Sorry Folks, Manufacturing Growth Tumbled in the 3Q… (The Revenge of Economics II)

…that’s if the recent surveyed data will be carried over to the government’s GDP.

Will Spiking M3 Save Merchandise Trade?

First, merchandise trade.

The Philippine Statistics Authority reported that exports rose by 9.4% and while imports recovered to grow by 10.5% last August. Merchandise trade (imports + exports) increased by 10.02%

 

Despite the 10.5% spike, imports for the first two months of the 3Q quarter tallied a 4% increase while exports grew at 10.2%.   In the 2Q, the imports recorded a 5% growth while exports increased by 12.7%. So a slight slack exists in the current growth rates for both imports and exports compared to the 2Q.

The acceleration in M3, which at the August rate of 15.4% broke past the high in 2016, can be attributed to the surge in August imports. The BSP has been forcing up money supply via inflation targeting channeled through emergency policies. They have channeled these through the banking system and its monetization of National Government (NG) debt.

The implicit objective of such monetary policies has been to ensure that there would sufficient revenues to finance the NG’s boondoggles.

The jury is out as to whether the August surge in M3 will translate to a follow through in import growth. Present trends, however, could be indicative of a merely bounce from the ongoing softness in merchandise trade. (see topmost chart) Nevertheless, 2017’s January to August trade deficits have been almost shoulder to shoulder (lower left chart) with last year’s data which coincides with the weak peso (lower right chart).

Fierce competition for resources and for financing between the public sector and the private sector would signify as the initial symptoms of the “crowding out effect”. Such competition will be ventilated in real economy prices, financial markets and in fiscal and trade balances.

With domestic manufacturing drudging to recover in the face of spiking M3 growth, the likelihood is that import growth will continue to pick up steam. And that is in the condition that the private sector does compete.

In the case where private sector weakens, this would translate to the latter phase of such dynamic which evinces the government’s taking the upper hand in the economic contest.

Nevertheless, to finance a sustained widening of trade deficits, if dollar proceeds from OFW remittances and BPOs would prove to be insufficient, then external debt would likely expand.

According to the PSA, based on its October 2017 CURRENT LABOR STATISTICS, the biggest increase in the number of employed registered full-time workers in July was in the government sector which grew by 5.9% as against the private sector 1.9%. Laissez faire eh?

Manufacturing Travails: The Revenge of Economics II

Next manufacturing.

Based on recent statistics, the manufacturing sector will most likely signify a drag on the 3Q GDP.

 

The PSA’s August Industrial production index shows an increase of a measly 2.4% compared to July -2.0%.  The bad news was that the sales index plunged 5.2% which should imply the furtherance of the production weakness in the coming months

Markit’s Nikkei PMI showed that September manufacturing hardly recovered from the sharp fall in August: (bold mine)

Subdued growth of the Philippines manufacturing economy persisted at the end of the third quarter, as output expansion slowed further. Order book gains continued to underwhelm relative to the historical trend, even as exports returned to growth, which weighed on hiring.

However, elevated business optimism encouraged firms to step up purchasing activity in anticipation of higher sales, which led to a further rise in input stocks. Meanwhile, cost pressures rose noticeably, prompting further price hikes from firms seeking to protect their margins.

The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI™) stood at 50.8 in September, slightly up from 50.6 (a record low) in August, signalling only a marginal improvement in the health of the sector. The latest reading was the second weakest in the survey history September data showed that output volumes rose at the weakest rate since the survey started in January 2016 amid a modest sales trend. However, firms revealed that reduced overtime work and input shortages also contributed to the subdued expansion. There were also reports that rising costs for raw materials affected production plans.

Although order book volumes grew at a rate close to August, the degree of increase remained well below the historical average despite renewed growth in overseas orders.

Slowing order book growth enabled firms to work through their backlogs, where the level of incomplete work fell for a nineteenth month running. Firms also attributed equipment upgrades and improved systems for the drop. The ongoing lack of capacity constraints encouraged firms to use existinglabour resources for production

Employment shrank for a second straight month although the rate of contraction softened from August

The good news was that exports partially alleviated the sector’s dilemma.

Moreover, the continuing public optimism has brought about a divergence in the sector’s performance with that of the acquisition of input stocks. Manufacturing sales and output has decelerated, but optimism has impelled manufacturers to acquire inputs in expectation of improvements.

In reality, it is easy money that has brought about such public optimism. Businesspeople have come to believe that rising prices have been about economic growth, which changes in prices they could arbitrage and profit from, rather than from the side effects of credit expansion.

With manufacturers loading up on supply inputs from optimism, prices rose. And since “cost pressures rose noticeably”, this has prompted for “further price hikes from firms seeking to protect their margins”. And higher sales prices will likely slow demand. The ramifications of higher costs in the face of slow demand will not only be compressed profits but a glut of inventory (inputs and products for sale).

Yes, dear readers, another prospective case of oversupply.

BSP’s loans to the manufacturing sector grew at 13.05% in August and 12.3% in July. Such acquired bank loans could have been used to store up inputs.

As one can see, these are the products of the BSP’s easy money.

Price pressures can be seen in the PSA’s August Producer’s Price Index.

Again, the PSA’s data was for August. Nikkei’s data was for September, which means that the PSA’s September PPI prices must have turned positive to reflect on “cost pressures rose noticeably”.

And considering that manufacturers increased sales prices, aside from slowing sales, this would transmit into as higher wholesale prices, which eventually should diffuse into price pressures on the retail side. And asprices rise, projects will suffer cost overruns, profits will be crimped, and consumers will endure constricted disposable incomes.

The BSP believes that by forcing up real economy prices through its inflation targeting, it can juice up revenues for the national government. Thanks to their policies, economic strains have resurfaced. And despite optimism from easy money, the private sector has gradually been feeling the pain. Unfortunately, the public has little understanding of the roots from whence their angst has come to haunt them

Back in September I wrote*

Bottom line: Distort prices (by monetary inflation), prices get back at you!

The revenge of economics!

*OFW Remittances, Merchandise Trade and Industrial Production (The Revenge of Economics) September 17, 2017

In this issue

Phisix 8,450: SY Group and Ayala Corp Deliver ONE HUNDRED Percent of Weekly Gains! Lessons from Sodom and Gomorrah

-Lessons from Sodom and Gomorrah

-Top FOUR of the Five Issues Monopolize Gains

-PSEi's Top 5: The SY Group Erodes Ayala’s Share.  Sy Group’s Increasing Capture of the Phisix

Phisix 8,450: SY Group and Ayala Corp Deliver ONE HUNDRED Percent of Weekly Gains! Lessons from Sodom and Gomorrah

Lessons from Sodom and Gomorrah

In the Old Testament, Sodom and Gomorrah were cities deeply entrenched in sins and vices. To spare these cities from destruction, Prophet Abraham negotiated with God by proving that righteous people still existed in them. God agreed and sent his angels, who disguised themselves as guests of Abraham’s nephew, Lot.

However, ingrained and habituated to the imposition of abuses, the denizens of the city fixated on Lot’s guests. To excuse these guests from harm, Lot instead offered to sacrifice his two virgin daughters. The assailants refused then shifted to violence, but the angels blinded them.

Under the instruction by angels, Lot and his family decamped the city. Lot had also been admonished not to look back to witness the devastation "look not behind thee". Sodom and Gomorrah were, thus, consumed by fire and brimstone.

However, in defiance of the angels’ behest of not looking back, Lot’s wife morphed into salt.

It was not just vice and sins that condemned Sodom and Gomorrah to perdition, the perversion of morality assimilated as a cultural and ethical norm were the principal factor. Abraham wanted to show some exceptions which he failed to do.

Top FOUR of the Five Issues Monopolize Gains

How do the lessons of Sodom and Gomorrah apply to the state of Philippine markets?

 

Philippine populist politics predicated on the “end justifies the means” reflect on the state of the financial markets. Actually, populist politics signify a byproduct of the political systematic destruction of the purchasing power of the peso. Financial markets are just part of such emission.

In the context of Philippine stocks, the mainstream will do “whatever it takes” just to bring about a RECORD.

Whether through the price-fixing process or by coordinated pumps or even by a combination thereof, such milestone would have to be forcefully attained.

And it doesn’t matter if these actions would lead to the systematic degeneration of the markets and the economy. Instant gratification has taken precedence.

Vice has now transformed and assimilated as a societal norm.

A new record was not just on the price levels, but also in the degree of consummated depravity.

FOUR stocks, particularly, the SY group + Ayala Corp delivered ALL or over 100% of the PSEi’s 1.65% gains of the week!

Proof?

Let me use the difference in the market cap weight share between the week ending October 6 and October 13 (see middle pane).

The share weight of the top 5 issues (SM, SMPH, ALI, BDO and AC) jumped to an amazing 42.8% from 41.58% or by 2.93% the highest week-on-week gain since March 4, 2016.

The top 10 issues hold 65.82% weight and the top 15 comprise 80.33%. Seen differently, the top 5 accounted for over half of the top 15’s share weighting. The last 15 have been benchwarmers.

Even more, when segregated by quintile, the group of the top 5 registered not only an average gain of 3.11% this week; it was the only group that posted growth in market cap share! All the rest of the quintile categories suffered from dilution! (lower window)

Essentially, gains to the PSEi’s market share gravitated into the top four of the five issues, which came at the cost of the broader PSEi!

Simply amazing!

Such substantial advances in market weight share had been brought about by eye-popping weekly returns of BDO (+7.5%), Ayala Corp (+5.52%), SM Prime (+5.34%) and SM (+4.5%)! Truly stunning!

Security Bank (+4.67%) and Megaworld (+3.22%) also posted considerable gains which translated to increases in their respective market weight share. However, losses by their respective group quintile members more than offset their growth.

To top it all, the PSEi 30 breadth wasn’t as ebullient as the top 4 issues. Advancing issues (16) edged out declining (14) issues by two firms. 

Moreover, the Phisix ramp was bereft of broader market participation. Decliners trounced advancers by a considerable margin of 96 from a 532-436 differential. Sellers ruled the market unanimously or in 5 out of 5 trading sessions of the week!

The obsession to power up the Phisix, at whatever costs, has been evident in the blatant disparity in the performances of the top 5 compared to the broader PSEi, as well as, the broader markets

And these combined with the mark-the-close price-fixing process, the Phisix, thus, carved a fresh 8,450.

The end justifies the means, so what else could go wrong??

PSEi's Top 5: The SY Group Erodes Ayala’s Share.  Sy Group’s Increasing Capture of the Phisix

  

And here’s more.

Of the share in the market cap weight of the top 5, Ayala’s share (AC and ALI only, BPI excluded) has consistently been eroded or taken away by the SY Group!

More evidence that the Phisix has become an alter ego of the SY group!

And this gravitation to the Sy’s has NOTHING to do with relative earnings performance. Ayala has consistently outperformed its rival.

Question is: Which group or WHO has frantically been pumping up the shares of the Sy group of companies? Another question is WHY? Why the need for interventions if the SY group of companies has sound fundamentals?

SMPH’s Php 4.9 billion worth of related party purchases could be a clue to the current meltup. [SM Prime’s Growth Model: In 1H 2017, Every Peso of Growth Was Funded By SIX Pesos of DEBT! SMPH Bought Php 4.9 Billion of Related Party Shares! August 13, 2017]  But surely that would only be part of the answer.

With the SM group yanking the PSEi market share from the Ayala Group, one would have the impression that trading activities would have mirrored the same dynamics.

To the contrary, it goes the opposite way.

The two charts above reveals of two time frames: first, daily activities during the September pre-breakout and the breakout week, and second, the daily activities of the last two weeks.

At the PSEi 8,450 level, last week’s average of Php 7.31 billion of main-board trade volume had significantly been below the breakout high of Php 10.941 billion. Main-board trading volume grew by 11% week-on-week.

And instead of the SM group generating interests, volume has been building in the Ayala Corp. That’s because AC has registered substantial foreign buying over the past two weeks. On the other hand, the SY group and Ayala Land were bought mostly by locals.

The SM group’s volume, as a share of the main board and as a share of total turnover, has materially dropped last week to pre-breakout levels. That’s even as prices of its three issues have gone parabolic!!!

I was supposed to show the charts here; however the MDR newsletter I sent earlier already incorporated these. 

When share prices rise, this translates to a decline in the purchasing peso power relative to shares. Said differently, MORE pesos are required to buy the same number of shares.

Hence, the erosion of buying power for these shares at a higher price level would be embodied by a falling volume. And this is what we have been witnessing.

And chasing prices by relentless upside bidding requires funding. Funding would be derived from either injection of new money (spare income, savings or credit) or from a rotation in asset holdings (sales or liquidations of other equity holdings or financial assets). 

The non-participation in the upside momentum of the broader market partly suggests the latter.

Moreover, these funding dynamics have been amplified by the absorption of domestic risk assets by local participants. 

What has prevented the disgorging risk assets given the steep climb of these securities?

Perhaps, the encouragement by sell-side institutions to their clients to refrain from sales could be a factor.

Collaborative support from a cabal of institutions, both from the sell-side and the buy-side, to meet head-on any significant sellers could be another factor.

 

In the past, foreign money has either provided leadership or has accompanied locals in a bidding spree which led to the twin 8,100 levels. Not anymore.

This episode has almost been exclusive for locals. Foreign inflows like in September had been inconsequential (top chart). In a way, this time would seem different.

Finally, the Phisix may be at a new record in local currency terms or in pesos alright, but not when priced in the USD.

Strength in most of Asia’s currencies has brought about a febrile jostling for yields that has powered to region’s record-breaking stocks

The Phisix-peso, as one of the region’s outlier, has departed from this paradigm.

Instead of a healthy economy, the tandem has manifested increasing strains of monetary malaise. Worst, the markets have become vastly dependent on sustained manipulations.

This third breakout run by the Phisix hardly resembles a functional market. Instead, they seem like a Sodom & Gomorrah market.