New Year Fireworks! Global Stocks and the Phisix Storm to Record Heights as Central Banks Tighten

But financial gravity can’t be resisted indefinitely. Although the exact timing and sequence of events are unknown, it will end, as always, in a Torschlusspanik moment — a German word for last minute or literally door-shut-panic — as investors try desperately to exit when they fear that stable instability is tipping over into simple instability.  To paraphrase Trotsky, the impossible will then become inevitable—Satyajit Das, Markets are Less Stable than They Seem

In this issue

New Year Fireworks! Global Stocks and the Phisix Storm to Record Heights as Central Banks Tighten

-Global Stock Markets Sprints to Record Heights

-Global Mania: How We Got Here

-The Global Central Bank Dilemma: To Tighten or Not

-Phisix 8770: Big New Year Week No Guarantee of Big Annual Return

-Risks From BSP’s Winner-Take-All Policies

New Year Fireworks! Global Stocks and the Phisix Storm to Record Heights as Central Banks Tighten

Global Stock Markets Sprints to Record Heights

Wow. Stock markets around the world have virtually been rocketing! They took flight in 2016. The ascent accelerated in 2017. And stock markets have virtually gone parabolic or vertical at the onset of 2018!

 

Price momentum has become of utmost significance. And momentum, brought about by the greater fool and the fear of missing out, has only been rationalized as “fundamentals”

Led by the US, the FTSE All-World Index jumped 2.34%! US major equity benchmarks were euphoric: the Dow Jones Industrials, S&P 500, Nasdaq Composite and the Russell 2000 vaulted by an amazing 2.33%, 2.6%, 3.38% and 1.6% respectively.

Asia was equally ecstatic. The MSCI AC Pacific Index zoomed by 3.2%. Fourteen of Asia’s 17 national benchmarks were up. The average return for the region was a spectacular 1.78%!

Benchmarks of Pakistan (+4.45%), Japan (+4.17%), Hong Kong (+2.99%), Mongolia (+2.96%), Vietnam (+2.89%), the Philippines (+2.47%), Singapore (+2.54%) and China (+2.56%) were the week’s most significant gainers.

The Thailand’s SET’s January 1994 pre-Asian crisis zenith of 1,789 was finally taken out last Friday. The SET closed at 1,795.45 up by 2.38%.

Asian currencies resonated with the epic stock market mania. The JP Morgan Bloomberg Asian dollar index (ADXY) climbed .6%. The ASEAN majors - Malaysian ringgit (+1.21%), the Thai baht (+1.15%) and the Indonesian rupiah (+1.03%) – were the biggest winners.

The Philippine peso also firmed by .13% as the USD fell to Php 49.865 from Php 49.93 at the close of 2017.

Global Mania: How We Got Here

A short backdrop.

The Chinese stock market bubble peaked in July 2015 was followed by a crash.

The Chinese government responded by erecting a firewall through the Xi Jinping Put to prevent an economic contagion. The put comprised of various stock market interventions to cushion or put a floor on the collapse.  The Chinese government likewise implemented huge fiscal support measures and loosened its credit spigot.

Despite blathers of ‘deleveraging’, in 2017 the Chinese government has inundated its economy with more than USD $ 4 TRILLION in Total Social Financing and local government debt!

After the February 2016 G-20 meeting in Shanghai, several central banks announced the imposition of negative interest rates. The G-20 meeting was thus dubbed the “Shanghai Accord”.  Because the Shanghai Accord implicitly and explicitly provided support to risk assets, global stocks advanced.

Through 8 months of 2017, central banks (ex-US Federal Reserve) bought $1.96 trillion, according to Bank of America. Assets of the Swiss National Bank expanded 12% for the year as of November 2017. Part of such expansion included direct purchases of US equities ($90 billion according to Quartz).

In 2016, Brexit and the US presidential elections occurred with the unexpected or unpopular outcomes. Nevertheless, global stocks simply bid off each correction.

Paradoxically, what previously was deemed as potential sources of turbulence became fodder for a meltup. Thus, price declines narrowed in time frame and shallowed in scale. With limited incidences of declines, prices only had one direction: up, up and away!

And since markets were perceived as operating in a singular direction, the bidding wars have only intensified!

Central bank policies have become “too asset-oriented” because of economic ideology (Phillips curve and the wealth effect) and the implicit protection of the banking and financial institutions. Economic pain, as a consequence of asset declines, would not be tolerated. Naturally, central bank’s implicit support has only escalated the public’s moral hazard.

And conditioned to believe that central banks have eviscerated the business cycle, the credit cycle, and the stock market cycle, markets have become bolder and more aggressive.

On the other hand, rising markets have only entrenched central bank dependence to accommodate these. Or, central banks have becomehostaged to the markets.

Even when expectations from economic ideology haven’t materialized, the US Federal Reserve has started to tighten. It has upped the tempo of its interest rate hike (3x in 2017). More importantly, it announced a progressive rollback of its assets. It will first desist from reinvesting the maturing assets.

Then it would commence on the tapering lift-off. From Investopedia.com: (bold mine)

At the Federal Reserve June meeting, committee members stated that once tapering begins they will start by letting $6 billion a month in maturing Treasuries run off, which will slowly increase to $30 billion over the coming months. With regards to its agency debt and Mortgage-Backed Securities (MBS), the Fed laid out a similar plan where it will begin tapering $4 billion a month until it reaches $20 billion.  Additionally, the Fed said the long-run plan is to keep the balance sheet "appreciably below that seen in recent years but larger than before the financial crisis."

And finally, confirmation. On September 20, 2017, the Fed officially announced lift-off. The unwinding of the balance sheet was underway.The $50 billion per month taper would begin in October, and at this rate, the balance sheet would drop below $3 trillion in 2020 at which point the next discussion will be how big should the Fed's balance sheet remain once tapering is over.

The Fed must be taking this stand to build upon ammunition once a downturn reappears. [Updated to add: Reuters Fed official says rates are last resort against financial risks January 6]. They are doing this in spite of unfulfilled expectations from the implanted policies. Outgoing Fed chairwoman Janet Yellen recently admitted that the Fed’s view on inflation and employment could be a mistake. Yet, the acknowledgment has been perceived by the marketplace as an assurance of the perpetuation of the easy money regime.

Baby steps tightening have only cemented the public’s perception that the central bank put will remain in place.

That said, aggressive punts and speculative excesses have been spreading to other spheres such as cryptocurrencies and commodities. Gold posted its eight best runs since 1968.

Mainstream perception of the recent global synchronized recovery represents the ramifications of central bank actions in early 2017.

 

The backpedaling on stimulus has been more than just the FED. The ECB has likewise commenced on halving of its asset purchasing program.  Despite the Bank of Japan’s pronouncement of maintaining its ultra-easy monetary policy, the BOJ has embarked on stealth quantitative tightening (QT).

Interestingly, China’s interbank loan SHIBOR rates suddenly plunged across the curve last week which has most likely been from unannounced liquidity injections by the PBOC. Such interest rate “magic” fueled a rally in the yuan (+.28%) and in Chinese stocks (Shanghai Composite up 2.56%). And the rebound Chinese assets reinforced the levitation of global stocks.

So 2018 should be very interesting.

The Global Central Bank Dilemma: To Tighten or Not

It is my view that central banks have been boxed into a corner. Maintain the current environment, economic maladjustments will be magnified by the escalation of the blowoff phase. Tighten beyond the market’s expectations, the market crashes.

Though central banks are unlikely to extricate themselves from spoon feeding global markets, the current and projected phase of incremental tightening/normalizing would most likely take the wind away from the current parabolic momentum.

Bear in mind, once volatility remerges, it is no guarantee that central banks can control them. If central banks cannot control the upside, then downside actions could hold a similar sway.

Proof?

The CNBC on the FOMC December minutes: “In light of elevated asset valuations and low financial market volatility, a couple of participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability," the minutes said.”

Remember that the central bank put has been programmed or hardwired into the market’s psychology such that cumulative marginal changes in expectations can morph into an accident. Greed can transmogrify into fear.

Additionally, markets have become totally anesthetized to any form of risk.

Even more, I see an escalation of geopolitical risks in 2018.

Here are some clues:

“Speaking in front of thousands of troops and over 300 perfectly organised military vehicles, Xi – the Communist Party's General Secretary – ordered his forces to prepare for the event of war.” (Daily Star, Chinese President Xi Jinping orders army to prepare for WAR in chilling footage, January 4,2018)

“The Centers for Disease Control and Prevention (CDC) has scheduled a briefing for later this month to outline how the public can prepare for nuclear war."While a nuclear detonation is unlikely, it would have devastating results and there would be limited time to take critical protection steps. Despite the fear surrounding such an event, planning and preparation can lessen deaths and illness," the notice about the Jan. 16briefing says on the CDC's website, which features a photo of a mushroom cloud.” The notice went on to say that most people don't know that sheltering in place for at least 24 hours is "crucial to saving lives and reducing exposure to radiation." (CBS CDC to hold briefing on how public can prepare for nuclear war January 5, 2018)

Last December, “VLADIMIR Putin has hit out at the “aggressive”new US national security strategy and warned Moscow will react. The Russian president said the US missile defence sites in Romania containing interceptor missiles could also house ground-to-ground intermediate-range cruise missiles, which would be in violation of the 1987 Intermediate-range Nuclear Forces (INF) Treaty. He told the military officials that both the US and NATO have been "accelerating build-up of infrastructure in Europe" and emphasised that the deployment of NATO forces near Russia's borders had threatened its security. (Express.co.uk, Russia's Putin blasts 'AGGRESSIVE' US national security strategy as relations PLUMMET December 22, 2017)

Last November, “Vladimir Putin has warned Russian businesses they should be ready to switch to military production in preparation for war. The Russian President told defence ministry officials on Wednesday that the arms production industry - both private and state owned - needed to be prepared to step up manufacturing at a moment's notice.” (Sky News Vladimir Putin tells Russian arms firms to be ready for war, November 23, 2017)

I do hope that Putin’s war preparation is about puppies, “THE Russian military has unveiled its latest puppy recruits, showing off Vladimir Putin’s forces softer side in its New Year’s message.” Express.co.uk Dogs of war! Putin’s military unveils latest puppy recruits in adorable New Year's video January 3, 2018

Though the good news, “President Donald Trump told reporters Saturday at Camp David that he's open to talking with North Korean leader Kim Jong Un. "Sure, I always believe in talking," he said. "But we have a very firm stance. Look, our stance, you know what it is. We're very firm. But I would be, absolutely I would do that. I don't have a problem with that at all." (CNN Trump on North Korea: 'I always believe in talking' January 6, 2018)

Besides, there are many potential geopolitical risk channels, like protectionism, Middle East war, escalation of cyber war, accidents and more…

Lastly, economic downturns will likely increase incumbent frictions and bring to the surface hidden ones.

Phisix 8770: Big New Year Week No Guarantee of Big Annual Return

Essentially, domestic events have resonated with global developments.

The Phisix surged 2.47% in the first week of 2018. Though it would be facile to point out that such a feat would account for the fifth biggest return since 2017, returns don’t appear out of the vacuum.

The Phisix seemed to have been ‘forced up’ especially on Friday January 5th. However, some forces looked as if they have resisted closing the week with a huge advance similar to 2017. So aside from engineered pumps, there was a pump and dump.

 

Returns have been a function of index levels too.

The huge 5.98% New Year week return of 2009 was an offspring to the 2008’s annual (-48.29%) collapse.

In contrast, 2017’s big move 5.96% came after successive two years of marginal declines: -3.85% in 2015, and -1.6% in 2016. Or, the Phisix closed below 7,000 for two years and was materially down from the April 2015 record of 8,127.48.

The Phisix started 2018 at record 8,558.

That’s not all. With the entrenched gaming of the system, returns have been foisted upon the pseudo-market. In fact, 2017’s magnificent New Year week 5.96% advance was preceded by 2016's end of the year trading week’s awesome gains of 4.22%! That is to say, in two holiday abbreviated trading weeks, the Phisix soared by a stunning 10.18%! These essentially pillared 2017’s 25.11% returns.

Fast forward today.

The Phisix would have closed above 8,820 to 8,850 had some cabal of shysters not dumped a boatload of SM shares last Friday. SM plunged a shocking -4.23% in a flash! SM, which was up by 1.37% before the market intervention phase, found itself suddenly down by -2.86% at the closing bell. Nevertheless, end session pumps on Ayala Corp +.95% and JG Summit 1.2% alleviated the last minute retracement of gains in the headline index from SM.

New Year week’s gain of 2.47% plus end December 2017 advance of 1.5% adds up to 3.97%, still a considerable markup.

As one can see from the above, such has not been evidence of a healthy functioning market.  

Also, New Year week performance does not guarantee a robust annual return for 2018 (lowest pane)

 

The meat of this week’s phenomenal gains accrued from the performance of the second quintile group

Risks From BSP’s Winner-Take-All Policies

While major central banks have been gradually pulling back on the liquidity stimulus, mostly to build upon policies as insurance against financial risk and to reduce financial instability manifested in the euphoric marketplace, the BSP remains wedded to a winner-take-all policy.

If the Philippine economy has been as robust as popularly depicted, why has it been that the BSP’s emergency measures (historically low-interest rates and expanded BSP balance sheets from subsidies to the National Government) remain in place?

Why has the BSP adamantly been resisting normalization of financial conditions? How are emergency measures consistent with a healthy entity?

Most of all, with an “ALL-IN” policy, what ammunition or insurance toolkit does the BSP hold in reserve once financial risk emerges?  Realization of financial risks may be triggered exogenously or endogenously.

If the answer is little or none, what would happen to the Philippine economy under such circumstances? Or has the Philippine economy attained a status where it has become totally immune to risks?

Convincing me is very easy once the above questions are satisfactorily answered or addressed

Yet, let me offer two reasons for the BSP’s recalcitrance.

One. Massive Fiscal Deficits. The huge debt-financed government spending would drain the system’s liquidity. The BSP hopes that through the banking system’s continued credit expansion would offset the liquidity “crowding out” dilemma. The BSP and the DoF have forgotten about prices (interest rates and inflation).

Two. Tax reform. A miscalculation by the DoF on the implementation of the tax reform program would not only be reflected in fiscal balance but also on the affected sectors of the economy. And part of the likely contingent required to address dislocations would entail easy access to money. Therefore, easy money conditions must prevail…

...except that the reason the economy is called as such is that it operates under the premise of “scarcity”. 

And ROP yields of the 10, 20 and 25-year maturities exhibit scarcities in motion! The entire curve has been rising.

So they can pump PSEi at will. But as history has shown, vertical (SSO-BW) prices eventually return to their roots.

Auto Industry: Which will Prevail: The DoF on HB 5636 (Tax Reform) or the Law of Demand?

In a section of their website, the Department of Finance published an infographic attempting to debunk supposed “tax myths”

 

A brief purview of the prevailing conditions of the domestic auto industry prior to the enactment of HB 5636:

First fact. Since culminating in July 2016, the growth of unit auto sales has substantially been slowing in conjunction with auto loans. The financing of car sales has mostly been through credit.

Second fact. Based on the Philippine Statistics Authority’s October manufacturing data, auto production grew at double-digit rates in 2016 until the 1H 2017 but suddenly contracted by -.6% and -4.7% in September and October, respectively.

So how will the DOF’s claim measure with the law of demand?

The law of demand as defined by investopedia.com is “a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.” (bold added)

So…

Will politics successfully suspend the fundamental laws of economics (law of demand)? Or, will the DOF get shocked by the emergence of unintended consequences to the economy from the practice of the populist notion of “statistics equals economics”?

Phisix 8,560: 7 Factors Behind 14th Record High That You Won’t Hear From the Mainstream

If I had to pick one, I think it is critical thinking skill. It's the ability to look at a situation and see it for what it is, which isn't necessarily what is presented to you. And when something makes sense to figure out what makes sense. And when something doesn't make sense to question it, to challenge it, to look at it from a different way, to often come to the opposite conclusion—David Einhorn, Greenlight Capital

As the PSEi 30 carved a new record at the close of 2017, the Philippine Stock Exchange acclaimed

The Philippine Stock Exchange, Inc. (PSE) celebrated the last trading day of 2017 with a bell ringing ceremony at the Ayala and Tektite Trading Floors.

The PSE also marked the first time that the PSE index (PSEi) closed at a record high on the last trading day of the year. On Friday, the PSEi rose by 23.33 points or 0.3 percent to 8,558.42. This was the 14th time that the main index closed at an all-time high this year. For 2017, the PSEi gained 25.1 percent.

Once more, nothing is what it seems.

Here are factors which are likely to be kept from the public.

1. Epic Price Fixing

The quality of the touted feat matters.

Does forcing the market higher at the closing bell, or pumping up the index then dumping it at the close been representative of a healthybullmarket?

Or has this been representative of a Sodom and Gomorrah manipulated market?

If stock markets were established to balance demand and supply of capital and savings, then what would be the repercussions of the systematic falsification or distortion of its pricing system? Would such not lead to a build-up of economic imbalances?

2. Concentrated Gains

The Phisix is supposed to represent the health of the spectrum of 30 largest listed firms from diverse industries of the economy. But just how accurate has this impression been?

 

The devil is always in the details.

In 2017, the PSEi 30 did return a magnificent 25.1%, but that number represents the market cap weighted return. (top chart)

The average return for the PSEi 30 was at 20.52%, which exhibits a significant discrepancy relative to the market cap return.

The concentration of gains towards largest market capitalized firms has been instrumental to such substantial difference in returns

Since the top 5 issues contributed over 60% share of 2017’s 25% returns; correspondingly, their market cap share of the PSEi 30 pie ballooned from 2016’s 38.49% share to 2017’s 43.86%! That’s a whopping 13.95% increase!

That’s right. With over TWO-FIFTH share of the PSEi pie, only FIVE companies essentially determines the fate of the Phisix!

3. Sy Group Owns the Phisix

It does not stop here.

Even among the top 5, the share contribution had been distinctly unbalanced.

The Sy Group’s market cap share of the PSEi 30 zoomed to a staggering 29.29% from 25.21% in 2016 for a remarkable 16.18% year-on-year growth! (middle pane)

Importantly, of the top 5, the Sy group’s market cap share has grown at the expense of the two Ayala companies.

The Sy group has accounted for 66.7% share as against the Ayala’s at 33.3% from last year’s 65.5% and 34.5%. Ironically, the Sy Group has been bestowed with more fortune even as their closest rival, the Ayalas, continue to trounce them in the context of earnings (lower pane)

From the above, it could be deduced that the Sy group virtually controls the movements of the Phisix.

So first, record Phisix is a function of the price actions of the top 5.  Second, the Sy Group has assumed the helm or informal command of the Phisix

Yet, underneath the cheerleading on record Phisix, the accelerating capture of the dominance in the PSEi 30’s market share pie translates to the amplification of concentration risks.

4. Relentless Price Multiple Expansion

More facts which unlikely will be disclosed.

 

The PSE plays around with statistics. While it usually cites returns based on the market cap weight, earnings are paraded as a function of the aggregate or the average.

The reason is simple. The sterilization of excesses justifies the buy calls at outrageous price levels. Hence, the substantial froth built into current prices have essentially been reduced by fixating on the aggregate and by suppressing market weighted earnings.

Based on the 9-month 2017 annualized eps, while the average PER was at 19.5%, market cap-weighted PER soared to a 1996 level high of 24.5!

Yet, changing reference points alters the outcome.

Based on the Trailing Twelve Months (TTM) earnings (2016), the average PER at the close of 2017 was at 21.5%, whereas the market cap-weighted PER was at the 1996 high of 27.45!!!

1997 Déjà vu?

Recall that PSEi 30’s aggregate net income grew by ONLY 5% through three quarters of 2017. Let’s say that a 4Q 2017 magic occurs that would double net income growth for 2017. 

What do the current returns mean? Well, a 10% eps growth implies that 2017’s 25% returns have not only fully PRICED IN 2017 earnings, but also factored in earnings for one and a half years!

But that’s if the PSEi 30s returns will deliver the same degree of income growth, but what if it falls short?

Valuations have been at nosebleed levels primarily because of frantic bidding of domestic stocks irrespective of the actual bottom line performance

In short, the relentless price multiple expansion reveals how domestic stocks have been priced for perfection and have become more detached with reality.

And yet the public have been hardwired to believe that prices can only go up!!!

But don’t worry, the PSEi’s forward earnings will be used to justify higher prices. Whether expectations will be met or not is immaterial. All that matters is that prices should rise!

And of course, individual valuations of PSEi 30 components vary. Since price multiple expansions have been charting the waters for the headline index, the concentrated returns resonates with the distribution of the most expensive issues (highest window)

5. Striking Diversity: Bearish Breadth and Faltering Volume

The rising tide lifts all boats typically characterizes healthy bullmarkets

Convergent actions tend to be representative of a broad-based enhanced risk appetite, possibly from upbeat expectations of income and or economic growth

But that’s not how things have unfolded during the last semester of 2017.

Ever since the PSEi 30 broke out of the April 2015 high at 8,127 in mid-September, ironically market breadth, or the spread between advancers and decliners, has substantially soured. Declining issues have become the dominant force thereby revealing broad market deterioration. (middle window)

That is to say, as the Phisix raced to record, prices of most listed issues fell. Divergence ruled.

In fact, the 1.5% Phisix runup during the vacation truncated last trading week of 2017 registered only a measly margin of 22 -in favor ofadvancers from a differential of 325-303.

Such patent disparity suggests of either a rotation or a growing lack of interests in the broad-based market.

A rotation means that the broad market had been sold to finance the trend-following trades within the PSEi 30. On the other hand, mounting losses on broad markets may have dissuaded many to pursue additional positions. It could even be a combination of both.

Trading volume further reinforces such divergence.

Peso volume actually shriveled as the Phisix scurried to record highs! (lower window)

The average peso volume has been cascading even before the Phisix broke to a new record in September. Special block sales of EDC and Meralco accounted for the volume spikes of mid-September and mid-July

The PSE even implicitly confirmed this on their latest disclosure: “Daily average value turnover rose by 3.2 percent year to date at Php 8.06 billion”.

Huh? A 25% return on a 3.2% increase in turnover? Given that more pesos are required to buy the same securities at higher prices, shouldn’t higher price levels be, at least, accompanied by bigger volumes? The PSE didn’t explain why this has been so.

And there’s more to this.

Special block sales are included in the account of daily turnovers. Special block sales soared by 77% in 2017 (Php 271 billion versus Php 153.24 billion). Thus, special block sales had entirely been responsible for the marginal gains in total turnover in 2017. Special block sales accounted for 14% share of total volume in 2017 compared to 8% in 2016.

Excluding special block sales, daily board turnover fell by 5.01% in 2017! Shocks! Record Phisix on faltering trade volume!

The dominance of the top 5 in the context of returns and priciest valuations, the Sy group capture of the Phisix and the significant divergence in market breadth and volume does not exist in a vacuum. These are interrelated. These signify as consequences of the entrenched dislocations brought about by epic price rigging.

Since every action comes with time-inconsistent consequences, the tradeoff from cosmetically propping up of the Phisix comes with internal entropy and a massive buildup of concentration risks.

Considering that the Sy group has essentially corralled actions of the Phisix, the implicit leadership they have provided to attain a record upside could drastically reverse from adverse changes in fundamentals and or even in expectations.

6. BSP’s Liquidity Supernova and Exploding Loans to Financial Intermediaries

The mainstream holds practically little or no relationship between money supply and asset performance.

That’s simply because this doesn’t fit the popular narrative.

The peso represents the other half of every transaction (exchanges). Thus, changes in the supply and demand of the peso matters in every transaction whether in the real economy or in the financial markets.

The fluctuations of the domestic money supply, which virtually represents changes in credit conditions, are causally linked with price actions of the Phisix

For instance, in 2016, the PSEi 30 climaxed in July or a month after M3 vaulted to a one-year high in May

In 2017, the September 2017 PSEi 30 breakout has coincided with an August M3 breach of its 2016 high.

M3 has moderated in November, which corresponded with the slight decline of the Phisix in November. With December’s new record, has M3 been likewise recharged in December?

Bank lending growth remains at a feverish pace although it also abated in November.

More importantly, sharp increases in financial intermediary loans appear to have fueled record Phisix in 2017.

Since 2014, price spikes in the Phisix has dovetailed with growth surges in financial intermediary banking loans (with one exception).

Have non-bank institutions been borrowing heavily from banks to finance the frantic pumping on the select issues of the PSEi 30???

If so, does extensive use of leverage to push prices been a salutary?

Hasn’t the credit cycle been instrumental in the shaping of the stock market cycle?

7. Phisix Record Is A Symptom of a Global Phenomenon

When stock prices rise, the public tends to embrace this as an accomplishment. On the other hand, external forces have mechanically used as scapegoats when stock prices decline.

How many of the establishment ‘experts’ would say that the record run in the Phisix may have been a function of a global dynamic: massive liquidity injected by global central banks?

 

Global stocks ended 2017 at a record high or up by $9 trillion. (upper window)

The US stock markets provided leadership to global stocks.

US equity benchmarks, Dow Industrials +25.08%, S&P 500 +19.42% and Nasdaq +28.24%, have been at par or even outperformed the Phisix.

Through a clean sweep of monthly gains, global stocks attained an unprecedented “perfect year”.  (middle window)

MSCI Asia closed the year on a record. The Phisix was the FIFTH best performer in the region after national benchmarks of Mongolia (+66.48%), Vietnam (+48.03%), Hong Kong (+35.99%) and India (+27.91%). Of Asia’s 17 bourses, only 2 suffered (Laos -1.59% and Pakistan -15.34%) declines while three (China +6.56% Australia +7.84% and Malaysia +9.45%) returned below 10%. (lowest pane)

Meanwhile, central bank assets surged to a fresh record. Assets of the BOJ, ECB and US Federal Reserve tallied to a record US$ 14.2 last November. Excluding the FED and the PBOC, global central banks bought about $1.96 trillion in 9 months according to Bank of America's Michael Hartnett. China’s PBOC added US $ 2.9 trillion in Total Social Financing as of November.

And part of central bank asset accumulation has been through equity markets. For instance, the Swiss National Bank bought $88 billion of US stocks as of the 3Q. The Bank of Japan has accumulated up to a staggering 74% of the nation’s ETF market as of October.

The massive injection of liquidity by global central banks has coincided with or has played a crucial role in whetting the risk ON appetite which not only drove stocks to record but also in bonds.

Even bitcoin’s phenomenal vertical rise can be traced to such easy financial conditions. (upper window)

At the same time, global corporate bond issuance hit record levels. Asian US dollar corporate bond issuance has also been at record highs.

Ironically, the string of records attained in 2017 came even as the US Fed raised interest thrice this year and five times since the financial crisis. The Fed has embarked on normalizing its balance sheets by rolling back its assets at the close of 2017.

On the back of tanking % growth in US commercial industrial bank loans, US yield curve has been sharply flattening (10 year 3 months, 10 and 2 year and 30 and 2 year).

The ECB announced that it would also reduce its large-scale asset purchases or quantitative easing.

Taken together, loose money conditions, which has fueled the serial record runups in risk assets across the globe, may have begun to reverse.

Or global stock markets sprinted to unprecedented heights as central banks have initiated the proverbial “taking away the punch bowl”

Even neighboring Malaysia have commenced using non-monetary tightening.

In fear of a contagion from an escalating property glut to the economy, Malaysian authorities will impose a ban on property development!

From Nikkei Asian Review (Malaysia's ban on development no relief for property glut, Malaysia's ban on development no relief for property glut: December 28, 2017) [bold mine]

Although 80% of the apartments had already been sold, only about 10% is occupied, according to Sim. Across the country, there are apartment blocks that share the same fate. Bank Negara, Malaysia's central bank, warned recently of the supply glut in commercial and high-rise residential property markets. 

"If we are not careful, the oversupply [in the property market] could have a negative impact on the economy," said Governor Muhammad Ibrahim on Nov. 17. In a study, the central bank said office vacancy rate in Kuala Lumpur and its surrounding areas could rise from 24% currently to a record high of 32% by 2021, surpassing levels reached during the Asian financial crisis in the late 1990s.

Total property transaction nationwide dropped 6% in the first half 2017, according to government data. In a series of conflicting statements in November, the government said it would impose a ban on the development of luxury condominium units and commercial properties in a bid to ease the glut.

In the retail complex sector, the average occupancy rate has been declining over the past six years and is now hovering at a five-year low of 86%, said Nawawi Tie Leung in a research note recently. The Malaysian house price index's annual growth has been sliding from a high of 10.1% in the second quarter of 2014 to 5.6% at the end of June this year.

In a sign of how many shopping malls had been built over the years, the retail space per capita in the booming northern state of Penang alone exceeded both Singapore's and Bangkok's in 2016, said the real estate consultant. 

The report added that the underlying stress in the retail sector was not just the typical demand-supply disequilibrium that could be resolved through the passage of time, rising affluence and an expanding population. Rather, structural changes including shopping habits, socio-demographics and technology would continue to impact the market. 

Even with the government's ban, the market can still expect supply from a number of key real estate developments to flow through, adding pressure on the market. 

Despite this, Malaysian stocks have been scaling upwards in a likely test of its 2014 record.

Overcapacity, a symptom of malinvestments, is a product of political tinkering with interest rates. They are almost everywhere.

In the case of Malaysia, déjà vu 1997?

In the world of the Fear of Missing Out (FOMO) and the Greater Fool, hardly any of these will be taken to into consideration…

…until it matters.