There are many recognised short-term risks in today’s global economy: new financial crises in highly indebted emerging market economies (EMEs), a bond yield snapback in advanced economies (AEs), old and new geopolitical tensions disrupting a fragile recovery or even an “unknown unknown” new event. There are also important long-term issues such as the environmental consequences of our present growth model, which might affect climate change. But perhaps the most significant risk for financial markets now is the risk of complacency and self-delusion. Some of this is partly related to markets’ hope that short-term policies at odds with well established economic principles are sustainable. But it is also partly related to markets’ bet that muddling through policies in increasingly fractured societies without undertaking sustainable structural reforms can still produce interesting short-term returns—Luiz Awazu Pereira da Silva and Előd Takáts of the Bank for International Settlements, The risk of complacency and self-delusion
In this Issue
The Third Breakout Of 7,400: The Risk Of Complacency And Self-Delusion
-High Valuations are Symptoms of a Disease
-7,400 Breakout Involved Seismic Scale of Price Instability!
-Questionable PSE Foreign Trade Statistics, Has the SM Group Been Responsible for the Breakout Pump?
-Have Stock Market Pumps Been Financed by Surging Non-Bank Financials Loans?
-Has Domestic Car Sales and Leveraging Hit the Proverbial Wall?
The Third Breakout Of 7,400: The Risk Of Complacency And Self-Delusion
High Valuations are Symptoms of a Disease
From Bloomberg (April 6): “Shares in the Philippine Stock Exchange Index are trading at 17.8 times 12-month estimated earnings, the most expensive in the region and almost a fifth above their 10-year average. The MSCI Asia Pacific Index is valued at 13.4 times, while a gauge of emerging markets trades at 12.1 times.” (Bold mine)
High valuations do not exist in a vacuum.
Please keep in mind: Estimated earnings have usually been significantly OVERRATED by the establishment, thereby resulting in “the most expensive stock market in in the region”.
Inspired by the feel-good storyline of G-R-O-W-T-H, market participants have been programmed orconditioned to pump up prices of domestic equities over the past few years. And where expectations fail to meet reality, even more tall tales have been impressed or foisted upon the public. Such hope predicated feel-good themes have been designed to fire up prices, or at the very least keep lofty prices afloat.
Figure 1: PSEi Pricing Imbalances and the 7,400 Jumping the Rope
And the unabashed contraptions used frequently to “game the system” in order to further inflate prices, have only compounded or exacerbated the grave mispricing and misperceptions in the marketplace.
Hence, domestic markets (or price fixing mechanism) have significantly DEVIATED from the “10-year average”, and from “region’s performance or peer (emerging market) standards” (see upper window figure 1).
Cause and effect.
And the establishment thinks or relentlessly feeds upon the public that there will hardly be any adverse consequences from the systematic deformation of market price actions.
Yet the untold story behind this has been the issue of invisible redistribution channeled through the BSP’s easy money “trickle down” policies which continues to benefit the establishment at the expense of the average citizenry.
7,400 Breakout Involved Seismic Scale of Price Instability!
In an awesome display of the desperation to rekindle or reignite the fading bullmarket, the Phisix flew by an amazing 3.72% to break past the 7,400.
As I wrote during the week, this would signify the third time 7,400 has been taken out.
The establishment will sell the idea that the price uptrend (see lower window, figure 1) from 2013 will continue. But that would be cherry-picking of reference points.
And such idea ignores the effects of the massive market manipulations (which means current prices are not market prices) and of valuation risks.
They also dismiss the idea of risks from prices artificially constructed from credit inflation.
People fail to realize that it is the QUALITY rather than the quantity that matters.
Said differently, the issue will not be whether the current run up will hit 8,000, 8,100 or more but rather, of the sustainability of the runup and the consequent risk of a much bigger decline (or a crash) as ramification to such mounting contortions.
From the perspective of asset allocation, it would be the tradeoff between risks and returns.
Ultimately, market trends depend on the market’s underlying structure. Or it is not the chart, but the underlying market conditions which determine the trend.
And to provide some evidence. Ever since the first breakout of 7,400 in January 2015, heightened volatility has afflicted the PSE.
It has been no coincidence that “marking the close” became a widespread and rampant practice in the second semester of 2014. Taken together, the repercussions from the brazen price fixing process began to impact the Phisix via magnified volatility.
Likewise, accentuated volatility has been expressed via vertical price movements.
Hence the similarities, or the seeming formation of cyclicality in price pumping seen in two successive January interim troughs of 2016 and 2017. In both instances, the PSEi rocketed by 11.2% and 12.2%, respectively. The latter has become MORE vertical than the antecedent.
In the same token, all three 7,400 breakouts were at least half as aggressive or violent than their bottom pumps. As initial thrust in the incursion of 7,400, it took a 6.5% move in 2015, a bigger 7.8% in 2016 while the present impetus at 6.12% which has yet to see a conclusion (lower pane)
Figure 2: Amplified Volatility via Weekly Performance
And this week’s 3.72% rampfest best illustrates the paragon of price instability.
With 26.02% of the share of the PSEi’s market cap weighting, the incredible price spikes of SM (+5.88%), SMPH (+5.1%) and ALI (+7.11%) cemented the 7,400 breakthrough.
Even more outrageous is the distribution in the degree of price changes. For a terse backdrop, 25 issues advanced as against 5 decliners. From these, 11 securities or 36.7% had price changes of over 5%! 13 firms or 43.3% registered price changes of over 4%! 14 issues or 47% had 3%! And 19 or 63% posted prices changes of over 2%!
How’s that for price stability?
Recall that I mentioned of the asymmetry in price performance which centered on Sy owned firms? See Phisix 7,310: A Journey to the Bullmarket or Perdition? April 3, 2017
And while Sy owned companies have been flirting with new records, and where others have joined them, prices of several companies slumped back to their December 2016 levels or have drifted in proximity to such levels, e.g. GTCAP, JFC, MPI, MEG, DMC, AP, AGI, FGEN, RLC and PCOR (the latter has broken the December 2016 lows).
Well, with SM on a fresh record high along with the outperformance by BDO relative to JGS, Sy firms have now captured 3 of the top 4 biggest market cap weightings!
Even more, the biggest weekly gains, outside the top 3, were channeled to the most of the major laggards I mentioned! MEG +16.57%! MPI +8.97%! AGI +7.26! JFC 6.53%! DMC +5.26% and RLC 4.78!
The above list excludes MBT which also saw a vertical run through a 9.12% weekly flight!
Wow! Eruptions in volcanic proportions! BW-SSO!
Because divergent prices would be alot burdensome for Operation Break 8,100, whoever spearheaded the run wanted to make sure of a rising tide lift all boats phenomenon!
Or Operation Break 8,100 requires broader participation not limited to the top 10.
It appears that these guys have learned their mistakes in 2015 and 2016.
The key problem is IF they will be able to generate enough number of “greater fools” for them to unload their recently acquired inventories.
And though it may be partly true that the Phisix may just be reflecting global events (Has the Fed “Fallen Behind the Curve”? March 11, 2017), as perhaps evidenced by the somewhat improved but puffed up foreign buying activities, this week’s run-up means that the Philippines has regained the tiara as Asia’s best performer (lower right).
This puts into context the momentum based yield chasing phenomenon: The most expensive in Asia will get even more expensive!
As one would observe, this is NOT a normally functioning stock market. Instead, the stock market has transmogrified into a loaded casino, if not a price fixing platform—totally unhinged from reality.
Since it would be inadequate to say that this has been a mania, considering that retail trade has hardly been a factor, instead the stock market have been about banks, buy and sell side institutions, the best description is one of GREED for more free lunches!
Questionable PSE Foreign Trade Statistics, Has the SM Group Been Responsible for the Breakout Pump?
This brings me back to foreign trade.
When 7,400 was taken out last week, I said “This suggests that foreign buying was more about the special block sales. And this is where I suspect that special block sales could be about international satellite offices.”
Well, what would one discern of transactional statistics presented as “foreign” when it is in reality “local”?
The kernel: The meat of April 4’s supposed foreign buying Php 4.08 billion was due to 2GO’s special block sales by SM. Period. The difference may have been technical but foreign money was, in reality, local money.
The facts. For that date, special block sales posted a huge Php 3.84 billion. Meanwhile, Php 3.48 billion or 91% of this figure was due to 2GO wherein SM bought 30% share of the firm
Total volume turnover for the day was at Php 11.941 billion. Hence, NET board trade was at Php 8.104 billion (outside total special block sales)
The net foreign buying was at Php 4.08 billion. Yet the published foreign trading activities for the 30 PSEi firms had been a net buying of ONLY Php 576 million. The difference between the two was Php 3.5 billion.
Total board trade of 30 PSEi firms was at Php 6.03 billion or 74.4% of the Php 8.104 billion board trade peso turnover. Seen from another angle, the ex PSEi 30 board trade was at Php 2.08 billion.
Presented differently, if the PSEi 30 registered Php 576 million of net foreign buying then just where did the Php 3.5 billion come from to attain a total of Php 4.08 billion of, again net foreign buying?
Even from a common sense perspective, Php 3.5 billion of ex-PSEi foreign buying relative to Php 2.08 billion net board transactions of ex-PSEi issues does not compute.
What actually tallied was the Php 3.48 billion of declared special block sales of 2GO with the Php 3.5 billion of net foreign buying net of the PSEi.
So it may be technically true that the registered buyer was a foreign affiliate or satellite of SM, but it was still SM that bought. SM just provided the statistical “foreign” cover.
Foreign “flows” depend on the source of the payment for the transaction. If the transaction was settled with USDs based on local account of SM that was paid to 2GO’s owners, then there would not have been any “inflow”.
Statistical smoke and mirrors.
And even more interesting was that the supposed foreign buying on that day was “coincidentally” timed with the volume feeble breakout.
The takeaway: Has the SM group been responsible for the 7,400 breakout???? If so, why the desperation???
The other lesson: one cannot trust statistics.
As a side note, the average weekly notional peso volume for this week’s breakout at Php 9.645 billion was the smallest of the three, namely January 2015’s Php 13.195 billion and May 2016’s Php 10.78 billion (see figure 3 upper left window). However, the picture changes when based on a net of special block sales. This week’s Php 8.42 billion would be in the middle of 2015’s 3-day average of Php 7.7 billion and 2016’s 4-day average of 10.23 billion. When 7,400 (7,392.2) was first hit on May 15, 2013, net peso volume was Php 10.31 billion.
The dearth of volume likewise signals the shortcoming of this week’s run.
Peso Bound for a Rebound Based on PSE Strong “Foreign Buying”?
Figure 3: PSEi’s Peso Volume on Breakout, Net Foreign Trade and GIRs
More on foreign buying.
The PSE absorbed net inflows of Php 8.366 billion (which included SM’s external affiliates), the largest since the week of May 27, 2016 or two months prior to the July 2016 PSEi 30 peak. (see upper right figure 3)
Theoretically, this translates to an increased demand for the local currency. US dollar holders exchange or sell their US dollars for (or buys) the peso which would be used to pay for recently acquired PSE securities.
This extrapolates to an outsized demand for the peso. And this similarly means that demand will temporarily eclipse the supply side factors of the peso.
This is regardless of whether such supposed statistical foreign inflows have been for real or had been meant as props. If it is the latter, then the markets should figure this misperception soon and accordingly adjust.
In the meantime, the implication is that the peso is bound to firm up over the short term.
There is a recent precedent. The May 2016 surge in foreign buying resulted in a significant peso rally of about 1.9% in two weeks. So a similar scenario may playout.
This week, the peso closed marginally stronger to Php 50.08 and placed second to India’s rupee as the best performing currency in the region.
Futures point to a breakdown of the USD peso 50 level. The USD peso could possibly trade around 49.8-49.9 next week.
Curiously, the Bangko Sentral ng Pilipinas reported that its Gross International Reserves (GIRs) dropped $570 million to a $ 80.87 billion in March that almost reached the December low at $ 80.7 billion. Most of the decline came from foreign investments. FX derivative positions were slightly down but still hovered at record highs.
With public sector deficits financed by the BSP and with stocks of government USD reserves being strained by a global US dollar shorts, up to what extent will the peso rally?
We will find out soon.
Have Stock Market Pumps Been Financed by Surging Non-Bank Financials Loans?
This brings us back to the risk of credit fueled stock market inflation (bubble).
Figure 4 BSP’s Non-Financial Intermediary Bank Loans and Car Sales and Leverage
It has also been fascinating to see how bank loans correlate with actions at the PSE. In particular, bank loans to the non-bank financial intermediaries (NBFI) [Figure 4 see upper window].
The rapid growth from NBFIs loan portfolio impacts the PSEi with a time a lag.
Last February, the growth rates of banking loans to the NBFIs jumped 28.39% to rip past the July 2014 high of 27.05%. It was the second month of over 20% growth rates (January clocked in at 25.14%)
For a clue, let’s have a pithy flashback.
In 2014, the consequence of 8 consecutive months (May to December) of 20% growth clip helped power the PSEi to its first 8,127.48 record in April 2015. When the growth rates fell below 20%, the eventual impact was for the PSEi to wither and crash into the bear market level.
In 2016, growth rates of bank loans to NBFI surged anew to a high of 22.9% in March. Three months after, the Phisix peaked for its second time at 8,100. Thereafter, the Phisix began to cascade and its second collapse.
It was almost the same in 1Q 2013 (not in the chart), where the average growth rate climaxed at 31.65%. More than two months after (in May-June), the Phisix had its first taste of the bear market.
Fast forward to the present. The likely effect of the colossal jump in the growth of bank loans to NBFIs in January and February has most likely spilled over to the Phisix…TODAY!
This week’s price spikes must have likely been due to the delayed effect from the NBFI balance sheet gearing with an asset buildup via the equity markets.
Or, NBFIs have bought the PSEi with borrowed money.
As I have been saying here since the PSEi is mainly driven by banks and NBFIs, and hardly by retail participants, the scorching series of loan growth must have been used to finance the wild punting binge and price fixing activities in the stock market.
What this posit to is that once loan growth to the NBFIs peter out, this should eventually reflect on the PSEi (again with a time lag).
A market that stands on credit expansion will fall on credit contraction.
Has Domestic Car Sales and Leveraging Hit the Proverbial Wall?
And here’s more.
Bristling growth rates of car sales have popularly been attributed to G-R-O-W-T-H.
Most seem blind to the fact that whatever G-R-O-W-T-H experienced in car sales have hardly been about economic prosperity but about CREDIT expansion. One can take home a car with only as much as Php 30,000 down payment. Easy money has allowed the leveraging of private sector balance sheets to artificially heave up demand for car sales.
Credit expansion has thus been confused with to G-R-O-W-T-H.
Such fiery growth rates, the average for two years at 23.82%, would not have been attained without interest rate subsidies provided by the BSP. Thus, output, earnings, profits, incomes, jobs and wages for the sector have principally been dependent on sustained easy money policies.
From a different slant, take away the punch bowl of interest subsidies, all these would fall like a house of cards.
Interestingly, the Chamber of Automotive Manufacturers (CAMPI) reported that sales growth rate of automotive vehicles plunged to 7.5% in February. This marks the second below 10% growth in the last 5 months (Figure 4 lower window)
The first one was in October 2016 which had an 8.6% growth rate. One international media outfit explained this as having been influenced by stricter rules on car registration and deliveries.
Perhaps.
But growth trend rates of both car sales and BSP’s bank loans to consumer auto purchases seem to have simultaneously culminated in the end 2Q of 2016.
October’s dive in sales growth rate was conjunctly reflected on BSP data via bank loan portfolio on consumer auto purchases. While the following months did register bounces, both have failed to hit previous levels. To the contrary, both appear to be losing momentum.
The Philippines has entered a milestone of the easiest money policy in history, yet car sales financed by leverage may have reached an inflection point.
The government has yet to implement an automotive tax hike in 2018. The tax hike will likely be passed onto consumers via higher prices. So this should provide incentives for consumers to chase current prices before it goes up. In marketing, this is called “selling the price increase”. And yet the slowdown.
Has car sales been manifesting a turning point in the big ticket consumer sales similar to real estate?
If so, then just what would happen to the tremendous amount of existing and planned capacity expansion for the sector?
And what even caught my eye in the February data was of the enormous disparity between auto sales (+7.5%) and consumer auto loans (+34.57%).
This shows that February auto loans sales may have been distorted (via delayed postings, again possibly due to new rules). Or that the persistent (still) blistering growth rates meant that borrowed money had been diverted to the other areas.
But the question is where? To stocks? To property?
As one can see, whatever asset pumping being done today have hardly been supported by the evolving economic dynamics.
And this comes in the face of the easiest money policy in Philippine history where the BSP has used both asset purchases and interest rates to enable and facilitate invisible subsidies or transfers in favor of the government and the elite at the expense of everyone else.
Yet much of borrowed money or systemic leveraging is being diverted inordinately to chase asset prices, which have been showing increasing signs of fatigue as balance sheet risks continue to mount.
All these are lucid symptoms of what the BIS officials warned above as “the risk of complacency and self-delusions”.
