?
Another more intriguing development has been the ongoing crash by the Philippines’ largest maritime terminal operator, (the fifth largest in the world according to ADB), the International Container Terminal Services Inc. (PSE:ICT)
ICT’s share prices got smoked by 3.9% this week. This week’s loss marks the sixth consecutive weeks of decline (below right).
ICT peaked last January 23 2015 at 117.7. As of Friday, ICT has lost 37.13% from its peak. ICT’s collapse have actually commenced only last August 4. So the gist of ICT’s collapse occurred only in just TWO months!
Why the crash? Has this been due to ICT’s US dollar debt (I wrote in August that ICT raised $450 million from perpetual bond issuance)? Or could ICT’s dilemma been mainly about casino Bloomberry? Or could this have been both?
Well, Philippine casino bubble has been rapidly deflating. This is something which I had been expecting since 2013.
This week’s stunning price actions reveals that BLOOMBERRY [PSE BLOOM] hemorrhaged by a shocking 18.56% (year to date -60.73%), Melco Crown [PSE MCP] bled by a ghastly 24.18% (year to date -74.37%) while Travellers International Group operator of Resorts World Manila (RWM) sunk by an ugly 7.25% (y-t-d -61.21%). [see left]
Bloomberry climaxed last November 3 2014 at 15.58, which means as of Friday, or less than a year, the stock has lost 68.7% [see right].
Except for the owner and his managers, the annual report of the ICT and BLOOM shows of no direct equity or debt connection. If ICT’s price collapse had been related to Bloom, could it be due to debt linkages through off-balance sheets? Or could the stock markets be pricing in ICT’s potential rescue of BLOOM, which means the depletion of ICT’s reserves (retained earnings)? And could it also have been that a possible draining of reserves from the Bloom rescue may expose ICT’s vulnerability to her US dollar based debts?
Meanwhile Alliance Global [PSE: AGI] parent of RWM also crashed by -10.28% this week. Year to date, AGI has been down by only 28.25% but AGI equity has already halved if based on April 30, 2014 crest at 31.15. Last week’s crash accounted 36.4% of the 28.25% year to date losses.
These fantastic collapses signify as interesting developments as they seem to signal the surfacing of the many skeletons in the closet.
It’s also fascinating to see how internal crashes or crashes within the PSE constellation have been spreading to infect even so-called blue chip stocks.
How much more time will the façade of the credit boom be exposed for what they truly are?
Philippine Casino Bubble Represents Only The Tip Of The Iceberg
Bear markets are frequently accompanied by frenzied rallies.
Macau’s casinos zoomed last week, reportedly on marginal improvements on September losses. Losses from 35% to 33% have been made by media as excuse to explain events post hoc (see left).
Meanwhile, other reports say the rally has been due to the promise by the Chinese government to support Macau’s economy.
Early this year, Macau’s casinos also had big rallies which eventually faltered. As proof, last week’s rebound emanated from recent lows.
So given Macau’s rally and the one week crash, a bounce seems likely for the embattled Philippine casino stocks.
But the deflating Philippine casino bubble represents only the tip of the iceberg.
The Bangko Sentral ng Pilipinas reported last week that production loans which constituted about 80% of all banking loans grew by 13.8 percent in August from 13.4 percent in July.[7]
Where was the gist of the growth rate? Well the hotel (+50.35%), construction (+32.5%) and education (42.46%). Meanwhile loans to the manufacturing sector tanked to single digits (+5.93%)[8].
Loans continue to swell even as losses on the casino-hotel industry mounts! If the big guys have been hurting those smaller players (even non casino hotels) may be hurting as well.
As I have previously written[9],
First, the industry’s debt problems, which eventually should be manifested in the banking system, will likely spillover to the other industries. When losses are recognized through growing bad loans, access to credit will tighten and interest rates rise. The risk of bankruptcies increases along with these.Second, casinos have been emblematic of the race to build capacity in hotel and other retail sectors. So I expect the casinos woes to eventually get transmitted to the hotel industry first then to the other retail related industries.The difference has been that these casinos have been new players in a saturated regional market whereas the other major listed retail players have been old players in a maturing domestic industry. Given the lack of market following, the former has been more vulnerable than the latter. Nonetheless it still should be a ‘periphery-to-the-core’ phenomenon…And once those topline numbers turn negative, that’s when the alarm bells will be sounded in the credit markets.Third, I suspect that perhaps some of them may not survive at its current form. 2016 should be very interesting.
The rubber is about to meet the road.
Domestic Liquidity Jumps as Benchmark Yield Curve Dramatically Flattens
Finally, the BSP also reported that domestic liquidity growth rate jumped by 9% year on year faster than the July 8.4% (revised). On a month-on-month seasonally-adjusted basis, M3 increased by 0.9 percent[10]
It’s a curiosity because after all the dogged manipulation of the yield curve from last May-August, production loans only eked up higher to 13.8% in August from 13.4 last July (see right).
And over the past few weeks, the benchmark yield curve (ADB’s favorite) continues to dramatically flatten despite attempts to steepen it last week.
If the flattening momentum persists then we may see an inversion of the key benchmark soon! And an inversion by this benchmark will likely attract attention of international observers. Will the observers say that this time is different a yield curve inversion won’t affect G-R-O-W-T-H?
Of course, I expect interventions to prevent this from happening. But until how long can they keep this up? Authorities will only be playing the whack a mole game, since other parts of the markets will reveal the concealed imbalances.
Nonetheless, the pick-up in August domestic liquidity growth has been significant. If this momentum will be sustained, then we will likewise see the CPI bounce back. And this will be read by the mainstream as growth n demand to justify GDP G-R-O-W-T-H, when in reality we are seeing the seeds of stagflation.
However, again the flattening yield curve should serve as a cap on credit growth. Add to this, signs of potential strains on the balance sheets of key institutions in the formal economy. Like the casinos, those balance sheet pressures are now being vented on equity prices.
Therefore, August domestic liquidity could signify an outlier more than a sustained dynamic.
[1] Into the Grey Zone, Famous Economic Quotes From The First Great Depression, January 5, 2011
[2] John P Hussman Misquoting Keynes, Hussman Funds, February 7, 2011
[3] See Phisix: The Convergence Trade in the Eyes of a Prospective Foreign Investor November 11, 2013
[4] George Soros, The Alchemy of Finance p .19 John Wiley & Sons p. 58
[5] See US Stocks: Disappointing Job Reports Spurs Frantic Buying on Expectations of Monetary Heroin; Atlanta Fed’s 3Q GDP Chopped to .9% October 3, 2015
[6] Bloomberg.com SE Asian Billionaires Feel Pain of Devaluation With Interest Bills Rising September 16, 2015
[7] Bangko Sentral ng Pilipinas Bank Lending Sustains Growth in August September 30, 2015
[8] Note: The BSP has shifted its statistical classification from the Philippine Standard Industrial Classification (PSIC) 1994 to 2009, effective June 2014. They ended the update on the PSIC 1994 classification last June 2015.
On the production side only 5 sectors retained their numbers: construction, financial intermediation, education, mining and accommodation and food services. Others had been reclassified. So my data now has become limited.
[9] See Phisix 7,400: Deteriorating Headlines and Market Internals, China Devalued In Response To Deflating Bubbles August 16, 2015
[10] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Rises in August September 30, 2015
