Chart of the Day: Most Expensive Stocks—US and Emerging Asia

This chart from an article from the Telegraph reveals the cheapest and the most expensive stocks in the world (based on their own measures):

Some caveats noted by the article:

1 inadequate data:

The Mr Troue said this was useful for markets such as Britain and the US where there is plenty of data available, but for emerging market nations such as China and India, where data is not as widely available, it does not work so well.

2 reasons for 'cheapest'

Some stock markets will be cheap because the countries are in the midst of economic turmoil – this certainly rings true for Greece and Turkey, which both have fragile economies. Highly indebted Greece, in particular, has been trying to get its house in order.

As noted, the reason many are cheap has been because markets have priced heavy debt burdens as an obstacle to fundamentals. China's PBoC and Japan's BoJ for instance hopes to submerge fundamentals with manipulation of the markets via flooding the market with fiat money and by direct interventions.

3 reasons for the 'priciest'

The main reason for the lofty valuations is that these stock markets have performed well in recent years. This pulled in other investors and has left these markets substantially overpriced.

I’d have an opposite causal view of the above; “performed well” has been a function of “pulled in other investors” predicated on the mostly fallacious G-R-O-W-T-H story, which has mainly been underpinned by massive debt acquisition. 

In short, speculative frenzies financed by cheap money always looks for excuses to justify their actions. Excessive speculations or manias are symptoms of the bandwagon effect—the piggybacking on momentum—which leads to overvaluation.  

Simply said when stock market returns exceed growth in fundamentals then price multiple expansions are the logical outcomes. This implies that if growth has really been the story then there won’t be egregious mispricing.  

Proof of this can be seen in the pricey ASEAN equity markets: debt accumulation by several major companies has ballooned dramatically for the S&P to recently warn on increasing vulnerability to default. This is what I call as widening adaption of “Ponzi financing”. 

So whatever G-R-O-W-T-H seen in corporate (or even macro) fundamentals have mainly been a mirage brought by credit expansion. Take away credit and G-R-O-W-T-H vanishes.

The article doesn’t include the Philippine phisix, but if one takes a look at how Indonesia or Thailand has fared along with the Phisix (chart from Bloomberg), the Philippine index has outperformed her peers during the past 5 years. So I’d place the Phisix among the world’s most expensive along with her peers.

Oh by the way, as sign of credit expansion driving fundamentals, Global M&A financed by junk bonds are at record levels.

From the Wall Street Journal (bold mine)

As of last Thursday, junk-rated companies had borrowed $92.5 billion in the high-yield bond markets for acquisitions. That’s up 40% from the year-earlier period and the highest on record for any comparable stretch, according to Dealogic. 

US equity boom financed by M&A (but currently has been on a downturn)

M&A-related bond borrowing has accounted for roughly 30% of all new offerings in the U.S. bond market this year, said Marc Warm, head of U.S. high-yield capital markets at Credit Suisse Group AG . 

He pointed out, however, that such borrowing is down from previous M&A booms. “When we look back at times like 2005, 2006 and 2007, the M&A component of the market was 40% to 50%,” he said. “It was a meaningful difference than where it is today.” M&A activity has begun to slow recently. While global M&A value for the year stood at $2.90 trillion as of Thursday, the highest level since 2007, October’s deal value, at $227.1 billion, was the weakest for October since 2011, according to Dealogic. 

Highest level since 2007, doesn't this ring a bell?
Take away credit and G-R-O-W-T-H and its attendant equity BOOM vanishes.

Geopolitical risk theater links: Russian Bomber Flights near US shores, NATO: Russian troops cross Ukraine Border, US $ Costs of ISIS war and more…

Dear email subscribers, the following posts won’t be included in your mailbox today:

-China’s Stock Market Massaging: Hong Kong to Scrap Yuan Conversion Limit

-G20 to institutionalize Bank Bail-Ins?

An update on geopolitical developments:

1 Brinkmanship geopolitics continues as Russia plans long-range bomber flights near U.S. shores CNN.com November 13, 2014

Russia plans to send long-range bombers to patrol the Gulf of Mexico and the Caribbean, the nation's defense minister said, amid escalating tensions with the West over Ukraine.

The patrols, which would also include the western Atlantic and eastern Pacific, would bring the flights close to the United States' territorial waters.

The move is in response to a growing international resentment against Russia, defense minister Sergei Shoigu said Wednesday.

Just ONE mis-encounter is all it takes for an escalation...nuclear exchange?

2 As the US and China firmed up some deals, Chinese hack U.S. weather systems, satellite network November 12, 2014. Will the deal end the mutual hacking?

3 Putin’s mighty escorts: Russian Warships Head to Australia Ahead of G20 Summit Newsweek.com November 12, 2014

4 NATO itching for a fight? : Ukraine crisis: Russian troops crossed border, Nato says BBC.com November 12, 2014

5 More financial and economic burden for US taxpayers for a war that has little or nothing to do with US interests. Nonetheless US politicians, and bureaucracy military industrial complex cheers on more the prospects of monetary largesse, again charged to the taxpayers: $300,000 an Hour: The Cost of Fighting ISIS The Atlantic November 12, 2014

An excerpt

It's been 96 days since the United States launched its first airstrikes against ISIS militants in Iraq; 50 since it expanded that campaign into Syria. And on each one of those days, the U.S. government has spent an average of roughly $8 million, or more than $300,000 an hour, on the operation against the Sunni Muslim extremist group, according to Pentagon officials.

That's a trivial sum compared with the more than $200 million the U.S. pours each day into its 13-year war in Afghanistan (the National Priorities Project, which advocates for budget transparency, estimates that the U.S. has now spent more than $1.5 trillion on its wars in Iraq and Afghanistan, and against ISIS, since 2001). But the bean-counting matters, because the place values and line items offer clues to understanding the military offensive President Obama has committed the country to—and now asked Congress to bless.

5 Can’t beat the foe? Use the ISIS as an excuse to topple Syria’s Assad: Obama now admits Assad MUST go before ISIS can be defeated: President plans to focus on Syria and ousting brutal dictator as he tries to beat back terror group November 13, 2014

6 Will people learn from the history of wars? :Graph of world wars by number of dead and duration of conflict shows how war is very much not behind us Independent.co.uk November 11, 2014

I don’t think so.

7 US has spent so much for warfare, yet a recent encounter with Russian aircraft may have exposed some of  their vulnerabilities: What frightened the USS Donald Cook so much in the Black Sea? Voltairenet.org November 8, 2014

The US destroyer is equipped with the most recent Aegis Combat System. It is an integrated naval weapons systems which can link together the missile defense systems of all vessels embedded within the same network, so as to ensure the detection, tracking and destruction of hundreds of targets at the same time. In addition, the USS Donald Cook is equipped with 4 large radars, whose power is comparable to that of several stations. For protection, it carries more than fifty anti-aircraft missiles of various types.

Meanwhile, the Russian Su-24 that buzzed the USS Donald Cook carried neither bombs nor missiles but only a basket mounted under the fuselage, which, according to the Russian newspaper Rossiyskaya Gazeta , contained a Russian electronic warfare device called Khibiny.

As the Russian jet approached the US vessel, the electronic device disabled all radars, control circuits, systems, information transmission, etc. on board the US destroyer. In other words, the all-powerful Aegis system, now hooked up - or about to be - with the defense systems installed on NATO’s most modern ships was shut down, as turning off the TV set with the remote control.

The Russian Su-24 then simulated a missile attack against the USS Donald Cook, which was left literally deaf and blind. As if carrying out a training exercise, the Russian aircraft - unarmed - repeated the same maneuver 12 times before flying away

Hmmm

Once again, Stock markets drool over central bank uppers as 'Central Banks are the only game in town'

Here we go again. Stock markets drool over the prospects of central bank 'uppers'.

 

Bloomberg reports on today’s stock market activities…

European and Asian stocks rose with U.S. equity-index futures and the yen weakened on signs policymakers in China and Japan will do more to support economic growth…

The People’s Bank of China is asking city lenders to apply for cash to support loans to smaller enterprises, according to an official with knowledge of the matter. Speculation is mounting in Japan that Abe will call a snap election to seek support for delaying a planned sales-tax increase.

Japan's Nikkei closed 1.14% today and is fast approaching the May 2007 highs as the yen got battered.

Are stocks pricing have been based on fundamentals or earnings? Well from the above, you can throw textbooks into the garbage bin.

“Central banks are the only game in town now” to paraphrase Bank of France Governor Christian Noyer. Of course that’s until the magical spell blows over

Oh by the way, see why the Chinese government have been propping up the stock market? There seems to be signfinant credit gridlock in the real economy as shown by the PBoC's urging of local lenders to "support loans to smaller enterprises".  

The underlying belief is that you can do away with debt problems by having more debt. Keeping stock markets up may just persuade lenders to lend to deadbeats.

Periphery to the Core Dynamic: Weak EM Currencies equals Underperforming Stock Markets

I’ve written about how weak Asian currencies are most likely to be transmitted into asset markets. 

The theoretical underpinnings have been that if the developments in the real economy should get reflected on asset prices then a weak currency would imply increased domestic inflation pressures (requires more local currency to buy foreign goods that compounds on domestic financial repression policies), and more importantly, higher debt servicing costs on foreign currency loans  (requires more local currency to service dollar based loans).

There are of course exceptions to the above such as when governments monetizes fiscal expenditures by massively inflating, stock markets become safe haven from currency destruction or runaway inflation  (Venezuela and Argentina as examples) or when government purposely fuels a stock market boom by buying financial assets from the private sector (current examples BoJ and ECB)

Since the latter two political conditions haven’t been pervasive in emerging markets, the likely result from strong dollar (weak EM currencies) has been highly fragile risk assets.

The Gavekal team presents technical evidence of such underperformance in their post “Rising US dollar=Narrowing Market Performance” which measures market internals during the recent risk ON episode.

Trends like the advance/decline ratio have a strong correlation with the USD as can be seen in the charts below where we compare the 100 day moving average of the A/D ratio to the nominal effective, trade weighted USD.

Applying to Emerging Markets here is what Gavekal observed:

In the emerging markets, the trends are comparatively worse.  Here only 29% of companies have outperformed the MSCI World index over the last 50 days, while only 23% have outperformed over the last 20 days.  The trends are getting worse for the EMs.

Percent of Companies Outperforming the MSCI World Index by Country

on a per sector basis…

Percent of Companies Outperforming the MSCI World Index by Sector in Emerging World

The Gavekal concludes:

Over the last month:
1) The USD has continued to rise.
2) There has been NO change in leadership off the bounce.
3) The market has narrowed more.

All these signs suggest that investors should continue to focus on North American counter-cyclical companies.  There is no rotation yet, and as long as the USD continues to rise, we should expect a continued narrowing of market performance.

Narrowing of performance means distribution or that global stock market breadth has been weakening despite the present risk ON landscape. 

Yet if the “narrowing” dynamic is sustained will this translate to an eventual drag to the current leaders? I expect so.

And if EM hasn’t been picking up in the face of a central bank induced risk ON landscape, how will they perform when risk OFF returns?

As for the Philippines, there has been an astonishing rise in the frequency and intensity to  “massage” the equity benchmark. This has been channeled through intraday buying panics on select heavyweight issues, the regularity of “marking the close”  and the most current innovation—pushing select heavyweight issues to get past record highs in order to generate the "greater fool" momentum and to improve sentiment. 

Yet the data above (relative performance vis-à-vis MSCI world) seems to reinforce signs of the massaging of heavyweights through poor breadth (plus deteriorating volume) and how such actions have so far failed to meet its objectives. 

China’s Stock Market Massaging: Hong Kong to Scrap Yuan Conversion Limit

In the name of liberalization, the Chinese government has been trying to inflate a stock market bubble to mask the ongoing deflation of her credit (property) bubbles along with the deterioration of her domestic economy. 

I made my case on the convenient use of liberalization to pump the stock market here. 

Now the Chinese government will facilitate the easing of money flows into stocks via Hong Kong.

From Reuters:

Hong Kong will scrap the daily 20,000 yuan ($3,264) conversion limit for residents from Monday when a landmark scheme to link the city's stock market with Shanghai is launched, facilitating investment flows into China's stock market.

Regulators said this week the cross-border share trading scheme would start on Monday, a crucial step in China's efforts to open its capital markets and to allow Hong Kong residents to choose from a wider menu of yuan-denominated assets apart from bonds.

"The removal of the daily conversion limit will facilitate Hong Kong residents' participation in the Shanghai-Hong Kong stock connect as well as other investments and transactions denominated in the yuan," Norman Chan, chief executive of the Hong Kong Monetary Authority, told reporters.

G20 to institutionalize Bank Bail-Ins?

As I have been saying and predicting here, governments have been in a mission creep to institutionalize "deposit haircuts ", which eventually culminates into a Cyprus style bail-IN. This has been part of the deepening of use of financial repression.

Negative deposit rates signify a slippery slope towards wealth confiscation as I recently noted: Negative rates will serve as a precursor to the widespread adaption of deposit confiscation via haircuts or wealth taxes especially when the global crisis emerges.

Analyst Russell Napier warns (published at the Zero Hedge which he calls “the day the money dies”) that the G-20 has reached an accord for member nations to standardize Bail INs by legislating a downgrade on the treatment of bank deposits. (bold mine)

The G20 announcement in Brisbane on November 16th will formalize a "bail in" for large-scale depositors raising the spectre that their deposits are, as many were in 1932, worth less than banknotes. It will be very clear that the value of bank deposits can fall in nominal terms.

On Sunday in Brisbane the G20 will announce that bank deposits are just part of commercial banks’ capital structure, and also that they are far from the most senior portion of that structure. With deposits then subjected to a decline in nominal value following a bank failure, it is self-evident that a bank deposit is no longer money in the way a banknote is. If a banknote cannot be subjected to a decline in nominal value, we need to ask whether banknotes can act as a superior store of value than bank deposits? If that is the case, will some investors prefer banknotes to bank deposits as a form of savings? Such a change in preference is known as a "bank run." 

Each country will introduce its own legislation to effect the ‘ bail-in’ agreed by the G20 this coming weekend. The consultation document from the UK’s Treasury lists the following bank creditors who will rank ABOVE depositors in a ‘failing’ financial institution: 

-Liabilities representing protected deposits (in the UK the government guarantee protects 100% of deposits up to the value of GBP85,000) any liability, so far as it is secured

-Liabilities that the bank has by virtue of holding client assets

-Liabilities arising with an original maturity of less than 7 days owed by the banks to a credit institution or investment firm

-Liabilities arising from participation in designated settlement systems

-Liabilities owed to central counterparties recognized by the European Securities and Markets Authorities… on OTC derivatives, central counterparties and trade depositaries

-Liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration

-Liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits

-Liabilities owed to creditors arising from the provision to the bank of goods or service (other than financial services) that are critical to the daily functioning of its operations

The above list makes it clear that deposits larger than GBP85,000 will rank ahead of the bond holders of banks, but they will rank above little else. Importantly, both borrowings of the banks of less than 7 days maturity from other financial institutions and sums owed by banks in their role as counterparties to OTC derivatives will rank above large deposits. 

Large deposits at banks are no longer money, as this legislation will formally push them down through the capital structure to a position of material capital risk in any "failing" institution. In our last financial crisis, deposits were de facto guaranteed by the state, but from November 16th holders of large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets of a failed bank. 

Interestingly, HM Treasury uses the word ‘failing’ rather than "failed" in its consultation document and investors could find their large deposits frozen for a prolonged period in any "failing" institution while the courts unpick the capital structure and decide exactly where any losses should fall. 

If we have another Lehman Brothers collapse, large-scale depositors could find themselves in the courts for years before final adjudication on the scale of their losses could be established. During this period would this illiquid asset, formerly called a deposit and now subject to an unknown capital loss, be considered money? Clearly it would not, as its illiquidity and likely decline in nominal value would make it unacceptable as a medium of exchange. 

From November 16th 2014 the large-scale deposit at a commercial bank is, at best, a lesser form of money, and to many it will cease to be money at all as its nominal value can fall and it could cease to be accepted as a medium of exchange.

Fortunately, the developed world’s commercial banks are flush with central bank reserves and these are instantly convertible into the banknotes which they may need to meet demand from depositors. While the huge level of reserves on the balance sheet is a buffer, the funding of fractional reserve banks is still very negatively impacted by a shift from deposits to bank notes. With deflationary forces gathering momentum, this further impediment to the extension of commercial bank credit would be another factor preventing central bank monetary largesse translating into growth and inflation.

As the world’s smartest lawyer Charlie Munger is fond of saying, "Show me the incentive and I will show you the outcome." Some simple mathematics reveals that the November 16th announcement will create a very major incentive for investors to change deposits into banknotes.

In short, the formalization of the G20 accord on the downgrade of bank deposits implies greater risks of bank runs.  Yet the institutionalization of bail INs will not likely to be limited to G20s but should spread even on Emerging-Frontier markets. 

Governments around the world have been in a state of panic. They are desperately manipulating stock markets in the hope that these may produce “wealth effect”, a miracle intended to save their skin or the  status quo (the welfare-warfare, banking system and central bank troika), as well as, camouflage current economic weakness and or kick the debt time bomb down the road.

Yet the same political institutions recognize that inflating stocks are unsustainable. So during this current low volatile tranquil phase, they have been implementing foundations for massive wealth confiscation. 

What better way to confiscate than do it directly. Yet the more the confiscations, the greater risks of runs on banks and on money.

Geopolitical Risk Theater Links: Brazil Eludes NSA, China’s Newest Foreign Policy, the Ulfkotte-effect, Gorbachev warns Europe and More…

1 Distrust on US interventionism growing?: Brazil builds its own fiber optic network to avoid the NSA. Sovereign Man November 11, 2014

Writes Simon Black:

This past week Brazil announced that it will be building a 3,500-mile fiber-optic cable to Portugal in order to avoid the grip of the NSA.

What’s more, they announced that not a penny of the $185 million expected to be spent on the project will go to American firms, simply because they don’t want to take any chances that the US government will tap the system.

It’s incredible how far now individuals, corporations, and even governments are willing to go to protect themselves from the government of the Land of the Free.

The German government, especially upset by the discovery of US spying within its borders, has come up with a range of unique methods to block out prying ears.

They have even gone so far as to play classical music loudly over official meetings so as to obfuscate the conversation for any outside listeners.

They’ve also seriously contemplated the idea of returning back to typewriters to eliminate the possibilities of computer surveillance.

More practically, the government of Brazil has banned the use of Microsoft technologies in all government offices, something that was also done in China earlier this year.

The Red, White, and Blue Scare has now replaced the Red Scare of the Cold War era. And it comes at serious cost.

2 As I have been saying here, anti corruption campaings have usually been euphemism for or disguise on political persecution: U.S. Reports Signs of Division within Beijing Leadership Freebeacon.com November 11, 2014

Signs of a serious division within the ruling Communist Party of China are emerging over a crackdown on corruption led by current leader Xi Jinping, according to a recent U.S. intelligence report on the division.

The political rift is being linked to a nationwide anti-corruption drive launched by Chinese President Xi Jinping, and to differences among top leaders over the purge of several of China’s most senior leaders who held posts at senior Party levels that in the past were immune to such crackdowns.

Corruption in China—bribery, graft, and abuse of power—remains a key feature of the reform communist system in place since the 1980s.

The recent unclassified intelligence report circulated within the U.S. government disclosed that the leadership rift is linked to the case against Zhou Yongkang, a former member of the Politburo Standing Committee, the seven-person collective dictatorship that rules China.

3 The military industrial complex and the neocon Republicans will surely disrupt: US, China Hope To Avert "Military Confrontation" Zero Hedge.com November 11, 2014 

4 PhotoOp or lasting peace? China's Xi, Japan's Abe hold landmark meeting Reuters.com November 10, 2014

5 China’s new strategy: TRADE and INVESTMENTs Xi Dangles $1.25 Trillion as China Counters U.S. 'Pivot' to Asia Bloomberg.com November 10, 2014

Speaking to executives at a CEO gathering in Beijing, Xi outlined how much the world stands to gain from a rising China. He said outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government will spend $40 billion to revive the ancient Silk Road trade route between Asia and Europe.

6 Bastiat’s law: If goods don’t cross borders, armies will. Has Asia’s peace pact with China been sealed? Yahoo.com China wins support for Asia-Pacific trade proposal November 12, 2014 

7 Could the Chinese government be a closet fan of former US president Theodore Roosevelt whose foreign policy was based on “speak softly, and carry a big stick”? : China Shows Off New Stealth Fighter to U.S. Military Bloomberg.com November 12, 2014

8 More signs of Big Stick foreign policies: Researchers Detail a Spike in NATO-Russia Close Calls New York Times November 10, 2014.

9 As China extends peace, US-Russia spat continues In China, Obama spars with Putin on Ukraine Politico.com November 11, 2014

10 One of the most politically influential think tank the Council of Foreign Relations showcases The Russian Military November 11, 2014

11 Ukraine violence flares as ceasefire collapses CNN.com November 11, 2014. Related Ukraine Digs In to Keep Donetsk Airport From Rebels Wall Street Journal November 11, 2014

12 Fact or Propaganda? Thousands of Putin’s Troops Now in Ukraine, Analysts Say Daily Beast November 11, 2014

13 Injured after airstrike Fate of ISIS leader still unknown CBSNews.com November 11, 2014

14 Fact or Spin? : ISIS Boot Camp Syria: Children as Young as 10 Forced to Behead Syrian Soldiers International Business Times India November 12, 2014

15 More Signs of expansionary US imperialism? US Sponsored “Regime Change” in Burkina Faso? Coup Leader Trained by Pentagon  Lt. Col. Yocouba Isaac Zida follows pattern of other military officers who enter politics Global Research November 11, 2014

16 Mainstream media being dumped for being bought by the CIA? News Report from Russia Insider Lew Rockwell.com November 11, 2014

An excerpt from former assistant secretary of US treasury and former associate editor of the Wall Street Journal Paul Craig Roberts

Germans Abandon Major News Sites in Anger Over Slanted Russia CoverageTriggered by reader disaffection, internet traffic has collapsed for half a dozen major German media websites

What’s going on in the German media is huge. It is one of the most popular subjects on our site.  The US and UK media have been hugely biased in their coverage of Russia, but German media has been far, far, worse, to the point which strains credulity.

Now it turns out that part of the reason is CIA fiddling with German media outlets.  Coming on the heels of the Snowden revelations, this has Germans seriously ticked-off.  Here’s the latest revelation from our correspondent in Germany.

They call it the Ulfkotte-effect. And it’s beginning to resemble an avalanche.

17 Former Soviet Union leader Mikhail Gorbachev warns on Europe: Europe may become irrelevant due to short-sighted policies – Gorbachev RT.com November 8, 2014

Quote of the Day: Gene Selection: Society is built on mutually beneficial co-operation

At his blog, businessman, science journalist and author Matt Ridley discusses the political implication of Gene Selection versus Group Selection:

“Group selection” has always been portrayed as a more politically correct idea, implying that there is an evolutionary tendency to general altruism in people. Gene selection has generally seemed to be more of a right-wing idea, in which individuals are at the mercy of the harsh calculus of the genes.

Actually, this folk understanding is about as misleading as it can be. Society is not built on one-sided altruism but on mutually beneficial co-operation.

Nearly all the kind things people do in the world are done in the name of enlightened self-interest. Think of the people who sold you coffee, drove your train, even wrote your newspaper today. They were paid to do so but they did things for you (and you for them). Likewise, gene selection clearly drives the evolution of a co-operative instinct in the human breast, and not just towards close kin.

It can even drive a tendency to defend fellow members of the group if the survival of the group helps to perpetuate the genes. But group selection is a theory of competition between groups, and that is generally known by another name in human affairs. We call it war. If group selection were to work properly, war would mean the total annihilation of the enemy by the victorious group.

Quote of the Day: Integrity is adherence to your code of moral values

When I speak of establishing a strong moral foundation, I’m talking about possessing a clear set of values that guides your day-to-day behavior. You need to know what you believe in ahead of time so you don’t have to think about the right action to take at the moment of truth.

What do you believe is moral? What do you believe is immoral? What do you believe is ethical? What do you believe is unethical? What do you believe is good? What do you believe is bad?

If you don’t formulate your moral beliefs ahead of time, your actions may inadvertently be based on spur-of-the-moment whims, emotion, or instant gratification. In other words, you’ll be in danger of revising your ethical standards to fit each new situation as it arises, a practice commonly referred to as “situational ethics.”

An individual who engages in situational ethics is someone who does not possess a fixed standard of right and wrong. Right is simply whatever he perceives to be in his immediate best interest at any given time, which is a fool-proof formula for failure.

That’s why it’s so important to decide on a clear, concise set of moral values when your intellect is in control. Then, in highly emotional situations, you’re more likely to act in accordance with the moral standards that you have decided — in advance — to live by.

Which brings us to the subject of integrity. Integrity is an impressive sounding word, one which people like to bandy about rather carelessly. Unfortunately, very few people really understand what the word means, and even fewer practice it — including, and especially, those who expound on it the most.

Integrity is adherence to your code of moral values. It’s one thing to talk about moral values, but quite another to consistently adhere to them.

The above excerpt is from self development author and entrepreneur Robert Ringer—who writes about ‘concentricity’ which he says is the consistency of one’s words and actions—at his website.

HOT: Philippine Industrial Production Turns NEGATIVE in September! (Update: Correction on data: Still POSITIVE)

Remember this?

That’s investments during the 2Q14 statistical GDP. The decline of investments had been concealed by the property bubble that has led the consensus to celebrate the headline 6.4% G-R-O-W-T-H!

Here is what I wrote then: (bold added)

So from the expenditure perspective, 2Q GDP tell us that household growth has been losing momentum, and importantly, investments has been on a decline and has even been accentuated by the “plunge” in durable equipment.

These have been happening outside any weather or external related strains…

Why is this important?

Because investments drive growth. Business spending represents future income, earnings, demand, consumption, jobs, wages, innovation, dividends, capital gains or what we call as growth.

This also means that if the downturn in investments represents an emergent trend, then current rebound may just be temporary and would hardly account for as resumption to “high trajectory growth”.

About a few hours back Trading Economics released the Philippine industrial production data for September:

Surprise! The G-R-O-W-T-H number is NEGATIVE!!! Industrial output has not only been in a decline, it has retrenched in September!

…

Industrial Production in Philippines decreased 1.20 percent in September of 2014 over the same month in the previous year. Industrial Production in Philippines averaged 9.23 Percent from 1986 until 2014, reaching an all time high of 68.60 Percent in April of 1988 and a record low of -26.60 Percent in January of 2009. Industrial Production in Philippines is reported by the National Statistics Office of Philippines.

And more than that, it’s been a short term TREND since May 2014 or even seen from the December 2013 high of 17.8%. 

What is clear is that industrial output has been losing momentum. This validates the ongoing slump in investments. 

So statistical GDP will now depend on external trade, households and the property boom.

However should this momentum continue this is likely to spread to the wider economy as noted above (profits, income, earnings, demand, capex) thus much of the consensus--with entrenched belief that "this time is different"--will face a rude awakening as G-R-O-W-T-H will evaporate.

Tick tock tick tock.

Updated to RECTIFY: 

I guess Tradingeconomics.com made an error so they revised to show a still positive 3.8% for the September data, as can be seen in the new chart.

Here is the modified report:

Industrial Production in Philippines increased 3.80 percent in September of 2014 over the same month in the previous year. Industrial Production in Philippines averaged 9.25 Percent from 1986 until 2014, reaching an all time high of 68.60 Percent in April of 1988 and a record low of -26.60 Percent in January of 2009. Industrial Production in Philippines is reported by the National Statistics Office of Philippines.

NSO data can be seen here.

So while it is not NEGATIVE anymore the declining trend remains.

More Chinese Government Massaging of the Stock Market: The Hong Kong-Shanghai Connect; Added Symptoms of HK’s Bubble: Prison Cell condos

I have been posting here how the Chinese government has been attempting to stoke a stock market bubble (directly or indirectly) in order to camouflage the ongoing deterioration of her overleveraged domestic real economy.

 

The Chinese government has launched “targeted easing” last June, has resorted to selective bailouts of firms which almost defaulted last July, imposed price controls on stock market IPOs last August, injected $125 billion over the last two months and yesterday announced the definite schedule of the Hong Kong-Shanghai stock market link.

From the Nikkei Asia:

With the debut of the Shanghai-Hong Kong stock exchange link next week, China is expected to see inflows of money from investors across the globe -- retail and institutional alike.

Chinese securities regulators said Monday that foreign investors will be given access to Shanghai-listed stocks via Hong Kong, starting Nov. 17. Also, investors in mainland China will be allowed to invest in issues listed in Hong Kong. Limits will be placed on daily and total trading volumes between the two markets.

The Shanghai-Hong Kong link marks an important step for China's efforts to make the yuan a key global currency and open up its capital markets.

China has until now strictly limited cross-border trading for the sake of market stability, giving exceptions only to financial institutions designated under its qualified foreign institutional investor program. But obtaining this status is difficult, and foreign investors have long bought Chinese stocks that are listed in both Hong Kong and the mainland.

Let me say that I am in FAVOR of cross listings. That’s because in theory this allows savings to finance investments or simply connects capital with economic opportunities regardless of state defined boundaries. 

But with the way central banks across the globe has been distorting capital markets, cross listing (part of financial globalization) has become conduits of bubbles. Therefore I am suspicious of the timing of such liberalization. 

The "Hong Kong-Shanghai connect" was initially announced late August. Yet this has benefited China’s Shanghai index more than Hong Kong’s HSI as the latter has been influenced by the October meltdown. As shown above, despite the risk ON environment, HK's HSI continues to substantially underperform.  This is an oxymoron given the HK dollar's peg to the US dollar.

There has been a similar stock market "liberalization" story of late. 

Last July, Saudi Arabia's government announced of the opening of her stock market to foreigners in 2015. The outcome had been a miniature boom-bust cycle. Whatever gains from the “liberalization”, as seen from Saudi’s Tadawul index, has now been completely erased in the face of collapsing oil prices.

Given the short term nature of government pump, the Chinese government would need more gimmicks to keep the stock market bubble inflating.

Yet here is prediction: when this global bubble blows up, the blame will go to foreign money flows or the liberalization that accommodated the bubble rather than central bank policies. 

Even the Philippine central bank, the Bangko Sentral ng Pilipinas, has been conditioning the public on this, as I recently wrote “foreigners are being conditioned publicly as scapegoats to what truly has been an internal imbalance problem only camouflaged by inflated statistics.” 

Oh, as a side note, the underperformance of Hong Kong stocks may be due to concerns of property bubbles. The current fad: prices of prison cells condos running amok!

From another Nikkei Asia article: (bold mine)

Cramped condominiums are increasingly hot properties in Hong Kong, prompting pundits to sound the alarm about an overheating real estate market. 

Large apartments, not to mention single-family homes, are beyond the reach of many in the city, where 7.2 million people reside in an area half the size of Tokyo. But condo buyers are showing a willingness to compromise on space, and major developers are moving to cash in.

Cheung Kong Holdings has drawn attention with its Mont Vert condominium. The smallest studio starts at 1.77 million Hong Kong dollars ($232,861), exceptionally low for the local market. The catch: It measures 16 sq. meters. When the company announced the project, a Hong Kong newspaper compared the studio to a typical solitary-confinement prison cell, which measures 7.4 sq. meters…

The government's index for private-sector housing prices testifies to the popularity of small apartments.

In August, the most recent month with available data, the index hit 260, with 1999 used as a baseline of 100. Look at only condos of less than 40 sq. meters and the index comes to 283; for the 40- to 160-sq.-meter range it registers at 240 to 250.

Flats of less than 40 sq. meters have logged the steepest price increases since the beginning of the year. New highs were set in the four months through August.

Much of the activity stems from speculation. Investors, fed up with prolonged low interest rates, are treating small condos as readily accessible investment tools. Chinese Estates said 80% to 90% of its small flats have been purchased for that purpose.

A senior official at Midland Realty, a leading real estate agency, said investors account for more than 50% of buyers of small flats over the past several months. Up until the middle of last year, the ratio was around 10%…

Some experts worry all of this could spell trouble, since monetary policy in Hong Kong tends to mirror that in the U.S.

Easy money leads to malinvestments, which has been spreading and intensifying everywhere.

80% of Catalonians Say YES to Independence!

Last night I wrote (bold mine) 

Unlike the failed Scottish vote for independence where Scotland has mostly been a tax consumption economy, so in the fear of the loss of the welfare privileges, the elderly stampeded to cast a NO vote to independence, Catalonia has been the main contributor to the Spanish economy with nearly 19% of Spain’s GDP where her GDP per capita is higher than the European Union average (EU-27) according to the OECD.

In short, Catalonians may be fighting to keep their share of production rather than satisfy Madrid’s political interests by redistributing the former’s resources to the latter’s welfare dependent supporters.

Thus should Catalonia’s independence become a reality, this will likely signify a big setback to the already struggling Spanish political economy.

I am not aware of the political agenda of the leaders of Catalonia, whether they will elect to join the EU and adapt the euro or join the EU and decide to have their own currency or operate independently from the EU.

Moreover an independence victory by Catalonia can set in motion or inspire a string of existing and active secession movements around Europe to ask for political recognition. Should this happen this would serve as the death knell for the centralization plans for the Brussels based bureaucracy.

So should the independence vote prevail, there will likely be huge political uncertainties that will dangle over the political economic domain of EU and of Mr. Draghi’s ECB.

Well, Spain’s PM Rajoy, the EU and the ECB's troubles have come to fore as Catalonians has voted overwhelmingly for independence!

From the BBC.com

An informal vote on independence for Catalonia has shown more than 80% in favour, officials say.

The provisional results followed a day of voting across the autonomous region in north-eastern Spain.

The non-binding vote went ahead after Spain's constitutional court ruled out a formal referendum.

Earlier, Catalan leader Artur Mas hailed the non-binding poll "a great success" that should pave the way for a formal referendum…

The 80% Yes…

Voters were asked two questions - whether they wanted Catalonia to be a state and whether they wanted that state to be independent.

Vice President Joana Ortega said that more than two million people had taken part in the "consultation of citizens" and that with almost all votes counted, 80.72% had answered yes to both questions.

Just over 10% voted yes for the first question and no for the second, he said, and about 4.5% voted no to both questions.

Spain’s Mainstream Resists…

The ballot was held in the face of fierce opposition from the Spanish government.

Speaking beforehand, Spanish Justice Minister Rafael Catala dismissed the exercise as "fruitless and useless".

Opinion polls suggest that as many as 80% of Catalans want an official referendum on the issue of Catalonia's status, with about 50% in favour of full independence.

Spanish unionist parties argue that because the ballot was organised by grassroots pro-independence groups it cannot legitimately reflect the wishes of the region.

More than 40,000 volunteers helped to set up and run the informal exercise.

It is obvious that beneficiaries of Spain's welfare state will refuse to have an independent Catalonia, that’s because these groups get their welfare finances from them! The political parasites would essentially lose their financial and economic hosts!

But if the Spanish authorities will defy the wishes of Catalonians, don’t expect a peaceful transition. At worst, the outcome could be a civil war.

Catalonian experience as I noted above will fire up a string of existing and active secession movements around Europe to likewise ask for political recognition. The wave of decentralization has snowballed. 

The existence of the EU, ECB and the euro are now in jeopardy

Bursting Casino Bubble: Singapore Edition

I just wrote about Macau’s deflating casino bubble last night. The proverbial ink has hardly dried when an interesting article surfaced just a few hours back; Yahoo has an article on the Singapore equivalent

The recourse to undercutting and mudslinging…

Singapore's two glitzy casinos are fighting for a shrinking pool of high rolling players as China's corruption crackdown and economic slowdown reduce the number of VIPs at their tables, and the battle is starting to turn ugly.

Gaming mogul Sheldon Adelson, whose Las Vegas Sands runs the Marina Bay Sands resort, has accused rival Genting Singapore's Resorts World Sentosa of relying on overly generous incentives and credit to entice big money players.

Singapore’s major client base has been drying up…

Around half of that VIP business comes from customers from China, which is in the midst of an economic slowdown, while a crackdown on graft now in its second year is making it harder for wealthy Chinese to take money out of the country and discouraging conspicuous consumption.

Visitors from China were down 30 percent to 871,000 in the first half of 2014, according to Singapore's tourism board.

Last month, Las Vegas Sands reported a 34 percent fall in VIP volume business at Marina Bay Sands to $9.1 billion (5.73 billion pounds) in the quarter ending Sept. 30. Genting is expected to report a similar sharp slide in its third quarter results.

Festering consumer credit…

But credit collection is a thorny issue for Singapore casinos, which are already waiting on hundreds of millions of dollars in credit to be repaid by gamblers, the majority of whom are based overseas.

Genting has seen a 61 percent rise in its "trade and other receivables", or money owed by customers, to stand at S$1.2 billion in the quarter ending June 2014 from June 2012, while total revenue has increased by 7 percent in the same period.

In August, Genting Singapore President Tan said the company was prudent in managing its debt collections, citing a S$81 million ($62.5 million) impairment loss it had taken on its trade receivables in the second-quarter versus a S$32 million impairment loss a year-ago.

Las Vegas Sands said in its latest earnings presentation that its "gross casino accounts receivables" for Marina Bay Sands stood at $984 million at the end of September 2014, up 10 percent from September 2012.

So with the drying up of client base, the rivalry between the two Singaporean casino operators have turned acrimonious.

In trying to survive, one firm resorts to the undercutting of the competition, while the other goes to media to scream  “unfair”!

Yet the desperate attempts to garner consumer share with “overly generous incentives” comes with a cost—a surge in bad credit.  Actions have consequences. Aggressiveness  has a price.

The article goes to blame China’s “crackdown on graft” for the plight of Singapore’s casino operators. While this may be partly true, this doesn’t explain the surge in “money owed by customers”.

The article also goes on to look for other excuses to suggest of regional competition, “Another concern is that with new casinos opening in the rest of Asia, VIP players may be looking beyond Singapore to play.”

Again while this may partly be true, but this doesn’t explain why Macau or Singapore casinos being the region’s major leagues have all been enduring top line AND bottom line misfortunes.

The reality is that China’s sputtering economy has been reducing demand for the region's casinos. Political persecution of the opposition (via crackdown on graft) represents only the icing on the cake. Add to this the slowing regional economic growth which should exacerbate demand sluggishness.

On the supply side, zero bound has led to casino operators to overestimate on demand, thus the region's overcapacity which has most likely having been funded by cheap debt.

Now the chicken comes home to roost.

The deflating casino bubble can be seen in their respective stocks…

…Genting PLC

...and Las Vegas Sands owner of Marina Bay Sands

And this signifies the falling revenue-earnings part of the cycle. 

The next phase will be about credit anxieties where bad credit from both the consumer and supply side will become the chief concern.

There will also be a contagion phase.

Again as I wrote in April 2013

At the end of the day, basic economic logic says that all these yield chasing activities (whether the shopping mall, casino, housing and vertical projects) will end badly.