This
week’s outline
Even
at Only 7,800: PSEi Hits Historic Proportions in Terms of Valuations
Excesses!
-Déjà
vu 1996? Furious Pumping Sends PSEi Valuation Excesses to 1996
Levels!
-Broadening
Misperception: Historic PERs Not Just About Price Pumping, But
Lethargic Earnings Growth!
-BSP’s
Silent Stimulus Will Aggravate the Malinvestments and the Coming
Violent Market Clearing Process!
Even
at Only 7,800: PSEi Hits Historic Proportions in Terms of Valuations
Excesses!
Activities
at the Philippine Stock Exchange have reached historic
proportions.
The
headline index has yet to match the April 2015 milestone threshold of
8,127.48 but current developments have already signified epochal
scales in the context violent price pumping.
And
since actions have consequences, the ramifications of such frenetic
or manic episodes of price pumping (combined with rampant
manipulations) have led to the panoply of momentous vertical price
charts for the PSEi majors.
And
since price pumping equates to the disproportionate increase in
prices relative to fundamentals, or price multiple expansions, or
seen in economics as mounting imbalances between prices and
fundamentals, thus another consequence has now been manifested
through the acceleration of climatic valuations!
Déjà
vu 1996? Furious Pumping Sends PSEi Valuation Excesses to 1996
Levels!
Early
last week, the Philippine Stock Exchange updated their PER data to
incorporate the overall performance of listed companies for the year
2015.
As
a side note, I validated this by looking at the SMPH’s 2015 annual
report where the firm’s earnings for the year 2015 was at Php .982
per share. At Friday’s closing price of Php 27.5 per share, PER was
at 28.004. This number matched the PSE’s data. In 2015, SMPH had a
huge jump in earnings due to one off extraordinary gains (Php 7.4
billion) from sale of marketable securities. The 2015 data bloated
the eps and artificially reduced the lather from the previous high
PER. But being an extraordinary item, in the 1Q 2016, the firm’s
earnings at .202 represented a 54% drop. So SMPH 1Q annualized (1Q
eps x4) would still entail a fantastic 34 PER!
Based
on the PSE’s PER* as of Friday’s close, the average PER
catapulted to an earth-shattering 1996 level of 25.7!!!
It was even at 26.06 last Monday, the Fourth of July!
Meanwhile,
the market cap weighted PER now stands at a staggering 26.65!!!
The
PSEi was down by .75% this week but the average PER rocketed by 30.8%
to 25.7 from 19.65! This means that the average PER have now caught
up, or closed the gap with the market cap weighted PER!
Nota
Bene: The PSE includes the PER on their quote page which is updated
real time. The PSEi’s average PER represents the summation of
indicated PER of the headline 30 composite members divided by 30.
PSEi PER= Σ PER (of 30 issues)/30. The market cap weighted PER is
the summation of PERs of the headline composite members multiplied by
their respective % share in terms of market cap weight during the
period of reckoning. Market cap PSEi PER= Σ PER x market weight (of
30 PSEi issues). Market cap weights are also reflected real time on
the PSE’s index composition page. I routinely tabulate and input
the closing figures at the trading week’s end. Anyone can go to the
PSE website to generate their data.
Aside
from their reckless and disingenuous cheerleading, the PSE’s
apparent taciturn on the performance of listed firms has prompted me
to write disparagingly on them. It appears that the annual report
card for the PSE universe will be published in their coming monthly
report for May. But like the 2Q and 3Q reports, I suspect or doubt
that they will broadcast a summary as part of their “press room”
disclosure, if the results have been dismal.
The
PSE only brandishes their data only
when the numbers fit on their preferences. Or the PSE highlights the
numbers only if they resonate on G-R-O-W-T-H theme which palpably has
metastasized into a political slogan! That’s the stylized du
jour
version of financial professionalism. That was the case for the last
two quarters where the PSE universe underperformed. Total silence.
Yet
what the PSE reckons as the PER for a specified period is the PER of
the last trading day of the said timeframe. This applies to the
monthly or annual data.
This
means that in 1996, the PER of the last trading day of December 1996
reflected on the 1996 data, the PER of which was at 26.14 (left
window).
What
this illustrates has been that the contemporary PERs have already
matched the 1996-1997 levels!
Yet
the end December 1996 PER level had been extended further for the
next three months, in particular 28.21 in January 1997, 27.35
February and 27.57 in March (right window)! This happened even when
the PSEi grew by only 1.65% over the three month period.
(Just
a side note, the PSEi composition and methodology have been different
then and today. So it is unclear how accurate the headline numbers
are)
Nevertheless,
the 1996-1997 episode only demonstrated that ultra-high
valuations
only means negative
returns.
Said
differently, prices
and returns have an INVERSE relationship, ceteris paribus (given all
things constant).
The higher
the price paid for an expected stream of future cash flows would only
translate to lower
returns for a perceived investment over time.
Just
take a listed firm, ABC with say a fair
value of Php 10. If the ABC’s share price is at Php 8 then
expected return should be 25%. At Php 9, this would be 11%. At Php
10, returns should be ZERO. Anything in excess of Php 10, or its fair
value, would mean NEGATIVE returns.
So
prices can only go permanently
higher only if the laws of economics and finance (via valuations)
have been rendered obsolete or broken. Though the same price-return
valuation relationship do
not discount
that prices can go up momentarily.
The
1996-1997 aeon have only demonstrated that such fundamental laws
existed. It delivered a fatal blow to popular expectations—through
a 68% market crash. Though of course, price-valuation imbalances
remained elevated for a certain period of time before the day of
reckoning.
Such
market crash, thus, put into spotlight the statistical
law called the reversion/regression
to the mean. The market cleared valuation excesses via the
reversion or regression to the mean. The Asian crisis, which
belatedly appeared in July of 1997, only served as trigger to such
mean reverting process.
The
1996-97 lesson applied today.
Should
the 1996-1997 milepost rhyme, then this means that while the current
episode could further extrapolate to even higher prices, that should
magnify valuation dislocations, any further upside run will likely be
limited.
Moreover
any further runup will extrapolate to intensifying market risks in
the face of enhanced buildup of price-fundamental discrepancies.
And
should
history serve as blueprint of the present, then current developments
indicate that present price levels would represent a crucial turning
or inflection point!
Broadening
Misperception: Historic PERs Not Just About Price Pumping, But
Lethargic Earnings Growth!
Since
PER represents a ratio between prices and reported earnings, it looks
most likely that not only has the spike in the headline index PER
been about rabid price inflation, but also about the denominator,
or an earnings growth issue.
For
a specific time period, the PSEi price index level can be divided by
the estimated PER to generate an estimated nominal based earnings to
represent the index.
Nevertheless
I’d rather wait for the official PSE disclosure to see the outcome.
The
past provides a clue. Through the 3Q of 2015, whether income or
revenues, the official numbers had only evinced inertia. Revenues and
income for listed companies, including PSEi composite members, were
mostly drifting in the negative.
And
this has been why these numbers have not made it through the PSE’s
“press room”. Any facts outside the G-R-O-W-T-H theme must be
considered as an anomaly thus excluded from official announcements or
censored!
And
I surmise that the based on a back of envelop calculations, fourth
quarter numbers could even be WORST!
Hence,
the current ferocious price pumping in the face of growing divergence
with real developments represents the worst dynamic in
motion—concrete signs of widening misperception!
And
current unfolding conditions have only reinforced my suspicions of
why the BSP launched a silent stimulus in 4Q 2015-1Q 2016!
The
chart above represents the distribution of PERs according to the
quintile market cap ranking based on Friday’s data.
Again
it shows of the concentration
of the HIGHEST PERs towards the top 15 or specifically, the top 5.
However,
the huge leap in the 16-20 quintile has been mainly due to the surge
in ICT’s PER to 124!
Yet
the end of the year for 2015 numbers could only likely mean an
extension of the stagnant 9 month performance.
Moreover,
to fill in the blanks, the 1Q 2016 30 PSEi eps numbers gives us clues
to the 2015 report.
The
present savagery in price pumping has come even as eps continues to
falter! Not just in 2015.
For
the PSEi, 1Q 2016 eps
growth slipped by 2.25% over the comparable period!
It’s
not just the headline numbers that has been bad. The
breadth and quality of earnings appear to be in decay.
Firms
with at least 10% in eps growth or the outperformers accounted for
only 16 or 53% of the PSEi universe.
Firms
with less than 5% growth (2015 NGDP was 5.2%) totaled 8 or 26.67% of
the Phisix.
5
firms or 16.67% of PSEi issues posted growth rates that were down
(negative) from last year. One posted negative or loss.
Overall,
14 or 47% of the Phisix had underperformed. And most of the
underpeformance comes exactly were the furious vertical pumping had
occurred—the top 15! 9
out of the top 15 or 60% had performed below par in 1Q 2016 relative
to last year!
1Q
2016’s underpeformance numbers have now been far greater than the
2Q 2015 numbers where only less than a third had lethargic eps
growth.
Moreover,
a vast majority of listed firms has shown of declining top line
numbers or revenues. This means that most
of the growth in eps had emerged from cost side reductions.
This only reveals that the 6.9% 1Q GDP was a puffery!
Again
this goes to show why the BSP had taken action in 4Q 2015-1Q 2016.
Also
this exhibits why the mainstream has been inundated by
misinformation, balderdashes or drivels, like the 4G telecom monopoly
that has served as fuel to a frenzied 5 month + pump!
That’s
because industry and economy wide eps has been hurtling downward!
BSP’s
Silent Stimulus Will Aggravate the Malinvestments and the Coming
Violent Market Clearing Process!
Of
course, I do not discount that the sudden spike in bank credit growth
from 4Q to the present could provide a TEMPORARY boost to NGDP and
eps.
Nonetheless,
the bank credit response to the BSP’s silent stimulus would
postulate to an enlargement or the amplification of an already
existing excess capacity in bubble sectors, the accretion of deeper
mispricing (as seen in the vertical pumping of stocks, but has yet to
be seen in property), significant degeneration of balance sheets of
credit recipients and credit providers, and most importantly, the
loss of purchasing power by Philippine resident consumers.
Proof?
June
CPI spiked by a stunning 18% to 1.9% from May’s 1.6%!
The
BSP
explained (bold mine): The
higher
June headline inflation was driven mainly by higher prices of most
food
commodities, particularly meat, fish, fruits, milk, cheese, and eggs,
as well as vegetables. At the same time, non-food inflation went up
as price increases of clothing, furnishings, and household equipment
as well as service-related CPI components
such as education, health, and catering services
more than offset the decline in electricity rates and in the prices
of domestic petroleum products.
Food
accounted for 36.29% in BSP’s CPI
basket.
Food related restaurant CPI which represented the second largest
non-food category has a 12.03% share. Education and health which
ranked fourth and sixth has 3.36% and 2.99% share. To wit, food, food
related services and basic spending on health and education has
accounted for 54.67% of the consumer’s income.
It’s
not just the CPI, there has similarly been a fantastic surge in
prices at the retail levels (+37.5% in May to 2.2% from April’s
1.6%).
From
the Philippine
Statistics Authority
(bold
mine):
The
annual growth of the General Retail Price Index (GRPI) in the
National Capital Region (NCR) moved up by 2.2 percent in May 2016. It
was registered at 1.6 percent in April 2016 and 1.5 percent during
the same month in 2015. Higher
annual increases were recorded in the indices of food
at 5.7 percent; beverages and tobacco, 1.9 percent; crude materials,
inedible except fuels, 1.4 percent; and manufactured goods classified
chiefly by materials, 0.7 percent.
Let
us assume that these statistics have not been understated. Or let us
give the benefit of doubt that these figures somewhat reflects on
actual developments. This tells us that overall,
the abrupt swelling of prices in basic items means LESSER disposable
spending power for consumers. That’s if the erosion of consumer
spending power through price level inflation have not been offset by
income growth.
Yet
with the PSE’s performance as a guidepost, then the 1Q 2016 data
hardly provides evidence
that income has grown enough to offset the ongoing corrosion of the
consumer’s purchasing power.
And
more signs that whatever stimulus implemented has hardly been felt in
the job markets.
Major
online job advertisers as Monster.com
and the largest online job website, Jobstreet.com, have shown bounces
off the recent lows. But such bounces may reflect on cyclical
responses rather than a structural recovery.
Not
even the BSP silent stimulus appears to have filtered into
Jobstreet’s nominal based job openings which appears to be turning
lower again [see lower window] (I tabulate this every Thursday).
So
just where are the jobs to provide spending power for consumers?
OFW
remittances? The BSP fidgeted with
the April remittance data
perhaps to hide another negative remittance growth rates last March.
Yet
OFWs growth rates are clearly headed downhill. OFW remittances are
unlikely sources of marginal demand and income growth.
And
here is a curiosity. The government says that since the Philippine
NGDP grew by 5.2% in 2015, disposable income grew by ONLY note 6%!
From
the Philippine
Statistics Authority:
“Net
National Disposable Income amounted to Php 15.0 trillion in
2015 or 6.0 percent higher as compared to Php 14.1
trillion in 2014. With the HFCE and GFCE amounting to PhP
9.8 trillion and PhP 1.5 trillion, respectively, total
Savings in 2015 amounted to PhP 3.7 trillion, up by 1.9
percent from 2014.”
The
plunge in CPI (thereby GFCE) most likely helped contribute to the
disposable income growth data. Of course, I would suspect that this
had
been tilted to the higher income levels (or the few beneficiaries of
the credit boom) to have lifted the aggregate numbers.
YET
go back to the 2015 NGDP figures. In the year 2015, the NGDP
performances of the bubble industries: Construction 10.4%, Real
Estate 10.3%, Retail 7.5%, Hotel and restaurants 9.7% and financial
intermediation 7.6%.
To
repeat, from the government’s perspective: Disposable income grew
by only 6%. Yet all these industries ballooned by MORE than the
growth rates of disposable income. Since every industry competes for
the consumer’s peso or disposable income, then
just what happens to the variance or the gap in the growth rates
between the industry and consumers? Would this not translate to
excess capacity??!!!
You
see, malinvestments reveal themselves even in government numbers!
And
because the numbers cited are from the government, disposable income
is likely to be overstated, while based on industry declarations,
previous declared expansion numbers suggest that some like real
estate and retail could be understated.
All
one has to do is to look at bank credit loans to the industry.
Yet
with disposable income under pressure from spiraling inflation rates,
just who will buy all such massive outgrowth in the supply of
shopping malls, office condos, horizontal and vertical housing and
hotels and casinos?
The
BSP hasn’t learned. They inflated domestic liquidity M3 by 30%+++
for 10 consecutive months in 2H 2013-1H 2014. And these caused
massive displacement in the economy from which side effects (as
reflected the erosion of eps, jobs and income and etc…) continues
to linger.
YET
with the silent stimulus, they apply more of the same treatment to
the very symptoms that emerged out of their 2009 “trickle down”
policies of borrowing growth from the future to pump GDP today.
The
BSP can never learn because this represents the prevailing central
bank dogma adapted by contemporaneous central bankers everywhere.
The
central bank catechism: Spend the economy to prosperity by through
credit expansion! Forget the balance sheets!
And
because balance sheets are not just imaginary and serve as real
function to every entity, the “spend to prosperity via debt”
paradigm has only been disintegrating.
So
worldwide, we now see central bank actions sending debt levels
skyrocketing even as the war on interest rates escalate. The war on
interest rates is now being conducted via negative interest rate
policies (NIRP) and bans on cash transactions!
And
worst, the central banking easy money doctrine transformed into
policy applied to the Philippines have only been intensifying
price-fundamental misalignment at the Philippine Stock Exchange.
Thus
the credit expansion fueled historic price pumping activities have
now been manifested through a landmark disparity in terms of price
valuations!
The
ramifications of which—if history where to rhyme would be an
earth-shattering nasty market clearing process via a reversion to the
mean!
