Continued slavish reliance on ratings is puzzling. While individual investors and less sophisticated institutions may be entitled to some protection, it is not clear why large, sophisticated institutions and highly paid fund managers should rely primarily on ratings for investment decisions. Given their fiduciary responsibilities, it is unclear why they should not be accountable for any lack of independent assessment of investments. The methodology and meaning of ratings continues to be misunderstood. While egregious errors may have been made, ratings offer a view only of the risk of non-performance over the life of the security. Ratings are only valid at a point in time, not encompassing migration over the term of the security that may affect the value of investments. Ratings were never intended to provide a basis for pricing risk—Satyajit Das, author
In this Issue
Phisix 8,000: Record Stocks as Political Circus, Where Will Growth Come From?
-Bolder, Intense and More Desperate Gaming of the Index
-The Phisix as Part of the Political Circus
-Government’s Latest 8 Economic Statistics: Where Will G-R-O-W-T-H Come From?
1) Retail price index
2) Wholesale Price Index
3) Producers Price Index
4) Prices of Select Construction Retail Materials
5) Prices of Select Construction Wholesale Materials
6) Industrial Production Output
7) February Exports
8) January Imports
Phisix 8,000: Record Stocks as Political Circus, Where Will Growth Come From?
The massaging of the index has not just become a regular phenomenon but seemingly increasingly bolder, intense and more desperate.
Bolder, Intense and More Desperate Gaming of the Index
“Marking the close” has almost entirely characterized the Phisix performance of last week as shown in the above charts.
I plotted below not only the major “marking the close” trading sessions but also the price differentials between the pre-run off prices (red font) and prices during the run-off phase in order to exhibit the degree of the unscrupulous activities.
From the opening until the last 45 minutes of the session, the local benchmark steadily headed south. But profit taking has been branded as taboo by index managers, so by 2:50 p.m., when the domestic benchmark hit a low of a stunning 2.13% (!), the index managers went to work. They went into their frequent tactical pumping operations which I call the ‘afternoon delight’. The asset pumping activities culminated with a massive marking close.
So what seemed headed for a brutal selloff had been thwarted by index managers!
The table above exhibits the intensity of such actions.
The day’s afternoon-delight pump only trimmed .43% from the lows. However, “marking the close” operations virtually erased .68% of the decline or equivalent to 40% of the 1.7% losses during the last minute! How amazing!
Another major marking the close session occurred on April 22nd. The Phisix was down by .52% through the session’s end, but 66% of that loss had been obliterated by egregious last minute pumping!
Friday April 24th posted another incredible schtick by index managers. The Phisix was up by only .35% during the pre-runoff but closed .7% for the day.
In short, “marking the close” essentially doubled (102%) the gains for the day!
And stunningly, for just the three sessions indicated above, an accrued 108.32 points or an equivalent 1.36% based on Friday’s April 17th close contributed to the remarkable padding of the index from last minute pumping!
In other words, a significant chunk of the positive changes in the Phisix emanated from market rigging! And for the establishment, this has been peddled as C-O-N-F-I-D-E-N-C-E!
Shocking!
The Phisix ended the week essentially unchanged.
And here’s more.
There seems to be a go-to-stock for the grand scheme of market manipulations. Said differently, the market caballers seem to have zeroed in or has come to rely on one particular heavyweight to do much of the index lifting.
That stock has been no other than the largest market cap in the PSE, SM Investments.
In four of the five sessions, SM had been pumped by the index managers (left window). Apparently, despite all the pumping SM lost -.11% for the week. This demonstrates pressures from profit takers on the issue which index managers labored to offset.
SM’s trading activities last Monday April 20th was a humdinger. At the pre-runoff price at 904 (middle pane), SM closed at 930 or just 1 peso off from Apr17 Friday’s close of 931! In perspective of percentages, SM was down by an incredible 2.9% but marking the close eviscerated 96.2% of the stock’s losses. Absolutely stunning!
Friday April 24th posted the same market rigging session for SM but at a lesser degree. Prior to the last minute or the runoff phase, SM was up by only 2 pesos or .2% from Thursday’s close of 913 per share. However, the last minute pump delivered a whopping EIGHTY EIGHT percent of the day’s 1.86% gains!
And because SM has a market weight of nearly 10% (9.77% as of Friday) of the Phisix basket, Friday’s pump doubled the Phisix gains for the day! The pump also neutralized the deficit incurred during the first three days of the week!
(all charts courtesy of colfinancial)
The Phisix as Part of the Political Circus
THIS flagrant manipulation of the index can be tied to the Philippine President’s desire to see Phisix 10,000 by 2016.
As recent record Phisix has been projected, this will be limned as “confidence” on the administration’s economic policies therefore should translate to political capital going into the 2016 presidential elections.
Record Phisix will then help boost chances for the president’s anointed candidate to win the elections. This means Phisix 10,000 will play part in the political public relations (PR) campaign process, thereby deepening the politicization of the stock market.
And a victory by the administration’s candidate will possibly extend the incumbent president’s influence, as well as, his political and economic interests through the next administration.
The second complimentary factor is that Phisix 10,000 would serve as a fanciful claim to the legacy of having delivered economic utopia. That’s if the domestic economy does not falter under his regime.
Yet because credit fueled booms has always been about short term gains followed by reversals overtime, such politicking will extrapolate to credit grabbing of present gains and the eventual passing the blame of a prospective downturn on the economy on the others. This should exhibit the nature of the zero sum and short term orientation inherent to politics.
Of course, even if the economy tumbles under his watch, such will be blamed on external forces.
Another possible supplement to the motivations of sustained market rigging would be to benefit the politically connected elites. Liquidity of the stock market increases with a boom. While liquidity will differ from stock to stock or will be an equity specific issue, stocks on a winning streak will be most likely be the major beneficiaries.
And with the increased traits of moneyness, these firms would be able to easily raise money capital from the public via various security offerings/issuances such as secondary equity offerings, equity placements, IPOs, bonds and or hybrids offerings, at subsidized rates or valuations. Thus, firms that benefit from invisible transfers of resources, and of risks, fostered by financial repression (zero bound rates) and channeled through record stocks will likely promote the status quo and may even be participants in the propping up of the index.
But there is no such thing as a free lunch. This means that the gaming the markets will have natural obstacles. Such limitation can be summed in a word: scarcity.
If such activities signify the use of depositor’s money, then the limit will derive from continued access to such funds, as well as, the profits from “marking the close” arbitrages.
The problem with the latter has been that much of the position being accumulated has been from extremely high valuation levels. Remember, “marking the close” signify as the impudent and reckless bidding up of equities with patent disregard for valuations. The motivation of “marking the close” hasn’t primarily been to generate arbitrage profits but to create impressions or symbolisms.
Further, profits from arbitrages seem very minimal relative to the risk from a downturn.
Additionally, portfolio performance will exert as barrier to access to funding from investor or depositor. This means underperformance from last minute pumps will diminish investor or depositor appetite to inject money on private institutions engaged in such activities.
Yet if such activities emanate from taxpayer institutions the same dilemma prevails; sustained access to taxpayer funding.
However there won’t be any apparent barriers on portfolio performance as taxpayers ultimately will bear the burden of the irresponsible management of fiduciary funds.
Importantly, if funding from the gaming the markets has emanated from credit, then sustained access to credit and the feasibility of leverage positions will serve as innate boundaries.
If markets fail to deliver returns to maintain the viability of any levered portfolio, then this entails required additional infusion of collateral or prospective margin calls. And failure to add collateral will likely mean that index managers will become NET sellers once their respective balance sheets come under financial duress.
In gist, as part of capital markets, stock markets serve a vital role in a market economy. Therefore, politicization of stocks would extrapolate to its deformation. The outcome of broken markets or markets turned into political circuses won’t be what the establishment thinks it would be. That’s because there is such a thing as the law of unintended consequences which arises out of distortions in resource allocations from political interference.
Government’s Latest 8 Economic Statistics: Where Will G-R-O-W-T-H Come From?
If the Philippines G-R-O-W-T-H story has indeed been sound and stock markets reflects on such dynamics, then why the need for manipulations? Interestingly too, why the apparent desperation to prop up the indices?
Could the following statistics serve as reasons?
The Philippine government recently released a chain of statistics based on prices from retail activities, producer’s prices and construction prices, as well as export, import and industrial output.
Unfortunately these statistics hardly seem to support the establishment’s overly sanguine outlook, which supposedly pillars the record Phisix.
And unlike the establishment experts who see prices as merely (statistical) numbers with little import, in a market economy, prices signify as a mechanism that reveals of the decentralized expression of people’s knowledge, preferences and values through the conduct of voluntary exchanges that coordinates the balance of demand and supply.
And because of the coordinating function of market prices, prices and the balance of demand and supply operates on an interactive feedback loop: Changes in prices affect economic balances while simultaneously changes in demand and supply impact prices.
Let us see what government various prices indices have been saying.
1) Retail price index
The National Statistics Authority on the year on year change of February’s retail price index[1] (bold mine): The annual growth in the General Retail Price Index (GRPI) in the National Capital Region (NCR) went up to 2.2 percent in February 2015. Last month, it was posted at 1.8 percent and in February 2014, 1.9 percent. The heavily-weighted food index recorded a higher annual gain of 6.2 percent in February; beverages and tobacco index, 4.4 percent; chemicals, including animal and vegetable oils and fats index, 2.1 percent; and manufactured goods classified chiefly by materials index, 2.7 percent. Slower annual upticks were however, seen correspondingly in the indices of crude materials, inedible except fuels and miscellaneous manufactured articles at 4.3 percent and 1.5 percent. Annual declines were registered in mineral fuels, lubricants and related materials at -21.1 percent and in machinery and transport equipment index, -0.4 percent.
On an annual basis, increases retail price increases had been attributed to mostly food and related prices while oil, manufacturing, transportation and related industries appear register decreases. In addition, the recent decline appear as an ongoing trend from a peak in August 2014.
So what’s driving down prices of manufacturing, transportation and related industries, productivity growth, deluge of imports or a growing slack in demand?
The same agency on month on month changes: On a monthly basis, the GRPI in NCR inched up 0.2 percent in February 2015 from its January level. -The 1.8 percent mark-up in beverages and tobacco index was due to price increments in beer, gin, whisky and selected softdrinks. -Price hikes in gasoline, LPG, diesel fuel and kerosene pulled up the index of mineral fuels, lubricants and related materials by 0.7 percent. -Price add-ons in selected paint products and laundry soap effected a 0.2 percent growth in chemicals, including animal and vegetable oils and fats index. -The monthly change in the miscellaneous manufactured articles index moved up by 0.4 percent as prices of selected ready-made clothing, undergarments, footwear items and jewelries were on the uptrend. -The heavily-weighted food index went down by 0.1 percent as prices of chicken, eggs, rice, fruits and vegetables were pegged lower during the month.- Downward price adjustments were seen in gravel and sand. This resulted to the 1.3 percent decline in the index for crude materials inedible except fuels. -The 0.4 percent drop in machinery and transport equipment index was brought about by the price reductions in electrical wiring devices and in recorded music CD.-The index of manufactured goods classified chiefly by materials rose 0.1 percent. This was due to the price upticks in cement and wire nails.
On a month on month basis, food and oil traded places, yet construction and manufacturing related goods or supplies remains under pressure.
So what has been pressuring prices of manufacturing, transportation and related industries goods to the downside? Again, has this been about productivity growth or deluge of imports or instead a growing slack in demand?
On a month on month basis, Philippine retail prices even experienced DEFLATION (taken in the mainstream definition of contracting prices of goods)!
So what has brought about deflation?
Yet what signifies the relationship between languid February retail prices relative to the continuing downdraft in 2014 4Q HFCE and 4Q retail output with sharply slowing OFW remittance growth, the recent crash in M2 and CPI and decelerating banking loans?
Have these been collectively suggestive of demand growth? Or the lack of it?
And by the way, 4Q retail prices seem to reinforce the data provided above also provided from the government.
So, again whatever has been happening to the much ballyhooed consumer boom story?
Has 4Q 6.9% GDP been nothing but a government statistical pump?
2) Wholesale Price Index
The NSA on Year on Year changes of Wholesale price indices[2] (bold mine): The General Wholesale Price Index (GWPI) at the national level continued to decline as it recorded a negative rate of 5.1 percent in February. In January, it decreased by 6.6 percent and in February last year it had a positive growth of 3.9 percent. The drop was mainly attributed to the decreases in the annual rates of crude materials, inedible except fuels index at -6.8 percent and mineral fuels, lubricants and related materials, -33.8 percent. Slower annual gains were likewise noted in chemicals including animal and vegetable oils and fats index at 2.2 percent and machinery and transport equipment index, 2.7 percent. On the other hand, higher growths were seen in heavily-weighted food index at 7.6 percent; beverages and tobacco index, 6.8 percent; manufactured goods classified chiefly by materials index, 2.0 percent; and miscellaneous manufactured articles index, 1.9 percent.
Practically the same story with retail price index: Strong gains in food and related items but weak or tepid growth in manufacturing, transportation and related industries goods.
The consequences from spikes in Q2 and Q4 2014’s wholesale activities have most likely contributed to wholesale price pressures as I previously noted[3]:
And another paradox, even as retail activities significantly ease, there has been spike in wholesale trade output. Wholesale output has zoomed to the highest level since 2013!
Has importers and manufacturers been engaged in channel stuffing or forcing wholesalers to acquire more inventories than required?
And what has the ballooning divergence between wholesale and retail trade tell us? It tells us that if retail activities don’t improve significantly soon, there should be a huge inventory build-up on the wholesalers. If the goods are perishable, then this will translate to losses soon. If goods are non-perishable, then the accrual of surplus inventories should imply of a big slowdown in wholesale trade activities which should be transmitted to consumer goods imports or consumer based manufacturing.
In other words, a surge in the supply build up as demand faltered may have contributed meaningfully to the pressures seen in the wholesale price index.
Again whatever happened to the much heralded consumer growth story?
3) Producers Price Index
The NSA on annual and monthly changes to producer’s prices: Producer Price Index[4] (PPI, 2000=100) for manufacturing falls by 5.1 percent in February 2015 compared to negative 0.8 percent posted in February 2014. Thirteen of the twenty major sectors posted decreases led by the significant decreases of petroleum products (-26.3%), furniture and fixtures (-24.7%) and wood and wood products(-12.5%). On the other hand, only five of the twenty major sectors registered increases led by rubber and plastic products (2.9%) and tobacco products (2.9%). On a monthly basis, PPI posted increments after manifesting negative monthly growth rates since October 2014. This can be traced to the increases of five sectors led by the heavily weighted petroleum products (8.7%). Furthermore, seven sectors posted decreases while seven sectors remained flat.
Let me repeat: negative monthly growth rates since October 2014… yes price DEFLATION again! Price deflation appears to have not only been spreading to cover input prices on manufacturing firms, on monthly or even to yearly basis, but it seems to also be deepening.
Has this been due to productivity boom or again a torrent of imports or due to developing slack on manufacturing activities?
Weak retail, weak wholesale and now weak producers prices, all of which has been a carryover from late 2014.
4Q 2014 6.9% GDP, really?
4) Prices of Select Construction Retail Materials
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The NSA on annual and monthly prices changes of select retail construction materials this March[5]: The annual increase of the Construction Materials Retail Price Index (CMRPI) in the National Capital Region (NCR) further eased to 0.1 percent in March 2015. It was posted at 1.5 percent last month and 1.2 percent in March 2014. Annual declines were noted in the following commodity groups: electrical materials index, -2.2 percent; plumbing materials index, -0.4 percent; and miscellaneous construction materials index, -5.6 percent. In addition, slower annual upticks were seen in masonry materials index at 1.2 percent; painting materials and related compounds index, 2.2 percent and tinsmithry materials index, 1.7 percent. On the other hand, a higher annual gain was noted in carpentry materials index at 2.9 percent. On a monthly basis, the CMRPI in NCR further dropped by 0.6 percent in March 2015. Last month, it declined by -0.5 percent. Monthly decreases were observed in electrical materials and masonry materials indices at -1.1 percent; plumbing materials index, -1.7 percent; tinsmithry materials index, -0.1 percent; and miscellaneous construction materials index, -3.1 percent. The index for painting materials and related compounds moved at it’s last month rate of 0.1 percent while that of carpentry materials index had a faster monthly gain of 0.6 percent. Prices of selected electrical wires and wiring devices, gravel, sand, plumbing fittings, corrugated GI sheets and steel bars were generally quoted lower during the month. On the other hand, plywood was priced higher during the period.
Wow, retail price DEFLATION on a broad array of construction items!
Has falling prices been due to a surge in domestic output of suppliers, a tsunami of imports or growing demand slack?
Whatever happened to the key driver of 4Q 2014, the construction boom story?
5) Prices of Select Construction Wholesale Materials
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The NSA on annual and monthly prices changes of select wholesale construction materials this March (bold mine)[6]: The Construction Materials Wholesale Price Index (CMWPI) in the National Capital Region (NCR) still posted a negative rate of 1.2 percent in March. In February, it was recorded at -1.4 percent and in March 2014, 2.4 percent. The decrease was brought about by the decline in the annual rate of fuels and lubricants index at -21.5 percent. Contributing also to the downtrend were the slower annual gains in the indices of sand and gravel (2.5%); G.I. sheet (1.0%); reinforcing steel (1.2%); structural steel (1.1%); tileworks (0.9%); and plumbing fixtures and accessories (6.6%). The rest of the commodity groups either had higher annual mark-ups or retained their last month’s rates with the machinery and equipment rental index still registering a zero growth. Measured from a month ago level, the CMWPI in NCR grew by 0.4 percent in March. This was primarily due to the 3.0 percent growth in the fuels and lubricants index. In addition, the index of sand and gravel and electrical works went up by 0.2 percent; hardware index, 0.4 percent; plywood and plumbing fixtures and accessories indices, 0.6 percent; and lumber index, 0.1 percent. Slow-paced growths were, however, seen in the indices of concrete products and PVC pipes at 0.1 percent and 0.2 percent, respectively. The indices of doors, jambs and steel casement and painting works retained their previous month’s rate of 0.1 percent while the other commodity groups had a zero growth. Upward adjustments in the prices of gasoline, diesel and fuel oil were noted during the month. Prices of sand, gravel, concrete and finishing nails, plywood, lumber, PVC doors, door jambs, electrical wires, some plumbing fixtures like kitchen sink and paints were also higher in March.
On a monthly basis, the posted improvements appear to be in divergence with retail activities. Will wholesale construction activities mirror the dynamics of general wholesale activities?
Has the recent gains in wholesale activities been about direct sales to government?
Nonetheless, in general, what has the listless price activities of retail and wholesale construction materials been indicative of? A surge in domestic output of suppliers? A wave of imports? Or developing weakness in demand?
Again whatever happened to the key driver of 4Q 2014, the construction boom story?
6) Industrial Production Output
Has there been a production boom during the first two months of 2015?
The NSA on the Value and Volume of Production[7]: Value of Production Index contracts in February 2015 Value of Production Index (VaPI) decelerated as it posted an annual decrease of 2.0 percent in February 2015, according to the preliminary results of the Monthly Integrated Survey of Selected Industries (MISSI). Ten major sectors showed significant decreases in VaPI as follows: furniture and fixtures (-51.9%), petroleum products(-30.8%), footwear and wearing apparel (-19.6%), rubber and plastic products (-16.3%), and chemical products (-15.9%). Volume of Production maintains its positive rate in February 2015 Volume of Production Index (VoPI), however, grew at a slower rate of 4.4 percent in February 2015 compared with 6.0 percent growth during the same period of last year. The increment was mainly due to the improved performance in production output observed in 12 major sectors, with two-digit increases reported by the following: leather products (86.8%), tobacco products (55.2%), printing (51.4%), basic metals (38.8%), beverages (38.6%), textiles (20.3%), non-metallic mineral products (17.5%), wood and wood products (16.2%), and paper and paper products (15.1%).
And it has not just been in output but in net sales as well
The NSA on Value and Volume of Net Sales (bold mine): Value of Net Sales Index posts a negative rate Value of Net Sales Index (VaNSI) shrank by negative 0.5 percent in February 2015 compared with 9.6 percent growth registered in February 2014. Five major sectors that largely contributed to the reduction in VaNSI were: petroleum products (-25.7%), printing (-26.0%), footwear and wearing apparel (-23.2%), miscellaneous manufactures(-11.2%), and wood and wood products (-10.3%). Volume of Net Sales Index gains in February 2015 Volume of Net Sales Index (VoNSI) attained a slower growth of 6.1 percent in February 2015 compared with 10.5 percent growth during the same month of last year. The increase was brought about by the expansion in sales output of 15 major sectors, with significant increases noted in the following: furniture and fixtures (39.9%), basic metals(35.0%), transport equipment (26.8%), chemical products (21.2%), fabricated metal products (21.2%),textiles (17.1%), leather products (16.0%), and non-metallic mineral products (13.4%).
Wow. Significant declines in both production and sales. Industrial activities seems to be slowing considerably.
7) February Exports
The NSA on Philippine exports as of February[8] (bold mine): The Philippines’ export earnings totaled $4.513 billion in February 2015, a 3.1 percent decrement from $4.657 billion recorded value in February of 2014. The negative growth was mainly brought about by the decrease of six major commodities out of the top ten commodities for the month and these were: woodcrafts and furniture; other mineral products; metal components; electronic equipment and parts; other manufactures; and machinery and transport equipment. Furthermore, aggregate merchandise exports for January to February 2015 likewise registered a 1.8 percent decrease from $9.036 billion in 2014 to $8.869 billion in same period of 2015).
One quarter of contraction!
Have exports and OFW remittances been singing the same tune?
8) January Imports
The NSA on January imports[9] (bold mine): The country’s total external trade in goods for January 2015 amounting to $5.108 billion, declined by 14.2 percent from $5.955 billion recorded during the same period a year ago. The decrease in total imports for this period was due to the negative performance of eight out of the top ten major commodities for the month. These were: Transport Equipment; Mineral Fuels, Lubricants and Related Materials; Iron and Steel; Organic and Inorganic Chemicals; Plastics in Primary and Non-Primary Forms; Industrial Machinery and Equipment; Other Food & Live Animals; Miscellaneous Manufactured Articles. The balance of trade in goods (BOT-G) in January 2015 registered a deficit of $751.54 million lower than the $1.576 billion trade deficit in the same period last year.
Wow. Philippine imports collapsed last January! Why? Has this been due to unabated smuggling or a dramatic weakening of internal demand or a combo?
In summary, frail retail and wholesale price activities which likely implies a still feeble consumer, deflation in producers prices and weakening of industrial output which possibly reflects on manufacturing conditions and falling retail and wholesale construction material prices which probably extrapolates to diminished construction activities, as well as, cascading external trade via slumping exports and imports…so where the heck will high economic G-R-O-W-T-H come from???
The bizarre thing has been that government GDP statistics contradicts their other statistics.
Nonetheless as 4Q GDP shows, since G-R-O-W-T-H represents merely statistics, they can conjure anything from it, or like a rabbit, G-R-O-W-T-H can be pulled out of the hat.
As caveat, if 1Q 2015 statistics should reflect on a big downside adjustment, then expect the BSP to use this as pretext to cut rates.
Wonder why the desperate attempts to pump the Phisix? To hope that record stocks can sway sentiment and reverse current downshift.
But it has not just been a Phisix pump now; the yield of 1 month Philippine treasury bills has been undergoing tremendous amounts of pump and dump volatility.
Why? Could it be that these have signs of growing pressures on short term financing?
Finally have my past warnings [10] now been in motion?
And slowing money supply will now put pressure on profits derived from the narrowing window of price arbitrages from previous money supply expansion. This will begin to negatively impact capital expansion, thereby slowing increases in income that will be reflected on reduced demand or consumer spending. As the supply side growth skids, malinvestments will begin surface in terms oversupply and debt burdens. This means that the process of diversion of resources—from productive to non-productive speculative capital consuming sectors—will slowdown. There will be a feedback loop between debt burden and growth. And once the problems become evident, the process of market clearing via liquidations and asset value mark downs will accelerate. Boom will morph into a horrific bust.
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