All
fixed set patterns are incapable of adaptability or pliability. The truth is
outside of all fixed patterns.—Bruce Lee
In this issue
Phisix 7,100: Surprise! ICTSI Chief Enrique
Razon Warns: Another Financial Crisis is COMING!!!! SM Plays with Fire!
-Surprise! ICTSI Chief Enrique Razon
Warns: Another Financial Crisis is COMING!!!!
-SM Group Plays With Fire: SMPH’s Race to
Build Capacity Financed by Debt
-More Playing with Fire: SMIC’s Declining
Earnings Trend as Capacity Expands
-BSP
and Media’s Up is Down,
High is Low, More is Less
-Phisix 7,100: Sluggish Trading
Actions as US Dollar-Asia/Peso Likely Higher on US Jobs Report
Phisix 7,100: Surprise! ICTSI Chief Enrique
Razon Warns: Another Financial Crisis is COMING!!!! SM Plays with Fire!
Surprise! ICTSI Chief Enrique Razon
Warns: Another Financial Crisis is COMING!!!!
Wow, this is
absolutely stunning!
For me, this explosive
revelation by International Container Terminal Services Chairman and President
Enrique Razon’s signifies a thundering breakthrough!
Mr. Razon reverberates
on my theme in this interview with Nikkei Asian Review[1]…
(bold mine)
Q: You have been critical on how monetary
authorities are addressing economic issues through stimulus programs.
A: I think it's nonsense, and we will pay a big price for this. What
is happening is that asset valuations
are growing. Debt is being taken on in unprecedented scale by everybody in
the last five to six years. The economy is suffering from overcapacity and lack
of demand. So capacity is more than
demand, but people are still
expanding. I think this is a recipe for something not good.
Q: Do you agree with those who say another
crisis is on its way?
A: I think that is for sure. The crisis is getting bigger and bigger because there
is more money. Another Asian crisis is
possible, probably just around the corner with currency devaluation. We
just hope companies are better prepared.
Why breakthrough?
This comment
hasn’t come from an opinion writer or a lowly investor, like me. And they are
not statements from multinational agencies like the Bank
for International Settlements, the IMF or the OECD.
Instead, Mr. Razon, whose wealth emerges out of economic rent
or as per Wikipedia—“benefit received for
non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities”—from
the political
(monopolistic) privilege granted by the government to operate a port company,
represents one of the entrenched
politically connected elites.
Mr. Razon
according to the updated
Forbes November 5 data, has an estimated wealth of $3
billion. He ranks FIFTH in the Philippines wealthiest roster and holds the
291st spot among the world’s wealthiest.
In essence, with
this interview, Mr. Razon seems to have
broken ranks with his colleagues! (more on this below)
And by stating
that “another Asian crisis is possible”, and given that
Asian crisis means a crisis of several nations within region, as exhibited by
the 1997 episode, it shows that he may believe that the Philippines
would be involved. Though he did not make this explicit in the public
discussion with foreign media. (Keeping quiet on local front would be
understandable)
However, notice
that Mr. Razon attempted to deodorize on his premises he propounded on. That
because if another “Asian crisis is possible, probably just
around the corner with currency devaluation”, which has been pillared from “capacity
is more than demand”, that presently is being aggravated by people who “are
still expanding”, then obviously it would be logically incoherent to think and
say that “companies are better prepared”.
Crises exist because people go to the extreme ends
to blindly IGNORE risks while imbibing immeasurable amount of leverage. Or in
general, if people running companies have been prepared, then there won’t be a
crisis at all!
There would not be a massive clustering of entrepreneurial
errors or malinvestments from the brazen misreading of the economic environment.
Since the accumulation of such maladjustments and imbalances are unsustainable,
they lead to an eventual unravelling or a disorderly market clearing process.
And this counterbalancing process would be expressed or ventilated through
recessions, or at worst a crisis.
Debt is a merely a symptom of malinvestments.
And such concentrated scale of misallocation of
resources can only occur through the tampering of money prices through
inflationism (e.g. negative rate policies).
Well, MR. RAZON
should know of what he admonished about. His businesses span the world.
Moreover, this partly
explains ICTSI’s 50% capex cut for 2015. The capex cut
was announced last October that was INTENDED for THIS year.
Yet if he is
serious about his prognostication, then ICTSI and BLOOM’s capital expenditures should be ALL about capital replacement NOW!
CAPEX or capital
expansion should be done at the peak or during the heat of the crisis! Yes, you read me right…EXPAND WHEN
EVERYBODY SELLS or WHEN EVERYBODY ECONOMIZES!
Crises are sources of MAJOR economic opportunities.
It’s where market share can be expanded (as competition ebbs)! And it’s where the
TEN baggers are made!
And crisis
investing was exactly how
the legendary John Templeton built his empire! In the
post-great depression era, Sir Templeton famously leveraged (borrowed money) to
buy 100 shares in 104 companies that had been priced at a USD dollar or LESS!
Mr. Templeton’s bargain hunting included 34 companies in bankruptcy! Sir
Templeton deftly played the law of averages to convert a heap of garbage into a
mountain of gold!
But I am not sure
Mr. Razon’s casino venture has been prepared. Of course, that’s unless if he had
subtlety insured this for himself in means that have not been visible to the
public…yet.
But this could
come at the expense of the other equity holders and creditors, or even domestic
media. Said differently Mr. Razon may be going against the interests of his and
ICTSI/BLOOM’s present business and social network. But that’s unless, again, if
he has commenced to reconcile his recently revamped views with his networks.
This would also
mean going against the political tide of propping up a farcical boom predicated
on “capacity is more than demand” financed by “debt is
being taken on in unprecedented scale by everybody”.
So taking on a
full frontal with the view that a ‘crisis-is-coming’ and ‘another Asian crisis is possible’ could mean
relational or network strains.
And if he has
been preparing for a crisis, considering that he foresees “another Asian crisis is possible”, through “currency devaluation” then
this should mean that much of his personal money (or even
ICTSI’s money) must have shifted or may have likely gravitated, or has been in
the process of transferring, to US dollars or US dollar denominated assets
(T-bills?).
Oddly, last
August, ICTSI
raised USD $450 million. Borrowing US dollar where the
firm’s revenues are mostly in pesos would mean more pesos to service USD
liabilities. And a weak economic environment here and abroad should magnify the
repayment strains.
So getting
exposed with USD liabilities can only be sign of (previous) bullishness or cash
flow predicaments.
Mr. Razon’s change
of heart: Bullish August—then suddenly—bearish October?
If so, ever
wonder why the peso remains weak?
How much more if
the other elites join the bandwagon? (Of course, markets will force them eventually)
Will the USD Peso
break 55?
And where will
the Phisix be headed for under Mr Razon’s scenario? 10,000 or 3,000?
And what will
happen to domestic “capacity is more than demand” and of big companies run by people
who “are still expanding”?
Curiously, Mr.
Razon’s opinion appeared in foreign media and NOT in domestic media.
Will he be
censored here? So far I have seen no extended coverage of this comment.
Will he retract,
or sanitize or downplay or say that he had been misquoted from this radical politically
incorrect perspective? Certain quarters will likely take his dissenting view
with vehemence.
Or will he boldly
pursue “we will pay a big price for this” because “debt is
being taken on in unprecedented scale” which should escalate
on the snowballing sentiment that would hasten the reversal process of this quack
boom?
Mr. Razon’s ICTSI
share prices had been thrashed by an astounding 13.7% this week! Could this
have signified a backlash from his latest ‘politically incorrect’ from his out
of the box views?
Finally, it’s
really fascinating for him to criticize monetary measures in addressing current
conditions where he says as “I think it's nonsense and we
will pay a big price for this”. Basically, he and
his firms had been major beneficiaries from such invisible transfers/subsidies.
In effect, Mr.
Razon seems to have had a surfeit of such subsidies to say enough is enough! He
appears to have recognized of the massive imbalances that arose and accreted from
these which may have begun to affect his interests.
And now he seemed
to have renounced it—a proselytization! Curiously, aside from personal
experience, what other influences could have prompted his tergiversation?
And if my interpretation
is right about his conversion, then kudos to Mr. Razon!
Mr Razon can help
awaken, educate, inspire and lead the public to a crusade to put to an end to such
unscrupulous redistributive practice from central banks. Such policies are the
nucleus of crises. Yes this should include the BSP’s financial repression
policies.
SM Group Plays With Fire: SMPH’s Race to
Build Capacity Financed by Debt
The statement “capacity is more than demand, but people are still expanding” represents
what I call as the race to build supply financed by debt. The outcome from such
carefree activities will not just be excess capacity but tensions in the credit
environment.
There is no
splendid example than to witness SM Group’s SMPH first declare a ‘strong’ 3Q earnings,
then a day after, announce the issuance of Php 15 billion worth of retail bonds to finance “mall expansions and refinance loans of the
company”.
People are
entranced by the surface. They seem to hardly care about what’s under the hood.
For me, there
would be no problem to raise money to “finance mall
expansions”. But it would be a different animal when bonds are raised to “refinance
loans of the company”.
Just what happened to all those supposed “strong earnings”? Just where exactly are those earnings to be
found? Why haven’t the firm been generating enough cash flows enough to cover internal
debt refinancing to prompt them to borrow externally?
Does anyone care?
Of course,
through negative real rates, borrowing from the public means not only the
transfer of resources via claims on SMPH’s future revenues, but likewise the
transfer of various risks from SMPH to creditors predicated on SMPH’s business
undertakings. Or simply said, if SMPH’s ventures fail, savers who lent money to
them take the hit.
Borrowing to
refinance loans are symptoms of neo-Keynesian Hyman
Minsky’s Ponzi finance pathology. For Minsky, insufficient
cash flows generated to pay interest and principal from operations makes a ‘Ponzi’
borrower mainly dependent on sustained appreciation of asset values to
refinance debt. This is aside from debt rollovers to bridge the financing gap.
To be clear, I am
not saying SM Group is into Ponzi Financing, instead I am saying that SM’s current business template appears to be
headed for one. Besides, I am only using the SM Group as representative of
the conventional debt financed ‘capacity is more
than demand’ dynamic. By market cap, SM accounts for
the LARGEST domestic firm at the PSEi, while subsidiary SMPH accounts for the
FIFTH largest (as of Friday). This demonstrates of the scale of resources and
financing involved by the SM Group relative to the formal economy.
I wrote about SMPH’s
booby traps in the 1H, apparently such dynamic has only
been amplified…
The following
excerpts are from SMPH’s 3Q 17Q report published at the PSE[2].
(bold mine)
Rent: SM Prime recorded consolidated revenues from rent of P29.41 billion in 2015, an increase of 11% from P26.44 billion in 2014. The increase in rental revenue was primarily due to the new malls and expansions opened in 2013 and 2014, namely, SM Aura Premier, SM City BF Parañaque, Mega Fashion Hall in SM Megamall, SM City Cauayan, SM Center Angono and SM City Bacolod Expansion, with a total gross floor area of 652,000 square meters. Excluding the new malls and expansions, same-store rental growth is at 7%. Rent from commercial operations also increased due to the opening of SM Cyber West and Five E-Com Center. Also, rentals from hotels and convention centers contributed to the increase due to improvement in average room rates and occupancy rates.Real Estate Sales: SM Prime recorded a 4% increase in real estate sales in 2015 from P15.97 billion to P16.62 billion primarily due to increase in sales take-up and higher construction accomplishments of projects launched in 2010 up to 2013 namely, Jazz, Wind, Green, Breeze, Grace, Shore and Trees Residences accounting for 60% of total revenues from real estate sales. Actual construction of projects usually starts within one year from launch date and revenues are recognized in the books based on percentage of completion.SM Prime’s malls business unit has fifty four shopping malls in the Philippines with 6.8 million square meters of gross floor area and six shopping malls in China with 0.9 million square meters of gross floor area. For the rest of 2015, the malls business unit will open one new mall located in SRP Cebu, as well as expansions of SM City Iloilo and SM City Lipa. SM City Cabanatuan and SM Center Sangandaan were opened in October 2015. By end 2015, the malls business unit will have 55 malls in the Philippines and six in China with an estimated combined gross floor area of 8.3 million square meters. SM Prime currently has twenty seven residential projects in the market, twenty five of which are in Metro Manila and two in Tagaytay. For 2015, SM Prime’s residential unit will launch about 12,000-15,000 units in total in the cities of Taguig, Quezon, Mandaluyong, Las Piñas, Parañaque and Pasay at the Mall of Asia Complex. SM Prime’s Commercial Properties Group has five office buildings with an estimated gross leasable area of 203,000 square meters. Currently, Three E-Com Center is under construction scheduled for opening in 2018.
Let us simplify
by dividing the above disclosure into growth in terms of demand and supply.
Demand side growth: (year to
date) Total rental 11%. Same store rent 7%. Real Estate 4%
Supply side growth:
-Mall (year to
date): 6,148,000+652,000 sqm= 6,800,000 sqm or 10%
-Real Estate:
SMPH’s declared inventory 79,741 units from 2003 (not in the above, but from
SMPH’s presentation). Additional 12K equals 15% or 15k equals 18.8%.
Analysis
Rent: A back of
the envelop calculation tells us that 10%
of new stores delivered ONLY FOUR PERCENT 4% of overall year to date growth!
So whatever happened to the other new
stores or the 6% of inventories? They remain as vacant spaces? So store
occupancy rate must falling even as earnings rise.
Given the huge
surge in property prices as discussed last week, same store rent are most
LIKELY about RENTAL INCREASES more than they are about royalty (overriding)
fees on sales.
And despite the
new store inventories (10% growth), year to date rental growth has fallen marginally
from 11.72% in 2014 to just 11.24% in 2015 (see right).
Again why are growth rates falling when massive
inventories are being added? As Mr. Razon noted, because capacity is (growing) more
than demand?!
The law of diminishing returns as defined by Wikipedia, “the
decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the
amounts of all other factors of production stay constant”.
Has the law of diminishing returns been plaguing the
main source of revenue of SMPH: shopping mall rentals?
For now it isn’t problem. But later it will be a big
problem, particularly when costs overwhelm sales.
Let us move to real estate.
In an investor presentation, SMPH noted that
since 2003 its real estate segment SMDC produced 79,741 units. So in the past
12 years the firm produced an average of 6,645 units. This means that the
current proposed and launched projects have been more than double the average.
But SMDC’s expansion spree has only been
from 2010 (see left). So it would be better to vet on SMDC’s activities from
2010.
From SMPH’s SMDC data, I estimate that 80%
of unit launched were declared as units sold. That’s could because in 6 years,
there has been only 2 years where unit sold exceeded unit launched. As noted
above, units launched are pre-selling projects, where construction happens a
year after the launch. So sales can take place even when the project is yet to be
constructed.
In 3Q 2015, SMDC posted a sales growth of
just 6.89%. This is substantially lower from last year’s 18.11%. But from a
year to date basis, real estate sales grew by just 4.11% from last year’s
1.11%.
So
real estate sales of SMPH have been slowing (in the 3Q) which somewhat
dovetails the slowdown shown in other real estate companies.
Importantly, condo units inventory (year to
date) shows that based on peso, supply of condo units ballooned by 36.245% even
as sales posted only 4% growth!
So
beneath those rosy numbers seem to be developing mismatches between supply and
demand.
Take note. No matter how one tries to shift
the angles, supply side growth has zoomed disproportionately relative to demand
side growth.
Of course, media regales the public with
reservation sales as they did in 2014 but this has yet to be converted into sales
and importantly cash flows!
You see now why SMPH needs to borrow? The
cost to finance supply expansion has been greater than demand growth (sales)
More proof.
I earlier asked “Just
where exactly are those earnings to be found”?
Well, trade receivables serve as a big part
of that answer
Trade receivables, as defined by SMPH, are
from sale of real estate which “pertains mainly to sale of condominiums and
residential units, at various terms of payment”.
In short, trade receivables are
manifestations of SMPH’s vendor financing
scheme platform. SMPH lends to its real estate customers, say down payment,
which the latter pays in installments or “various terms of payment”.
To be clear, there is no money transfer
from the developer to the buyer, lending comes in the form of staggered
payments or installments on agreed portions of the sale contract (say down payment)
that are internally financed by the company.
So while trade receivables are considered
in accounting as “current assets” or as defined by Investopedia, “the value of
assets that can reasonably expected to be converted into cash within a year”, it
is worth emphasizing that the uncollected or due sales translate to future and
NOT present cash flows. Down payments,
for instance, can extend by more than a year (up to five years).
SMPH’s
earnings are thus tied to the collection of these receivables which means the
company’s profits are mostly ‘accounting profits’. That’s because NO collection means NO realization
of profits.
Yet trade collections are by no means a
guarantee. They could most likely be subject to economic fluctuations.
SMPH’s trade receivables (uncollected
sales) account for nearly a third of
the company’s current assets.
Trade receivables have slightly been down
this year from last year, but this may partly be due to the low rate of sales
growth and partly from the completion of earlier down payments and its
consequent migration to bank financed loans for the balance of the sales
contract, as well as, to full cash payments.
So
given the rate of inventory (condo units) expansion that has been
insufficiently backed by cash collections derived from accounting sales,
naturally a financing gap arises.
Besides, as earlier noted, the rate of supply
side expansion has been growing faster than even top line growth
SMPH’s cash flow statement reveals of its
heavy dependence on bank credit to finance BOTH its sales and the delivery of
its products.
And that
financing gap—particularly from supply side expansion growing faster than top
line sales and from cash collections—signifies what the Php 15 billion retail
bond offering has been about—which officially has been stated as to finance
“mall expansions and refinance loans of the company”.
This
is the essence of SMPH-SMDC’s real estate growth story: an economic model heavily
based on leverage.
The problem with SMPH’s leverage model is that when an
economic downturn takes place, this will likely hit FIRST SMPH’s real estate market
through its potential and existing customers. This will affect not only topline
sales, but then filter and spread into trade receivables (via loan impairments),
cash flow and overall debt, notwithstanding, the excess inventories and those
jobs and supplier-creditor networks attached to them.
In addition, a weak real estate market will compel
companies operating like SMPH to become increasingly dependent on access to
debt in order to finance existing debt—Debt IN Debt OUT—hence the pathway
towards Ponzi financing.
So SMPH-SMDC depends on a trajectory of sales growth
predicated on sustained expansion of credit. Or stated differently, because the
company’s business model relies heavily on credit expansion for its prosperity
and for survival, the company depends on a continued inflationary boom, as
evidenced by the continuing surge in prices of properties, facilitated and
enabled by BSP subsidies.
Moreover, the swelling of trade receivables are
manifestations of the invisible redistribution mechanism of the BSP’s financial
repression policies. Easy money policies have only stoked artificial demand for
properties through credit accommodation, in particular, through vendor
financing. The artificial surge in
demand from mostly a small segment of society has ignited unsustainable
property inflation which has serious economic wide side effects.
Unfortunately, there is no such thing as free lunch
forever.
Thus with little margin for error, SMPH’s current real estate growth model would
be tantamount to playing with fire. And to play with fire, one risks getting
burned.
More Playing with Fire: SMIC’s Declining
Earnings Trend as Capacity Expands
In 2013 SMDC was
merged with SMPH. Here is a guess why the merger took place. SMPH’s shopping
malls has been popularly seen as a cash cow. Perhaps SMDC or the real estate
segment has been seen by the owners as a fragile venture. Through the merger,
the revenues from shopping malls are supposed to hide such fragilities or
subsidize any deficits that would be incurred by SMDC in the event of a
downturn. On the other hand, a boom on the real estate would amplify or
compliment mall revenues. This seemed like a neat strategy. But this strategy
depends on the premise that SMPH’s shopping malls would continue to serve as
cash cows.
Since SMDC
was merged with SMPH in 2013, the real estate
data provided by SMPH has been limited.
Nonetheless 3Q
results from parent SMIC was also announced last week. But the announcement
came without the corresponding 17Q yet. So I will just quote relevant portions
of the disclosure based on media.
First parent SMIC
reported earnings grew by 7% for the first 9 months.
Next the retail
operations: Retail operations under SM Retail, Inc. netted P4.6 billion in the
nine-month period, up 21% year-on-year, on the back of a 6.5% jump in total
sales to P145.3 billion. At end-September 2015, SM Retail had a total of 294
stores, comprising 51 department stores, 41 supermarkets, 43 hypermarkets, 130
Savemore stores and 29 WalterMart stores…[3]
From another
report…The group’s food retail group, SM Markets, expanded in both urban and
rural communities in various parts of Luzon, Visayas and Mindanao. This
unit added 20 new stores, mostly standalone Savemore stores.[4]
I find these reports intriguing due to the
absence of same store sales number in media’s report.
In the 1H, I posted that same store
sales growth (year on year) for SM department stores at 3.7% and
for SM food retailing group 1.2%. In the 1H, SMIC
earnings grew by 10%.
So with income down by 3 percentage points how did same store sales
perform? Why is this important?
Same store sales provide an
insight of consumer spending activities in the lens of the largest retail
chain.
The government says that household
consumption grew by 7.2% and 7.1% in 1Q and
2Q (at current prices) even when the network of the largest retail stores grew
by below half of the stated government numbers. Perhaps competition has eroded
or muted SM’s performance or perhaps government has been overstating consumer
activities, or such might be a combination of both.
Same store sales also provide an
outlook for the prospective earnings growth for the SM’s shopping mall, the
core of SMPH’s revenues and also of the health of SM’s real estate segment
SMIC’s top line growth rate declined to 6.16% in 1H 2015 from 7.17% in 1H
2014 (upper window). This was mostly due to the combination of diminishing
growth rate of retail sales and rents. Real estate has posted insignificant
growth rates.
Yet 2014 and 2015 performance have been halved from 2013 and 2012’s
numbers at 16.14% and 14.18%, respectively.
Overall, SMIC’s growth rate has
been plunging.
Curiously, this comes even as SMIC has aggressively been expanding
capacity. Why have growth been dropping when capacity continues to swell? Why
have all those extra capacity not been adding to the growth rate of SMIC and
her subsidiaries? Law of diminishing returns at work? Or has consumer spending
been falling? Or both?
Ironically, SMIC’s real estate performance hardly reflects on the massive
price inflation from Makati, Ortigas and Rockwell during the same period.
SMIC’s real estate segment provided a major boost only in 2012. The
underperformance of SMIC reveals that so called ‘demand’ that fueled 1H
property price inflation has been only in some areas and hardly applies to all.
Global Property Guide could be right; there could be an ongoing
expansion of ‘ghost cities’ or ghost condos serving the middle class.
A portion of the 1H performance can be seen in the 2Q activities (see
lower window). Since both tell of the same story, then they resonate on the 1Q
performance, except that 2Q top line sales was weaker +4.83% than the 1H
performance. So this means 1Q lifted the average.
SMIC’s 3Q and first 9 months activities from 2012-2014 (no data available
for 2015 yet) shares the same tale; slowing top line revenues mainly from
descending performances in retail and rents. Real estate outperformed only in
3Q 2014.
Moreover, SMIC profits rose 10% in 1H 2015. In 9 months of this year,
profits rose by only 7%. This means that
the profit growth rate for 3Q significantly slumped! And that number could just
be about 1.2%! That’s why I noted that the absence of media’s report on
same store sales for me seems intriguing. Because
they seem to be hiding something unpleasant. Something that would not only
expose on health of the resident consumers as seen in the purview of retail
outfits, but most importantly decompose on the populist myth of the political
fabrication called as the consumer economic growth ‘success’ story.
More, the downhill performance of retail sales suggests that SMPH’s
rental growth 3Q 2015 of 13.7% and for the first 9 months at 11.24%, have considerably
been due to rental increases rather than from royalty fees or consumer spending
growth. So if true, money illusion via property inflation (aside from new mall
spaces) had been a significant contributor to 3Q earnings growth. Hardly a
sound economic model.
Yet if profit growth rate has been headed toward stagnation, then just
how will SMIC and her subsidiaries finance all her aggressive expansions? Part
of this is through bond issuance.
Also what justifies those stock market ridiculous valuations?
I believe that a
lot of companies have embarked on the same business model as SM Group. They
better make sure that they have many channels to access to credit. SM, through
their subsidiary bank BDO, has that privilege.
That’s because
once Mr. Razon would be proven right, many people will pay a big price for their
recklessness. And access to credit will be the premier concern for survival.
As clue to this, a retailer BW
Gaisano dived its IPO offering by a shocking 35%!!!
The Gaisano IPO account hardly signifies a sign of a boom. Rather, it
looks likely a symptom of desperation to gain access to financing! Why??!!
BSP
and Media’s Up is Down, High is Low, More is Less
In the dystopian novel
1984, George Orwell coined the slogan
of “war is peace, freedom is slavery, and ignorance is
strength” to demonstrate of doublespeak
or the corruption of language to control people through their thoughts.
I
was reminded by these when I came through an article where the Bangko Sentral
ng Pilipinas would reportedly “tighten rules” on the banking system’s treasury operations in order to minimize risks. And minimizing risks
will be coursed through new regulations that supposedly will prevent investors
“from transacting in financial products for which they are unsuited[5]”
Astounding! Just
how on earth will the BSP know which financial products are suited or not
suited for individuals???? Does the BSP know every person’s risk tolerance
profile for them to make such a claim???
Instead of treasury
products let us apply such ‘fatal
conceit’ on stocks.
The above
represents the price to cash flow (or a ratio of market price
relative to its cash flows) of the MSCI Philippines (21 component) as
constructed by the fabulous Gavekal team.
Do the above
numbers indicate a buy or a sell for the MSCI Philippines or for specific sectoral
based performance, for me or Juan or Pedro? Does the BSP know? What are the
profit or loss probabilities for a position on them, for me or Juan or Pedro?
How does one apply a position, short term or long term based on the above, for
me or Juan or Pedro?? Does the BSP know? What are the risks for me or Juan or
Pedro, or to the general markets from the above valuations? Does the BSP know?
What do the above
valuations indicate relative to “the proper conduct of client suitability is,
therefore, deemed a crucial part not only of consumer protection but also of
the self-protection of supervised entities against adverse claims”?
How about the
next image? These are related to the price to cash ratio. How? They account for
as the numerator of the ratio. However, the figure exposes on the price fixing
actions by certain groups through “marking the close” which had 3 incidences last
week. Marking the close based
on SEC mandate has been stipulated to be illegitimate. So
how do such manipulative actions serve to protect consumers? What is the BSP’s
role in them?
In the same
article Deputy Governor Nestor A. Espenilla, Jr was quoted as saying new
regulations are needed to minimize risks of mis-selling treasury products, “In
a low-interest environment when there may be great temptation to chase yield,
sellers may be too aggressive and buyers too careless.”
The BSP has
hardly ever bothered to make an official comment on whether current equity
market valuations have been products of the “great temptation to chase yield”.
Although to be fair, the BSP chief did issue implied warnings during two of his
speeches in August 2014 (“complacency and chasing the markets”) and in October 2014 on (“mis-appreciation of risks in certain segments of the market, including the real estate sector and the
stock market”). Yet unless one follows the speeches of the BSP leaders, hardly
anyone would have known since there hardly has been public coverage on this.
Especially not with biased media (or what political analyst and trend
forecaster George Celente contrived as “presstitutes”). For biased media, unless it is
about personality based politics, nothing can ever go wrong with the Philippine
economy.
Media recently broadcasted that some
P 25 billion that have been lost to investment scams. Yet what has the BSP’s role been in them?
In an
environment where money has been politicized and manipulated to become free
(for government and for cronies), has the
BSP not been responsible for creating incentives for people to the fall trap to
the “great temptation to chase yield” in which many become suckers and fall
victim to unscrupulous agents?
Media
also reported that there has been a “rising trend among young people
victimizing the older citizens”. Increasing market stress
also aggravates on the proliferation of financial fraud (Ponzi-pyramiding
schemes) as I noted in 2008. The greater the market stress, the more
vulnerable people are to fraud.
Yet who created
such market boom bust market tensions?
To add, whom have
media and the BSP been kidding when they show of the sudden drop in the growth
rate of consumer NPLs in the face of a slowing economy?
The BSP,
possibly in cahoots with the banks, may be engaged in statistical talisman or
shouting statistics to shoo away financial demons that plagues the banking system’s
balance sheets.
The rate of
consumer lending continues to sizzle, though lower the previous highs, even
when the statistical economy has been materially slowing.
The cooling
formal economy such as in manufacturing and in exports translates to output,
jobs, income and financial losses. So for those who have contracted loans when
everything had been booming, they are likely to be feeling the financial heat
in 2Q, and even right now.
So what those stats above from the BSP seem to tell us have
been that economic conditions hardly has any bearing on credit conditions. Even
when debt is high, a substantially lower GDP translates to the more prompt
payers by debtors!
Up is down. High
is low. More is less.
And while the
second quarter has signified a done deal, and while there have been persistent
and sustained attempts to widen spreads of the yield curve, the above
flattening doesn’t spell good for credit, liquidity and even for NPLs! They can
hide a quarter but eventually those tensions will surface.
Moreover, media
tell us that 3Q GDP should be better than the 1H.
So they cherry
pick on statistics that makes GDP to supposedly look good. Say manufacturing,
despite a negative August data, they will instead cite ‘volume’ which grew by
3.7%. It’s really disconcerting, if not pathetic, to see people brandish
numbers even when official GDP computation of manufacturing is about Gross Value Added or the measure of value of goods and services of a sector in the economy. And yet they call themselves experts.
Apparently, experts at manipulating numbers.
Down is Up. Low
is High. Less is More.
The above
quarterly growth numbers of tax revenue collections seem to be declining in
conjunction with GDP.
Though the
relationship between changes in tax revenues and GDP has not been clear cut, as
taxation represents stringently political activities relative to the GDP which
supposedly measures economic output from a political economic environment,
somehow tax collections may partly reflect on economic conditions.
In three
occasions where growth rate of tax revenues fell for two successive quarters,
GDP either fell as in 2010, or flat lined as in 2013.
So falling
revenues may be a manifestation of a lack of political will to collect taxes,
easing up of tax collection due to political season, and or has been reflecting
on economic conditions-a slowdown.
I know. The
opaque relationship may even be called a null
hypothesis.
Finally, the BSP seems inundated with
contradictions. First, they tell us that they know what is good for the public.
So they lay rules that are supposed to protect us. But then they tell us many
things about them not knowing! That’s when they have agendas to push or when
they are put on the spot.
Agendas to push. In a speech
early this year, the BSP chief lectured media about the knowledge problem or
how to LOOK beyond statistical numbers. As I earlier posted[6]:
Economic
numbers rarely tell the complete story when taken at face value. Therefore, a responsible journalist
who seeks to offer readers a fuller appreciation of the information will examine the figures within a
broader context or against an array of other relevant indicators. Given the
facts on hand, a good reporter will know which leads to chase, and which to set
aside, perhaps for another day, for another story. The objective is to understand what is
happening -- and why -- so
that the facts can be pieced
together into a sensible and useful news report for their publics.
By engaging in
statistical talisman for 2Q consumer loans, such sagacious advice from the BSP
chief is something which the BSP doesn’t want the public to do. Or they want
the public to just take these numbers at face value, even if they defy economic
logic!
Put on the spot. And when
asked about how risks from China’s economy may affect the Philippines, the BSP
chief even used one my favorite—the Chaos Theory—to justify the BSP’s knowledge
problem or ignorance!
In a September
speech[7]:
(bold mine) This reminds me of how “chaos theory” is
often described. As everyone here is aware, CHAOS THEORY is the study of
nonlinear relationships where events that appear logically random are actually
linked. It is said, a butterfly flapping its wings in the Amazon will affect
the time of formation, exact location, and path of a hurricane several weeks
later in North America. This “butterfly effect” is formalized in various fields
like risk management, that’s why this audience knows it, right? It underpins
the very framework of Financial Stability used by the BSP but, in its simplest
form, it is more commonly referred to today as “contagion”….Ladies and
gentlemen, it is clear that there is already some impact on EMEs, including the
Philippines. And the possible
consequences of a hard landing could be significant to many
jurisdictions. There are layers of nonlinear and changing linkages that
make the prediction of full effects an impossible task. But it is
precisely an evolving situation such as that in China which should provide us a
good platform to think about the possible issues that prudential policy may
consider. In your more focused request, you asked me what the impact is on us
of the slowdown of the Chinese economy. My reply -- So far, it’s been on the
whole, benign. We’ve so far managed well but we are not immune should Chinese growth slow more steeply and
financial market volatilities intensify further.
So the BSP thinks
that the “chaos theory” or nonlinear relationships apply ONLY to external
forces and its linkages with the Philippines. They can’t seem to perceive of the
chaos theory applied to the domestic setting particularly from “new regulations
setting “minimum expectations” for supervised financial institutions that sell
securities and similar financial instruments”
Very interesting.
Nevertheless, the
great Austrian economist F.A Hayek has once been again validated.[8]
The curious task of economics is to
demonstrate to men how little they really know about what they imagine they can
design.
To
the naive mind that can conceive of order only as the product of deliberate
arrangement, it may seem absurd that in complex conditions order, and
adaptation to the unknown, can be achieved more effectively by decentralising
decisions, and that a division of authority will actually extend the
possibility of overall order
Phisix 7,100: Sluggish Trading
Actions as US Dollar-Asia/Peso Likely Higher on US Jobs Report
A short note on
the Phisix.
The PSEi was
down .23% on a mixed showing. The headline index was generally up: 19 advancers
versus 11 decliners. All sectoral indices were up except the service sector.
The service
crashed by 6.54% last week, spearheaded by telco issues, PLDT -7.91% and Globe
-5.35% and seconded by port giant ICTSI -13.70%.
But market
breadth was considerably down: in aggregate decliners led advancers by 91.
Three of the 5 days were in favor of the sellers.
Despite the
rangebound trading that has partly been a product of price fixing, fascinatingly
peso daily volume continues to emaciate.
This week’s daily volume (averaged weekly)
at Php 5.479 billion accounted for the second
smallest volume for 2015. The lowest volume for the year was at week ending at
September 11, 2015 where peso volume (averaged weekly) was at P 5.404 billion.
(see left)
Moreover, wobbly
volume has resonated with other trading indicators, such as daily trades and
number of traded issues.
Such frail
volume makes the PSEi once again vulnerable to another selling stampede. The
August 24 meltdown was preceded by a daily volume (average weekly) of Php 5.82
billion, the third lowest for the year!
Interestingly
the USD peso has once again reached its resistance to close at 46.935.
The USD was
mostly up in Asia with the exception of the Indonesian rupiah and Taiwan dollar.
The Indonesian government reportedly announced a sixth economic package for this year.
Malaysia ringgit and the rupiah have diverged last week.
Given that US
October jobs market 271,000 widely beat expectations, this has been perceived
as substantially bolstering the odds for a FED rate hike in December, the USD
peso as with other ASEAN currencies are likely to trade significantly up at the
opening of next week. If sustained through the day, then this should mean a
breakout of the USD Php past the 47 level where the next target could be Php
47.5- 48 zone.
What arouses my
curiosity in the US job report has been that many of the details seem to
contradict other economic data related to the jobs. For instance strong jobs
from retail and wholesale sectors come even as sales performance of the wholesale sector has been fumbling while retail sales (ex
food seems to have plateaued since July). Wholesale inventory to sales ratio
continues to climb and has now been approaching recession levels! Manufacturing
showed ZERO job growth! Yet 54% of the 271K jobs growth came from arbitrary birth-death model. Generally, the US October job data was a story of mostly construction jobs from a property boom.
What can be seen
has been a widely divergent or unbalanced economy which has been tilted balance
towards areas benefiting from zero bound rates—asset boom.
Yet I doubt the
integrity of those numbers. Because the FED was widely criticized for pushing
back rates by incorporating “global
economic and financial developments” the job data looks designed or a set up to
reverse what seems as faux pas that would pave way for the FED to redeem itself
by a reluctant hike in December.
But a December hike will hardly solve the global
dollar problem which mostly emerged out of the accumulation of balance sheet
imbalances or mismatches.
A December hike will only put a squeeze on
highly levered balance sheets of the rest world (specifically Asia and emerging
markets) which should eventually boomerang back to the US.
And even when the US Fed eases (by QE) in
response to a faltering economy (or bursting bubbles), the matching process of
central bank action to fill balance sheet deficits will likely take time. So I expect the USD to serve as a lightning
rod against stresses that would surface in response to massive imbalances as an
outgrowth of central bank policies from all over the world. And once the charade
from risks assets have been sloughed off, gold will scintillate.
[1]
Nikkei
Asian Review ICTSI
chief sees another crisis coming November 5, 2015
[3]
Business World SMIC 9-month profit up 7%, driven by property, retail November 5, 2015
[4]
Inquirer.net Core businesses push SMIC income to hit P19.4B November 5, 2015
[5]
Businessworld BW Rules on financial products fortified November 4, 2015
[6]
See
Phisix
7,800: Record Phisix as the BSP Continues with Deflation Spiel!
March 9, 2015
[7]
Amando M. Tetangco Jr Navigating Thru the Waters of Change...and Butterflies 2015 Annual Joint General Membership Meeting
of ACI, FMAP, IHAP, MART, NASBI and TOAP September 29, 2015, BSP.gov.ph
