Unbelievable narratives become believable. Unrealistic valuations are rationalised with the new narratives. A relentless tape makes markets appear invincible. People engage in ever riskier behaviour & the tape will validate the behaviour—Sven Henrich
In this issue:
Ayala Land’s Fabulous 3Q Growth Exposed, Fintech Driven PLDT Boom? Treasury Yields Spike as October CPI Slows
I. Fighting Misinformation with Establishment Misinformation?
II. Ayala Land’s Fabulous 3Q Growth Exposed: The Statistical Low Base Effect!
III. Fintech Driven Growth? PLDT’s 3Q Revenue Growth Stalls, Income Slumped
IV. Someone is Wrong: October CPI Falls, Institutional Traders Pushed Up Treasury Yields!
V. Nothing Operates in a Vacuum: Worsening Global Supply Bottlenecks, Record Fertilizer Prices, Food Price at 10-Year Highs and Volatile Liquidity Conditions
Ayala Land’s Fabulous 3Q Growth Exposed, Fintech Driven PLDT Boom? Treasury Yields Spike as October CPI Slows
I. Fighting Misinformation with Establishment Misinformation?
Misinformation. The establishment media always reminds us to fight misinformation by trusting them to provide timely, accurate, and objective data. Think climate change, vaccines, etc.
They seem to project to their audiences that not only are they sacrosanct and impartial, but they are inviolable to the manifold and complex forces of conflicts of interest and corruption.
Or that these outfits seem to be immune to the influences and interests of their principal sources of revenues and their primary sources of reporting subjects.
Also, perhaps because the public has desperately pined for better days ahead, selective reporting catering to these desires appears to constitute news these days.
But does reporting half-truths support such cavalier or holier than thou ethics of reporting?
Worryingly, who counterchecks the supposed vanguard of information?
Should the broader sentiment of consensus or popularity determine the information that the public sees or reads?
And should the voices of those on the opposite be distilled and canceled?
Let us apply this to the economy and the financial markets.
For the mainstream, the revival of animal spirits or the restoration of public confidence anchors the economic recovery.
Bluntly put, such public confidence stands on the foundation of hope.
In the stock market, confidence represents more than a product of the feedback loop of the cumulative narratives of positive information about economic and financial performances and market prices. Instead, it is an offshoot of monetary policies, which is rationalized popularly as growth. But the public isn’t told about the latter.
Despite recent downgrades, growth predictions stem from the bombardment of cherry-picked information reinforcing the confidence of the Panglossian cult.
Positive numbers are supposed to goad gullible market participants to chase share prices. Rising share prices provide the wealth effect of spending, reinforcing the positive news. And everyone lives happily ever after. And so goes the theory.
Should misinformation be labeled against those who believe that this feedback loop—positive news causes rising prices while rising prices reinforce the positive news—is severely flawed?
Are the interests of the establishment elites and political bureaucracy higher than the public?
Or perhaps, have establishment media been promoting and implementing the ideological forces of woke-ism, political correctness, and the cancel culture in shaping public opinion?
As an adage attributed to educator, author and political advisor Booker T. Washington
A lie doesn't become truth, wrong doesn't become right, and evil doesn't become good, just because it's accepted by a majority
II. Ayala Land’s Fabulous 3Q Growth Exposed: The Statistical Low Base Effect!
Figure 1
From CNN Philippines, November 3: Ayala Land Inc. reported higher earnings from January to September, as operations improved despite the retightening of quarantine measures later in the period, it disclosed Wednesday. In a regulatory filing, the Ayala Group real estate arm stated that its net income grew by 38% to ₱2.6 billion in the third quarter, bringing earnings for the nine-month period to ₱8.6 billion. This figure is 35% higher than what it registered during the same timeframe in 2020, said ALI.
It is not just Wilcon, but the statistical low base effect has been more pronounced in Ayala Land’s 3Q-9M Financial performance.
Operation PSEi 7,000: WLCON’s Mania Anchored on the Mirage of the Statistical Low-Base Effect! October 31, 2021
The news article was strangely silent about the conditions of 2020, the stringent initial lockdowns, which served as the base of 3Q-9M 2021 growth. But it implied that this year’s lockdown hampered the current performance.
The general concept is that growth would have been much robust. But has it?
The drumbeat of growth barely squares with a broader perspective of facts.
While it may be true that growth did occur on a QoQ and 9M basis mainly from the low base effects, stunningly, ALI’s quarterly revenues and net income have barely reached the 2016 levels!
Worst, the nominal levels of the same factors appear to be plateauing in 2021!
Further, falling RE margins has weighed on its eps.
The rebound from depressed conditions had pointlessly been extrapolated as growth (G-R-O-W-T-H)!
As they say, it is all about the framing or presentation! Torture the statistics enough; it will confess to anything.
And the hope is that reopening will fuel even more growth (when it hasn't based on the broader perspective)!
Figure 2
But there is a segment in its Financial Conditions that continues to register growth. That is no less than DEBT!
While ALI abruptly slashed its record debt levels during the Covid-19 outbreak, it has started to rebuild a highly leveraged balance sheet since.
Thanks to the historic monetary policy of the BSP, the nominal rate of interest rate expenses declined in the face of escalating debt levels.
This demonstrates how the Financial Repression policies of the BSP implicitly extend its bailout reach to the real estate sector. Naturally, as one of the biggest borrowers, record low rates have translated to lower interest expense. But it encourages the industry to engage in a massive buildup on leverage.
So how is the story—that revolves around escalating debts, lower revenues and income, and falling margins, all dependent on the BSP—support the theme of growth?
Or, why is it not a story of risk than of growth?
At Friday’s close of 37.5 per share and based on 9M eps, ALI trades at about a whopping 46.9 2021 (annualized) PER! Incredible.
Such aggressive price-multiple expansion exhibits decreasing relevance between fundamentals and share prices. That is FOMO in motion.
While popularly rationalized on growth, speculative excess and the unscrupulous price management of the benchmark are in reality a product of the negative real rates regime from the BSP's historic liquidity injections.
Such entrenches the belief of 'something for nothing' or bubbles.
To be sure, even if interest rate policy remains at current levels (which may not be likely), it is as if heavily leveraged firms/industries can free ride on its mounting liabilities.
Good luck with that assumption.
III. Fintech Driven Growth? PLDT’s 3Q Revenue Growth Stalls, Income Slumped
From the Philstar, November 5: PLDT Inc., the fully integrated telecommunications company chaired by Manuel V. Pangilinan, reported a 10 percent increase in telco core net income to P23.1 billion in the nine months to September, putting the company on track to reaching its full year guidance of P30 billion. Pangilinan, chairman of PLDT, Voyager Innovations, and PayMaya, said the digital transformation of the country is at the top of the PLDT Group’s agenda including Maya Bank, the soon-to-be-launched digital bank authorized by the Bangko Sentral ng Pilipinas (BSP). Enhancing PLDT’s existing solutions and services are PayMaya, the fintech arm of Voyager Innovations, and Maya Bank, Pangilinan said.
Growth from fintech activities of leading telco firms has justified the parabolic actions of the major telco companies.
But as we previously said, this is unfounded or represents reasoning from changes in the ticker tape.
But the alleged boom to its fintech-mobile banking business will not only take time to ripen but most likely account for the substitution effects of the forced transition to a digital economy at the expense of the brick and mortar model in response to the pandemic. At the end of the day, it is the economic value-added or productivity context that drives growth.
An Escalating or Climaxing Telecom Bubble?! Globe and Converge Prices Go Vertical! August 29
Figure 3
Among the three majors, PLDT was the first to report on its financial performance in the 3Q. Has there been a realization of the Fintech justifications of a boost in their operating model? The short answer is NOT for now.
PLDT's revenue performance illustrates the forcible shifting of the economy from the brick-and-mortar model to the digital space.
Because its growth represented substitution effects than productivity-driven, PLDT's topline performance seems to have hit a wall.
Q3 Revenue growth decelerated to only 3.76% YoY. The three-year CAGR was a modest 6.08%. Revenue was up by 1% Q-o-Q. That is, PLDT's revenue growth has stalled seen from different angles.
It was not just the topline. Q3 Net income growth slumped 19.7% YoY. Though the nominal performance has been volatile, its three-year CAGR was 10%.
Neither has a margin boost from Fintech been occurring. While Q3 margins improved relative to the last three-quarters, it remains lower than the period covering Q1 2019 to Q3 2020.
But there is a growth component familiar to almost all members of the PSEi 30. That component is DEBT.
Unlike the conspicuous uptrend in debt, revenue, net income, and profit margins haven’t been as notable. PLDT’s debt growth surged 10.4% in Q3. It has a three-year CAGR of 11.135%.
Financing cost slipped .86% in Q3, but it has a three-year CAGR of 13.5%.
PLDT’s surging share prices indicate that value is being re-priced as a growth stock.
In closing, the much-ballyhooed contribution of Fintech to PLDT’s existing business model has yet to become apparent.
Again from August…
For telcos, the forced adaptation from brick and mortar business models to remote work and telecommuting during the pandemic boosted their revenues.
However, as a service platform, its growth prospects remain anchored on the economic and financial conditions of households and businesses.
In any event, the sector’s outperformance is temporary and should realign eventually with the growth dynamics of its clients/consumers as socio-economic conditions normalize.
PSEi 30: Surging Prices as Criteria to Membership: ACEN and CNVRG in, EMP and DMC out August 8, 2021
Author and Financial Consultant Peter Atwater rightly noted,
The stories we tell ourselves are most compelling at extremes in confidence while also being the most decoupled from reality.
IV. Someone is Wrong: October CPI Falls, Institutional Traders Pushed Up Treasury Yields!
From CNN, November 5: Oil price hikes failed to fuel the country's inflation rate in October as basic commodity prices increased at a milder rate, the Philippine Statistics Authority reported Friday. Inflation stood at 4.6% during the month, National Statistician Claire Dennis Mapa announced in a virtual briefing. The pace is slower than 4.8% this September, but faster than 2.5% in October last year. The recent figure falls within the central bank’s target 4.5-5.3% range for October. Last month’s outturn brought the average inflation for this year so far to 4.5%.
From the Inquirer.net, November 4: There is scant evidence that rising prices currently hammering the Philippine economy is causing a chain reaction of inflation to warrant raising interest rates, the head of the Philippine central bank said. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the key to reining in inflation remained to be “non monetary government measures to augment the domestic supply of key food items.” “The domestic prices of key agricultural commodities such as fruits, fish, and pork as recorded in the consumer price index data have declined in recent months,” he said at an online briefing. “With continued implementation of non-monetary supply-side measures, the BSP expects ongoing price pressures to dissipate further in the coming months.” The BSP chief—who has, in recent months, been resisting calls for more aggressive action against “supply side inflation: — said the recent price increases have been traced mainly to higher prices of a limited number of items owing to pressures that are “transitory” in nature
Nota bene: This author does not believe in the accuracy of the CPI simply because averaging different goods as potatoes, cars, laptops, and Netflix subscription fees represent a ridiculous and impractical exercise, and thus, do not reflect a realistic demonstration of price changes experienced by individuals writ large (community). Furthermore, since the CPI is a political-economic sensitive number, as per the PSA, "it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy", hence to advance the political-economic agenda of the incumbent such statistics are vulnerable to interventions.
Let us start with how the supposed lower CPI affected the manufacturing sector.
The IHS Markit on the Philippines Manufacturing PMI (November 2): The IHS Markit Philippines Manufacturing PMI® rose fractionally from 50.9 in September, to 51.0 in October, registering above the 50.0 no-change threshold that separates expansion from contraction. Although only marginal, the latest uptick was the strongest since March, and above the average for 2021 so far. October data indicated a seventh successive monthly fall in output, with the rate of decline quickening from that seen in September. Firms mentioned that material shortages and virus-related restrictions drove the decline, though historically weak demand conditions were also cited. ... Goods producers continued to register a substantial deterioration in vendor performance. Raw material shortages and poor transportation conditions reportedly led to extensive delays. Lead times have now lengthened in each month since August 2019, with the latest deterioration among the sharpest in the series. …Firms continued to scale back on their workforce numbers in October, with staffing levels falling for the twentieth consecutive month. The rate of decline eased from that seen in September, however. Firms mentioned that whilst there were some cost-saving efforts, resignations were mostly voluntary. …On the price front, input prices soared once again during October. Higher cost burdens were commonly linked to material shortages, especially for metals, packaging materials and oil. There were also reports of rising transportation and energy costs. The rate of cost inflation was the joint-steepest since March 2018, and the fourth most marked in the series history. Subsequently, output charges increased at a quicker pace, though the rate of inflation was much softer than that seen for input prices. According to anecdotal evidence, some firms held back on raising their charges due to subdued demand conditions.
Figure 4
Though the Markit report doesn’t contain numbers, it showed that inflation plagued the manufacturing sector in October. But input prices rose faster than output prices. Aside from supply gridlock induced by mobility restrictions, material shortages, and prolonged manufacturing and assembly process, profit margin squeeze may have contributed to output declines, aside from weak demand, which may have been affected by higher output prices.
The IHS Markit data tells of a different scenario from the food-dominated PSA calculated CPI data.
Yet, sustained price pressures, declining output, and unemployment exhibit a STAGFLATIONARY environment.
Bank loans to the manufacturing sector have turned positive for the second month in September. Financing inventories and the production delays rather than expansion may have been the reason for the increased credit exposure. If so, the sector has increased its balance sheet leveraging to protect profits for survival.
Next, why does the BSP’s leadership insist on the 'transitory' nature of the elevated CPI?
Answer: The BSP has been resisting calls for more aggressive action (as quoted in the news above)
The lower-than-expected CPI provides the monetary authorities the convenience of MAINTAINING its current monetary policy stance, which delivers several substantial political-economic benefits.
First and foremost, such policies allow the sustained bailout of the banking system. For example, deposit expenses of BDO and MBT in the 3Q plunged by 43.5% and 31.9%, respectively. With lending down, that’s where the gist of bank profits or reduced losses come from today. But such subsidies are barely mentioned by the media.
Next, by keeping rates below the CPI, the negative real rates or the inflation tax subsidizes borrowers, particularly the National Government, banks, and their elite clients, coming at the expense of savers. Negative real rates are at a record.
Also, another intended effect of such implicit tax on saving is to help boost the GDP by bolstering bank lending and spending.
Another, calculated through the PCE component of the GDP, a lower CPI amplifies the GDP.
Since the CPI constitutes a principal factor in contributing to changes in the interest rates, a manageable CPI may lower or stabilize interest rates level that diminishes credit risks.
It also helps reduce credit and currency risks of the country’s mounting external debt exposure channeled through a strong peso.
But here is the thing. Central authorities expect substantial benefits from the influence of the statistics they created.
The CPI report is unaudited and unchallenged by competition from the private sector. And because it represents "a major statistical series used for economic analysis and as a monitoring indicator of government economic policy", it is inherently imbued with a political component.
With the election season in May 2022, wouldn’t a temporal boom in the financial markets help the odds of the incumbent’s anointed candidate?
Yes, the peso and the stock market rallied from its announcement. Over the past years, the Financial Repression policies of the BSP, expressed as excess liquidity, has driven higher the PSEi 30 along with the CPI. That correlation holds until a certain higher threshold of the CPI.
But the irony is, institutional treasury traders saw it differently.
Figure 5
Traders sold bonds that pushed up the treasury yields, particularly towards the belly of the curve (5-year) on Friday and for the week.
The yield surge suggests that the BSP may be about to raise rates in 2022! If the CPI is within the BSP’s target, why would traders project a hike then?
US Treasuries have hardly been the culprit. While somewhat correlated, yields of Philippine and UST 10-years parted ways this week.
The direction of 10-year treasury yield spreads usually serves as a precursor to the CPI, but with a time lag.
The current decline in CPI could indicate a sharp rebound soon or that such divergences may be about politics.
Glorifying a lower CPI to policy success may be overstating events. As shown above, bond yields and curves and the PMI story demonstrate a divergent narratives. Besides, the public seem to be oblivious that the CPI is a politically colored statistic.
Furthermore, a falling CPI should be a wake-up call. It means a sharp weakening of demand in the face of the present supply bottlenecks.
V. Nothing Operates in a Vacuum: Worsening Global Supply Bottlenecks, Record Fertilizer Prices, Food Price at 10-Year Highs and Volatile Liquidity Conditions
Figure 6
Finally, there are barely signs that the bottlenecks and shortages of the global supply network have eased. Delivery times and input costs surged to the highest on record.
Meanwhile, fertilizer prices have exploded to record highs, pushing up global food prices to ten-year highs.
On the other hand, many central banks have started to hike rates, withdrawing excess liquidity, like the US. Some of these may counterbalance the current forces of inflation.
Nothing exists in a vacuum. These factors are going to affect domestic prices and production.
Yours in liberty,
The Prudent Investor Newsletters
