Beware
of the person who gives advice, telling you that a certain action on
your part is “good for you” while it is also good for him, while
the harm to you doesn’t directly affect him.—Nassim Nicholas
Taleb
In
this issue
Phisix
6,900: 3Q
OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will
G-R-O-W-T-H Come From?
-The
Economics of Philippine OFW Remittances Redux
-3Q
OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will
Household Consumption Spending Come From?
-Which
Sectors will Deliver G-R-O-W-T-H to Buoy 3Q GDP?
-More
Fissures in the Real Estate Industry: Phil Realty and Rockwell Land;
GTCAP’s Massive Leveraging!
-Will
There Be A Pre-GDP Play Next Week? PSEi Backs Off Support Breakdown,
Storms Back to 6,900
Phisix
6,900: 3Q
OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will
G-R-O-W-T-H Come From?
The
Economics of Philippine OFW Remittances Redux
Remember
what I wrote last month1?
Personal
remittance for 1Q 2015 5.07% and for 2Q 5.4%. July and August’s
growth rates were at .5% and -.8% respectively. So to achieve 5%
September remittances should spike by an astronomical 15.45%!
Anything
below that number would entail for a remittance growth rate of below
5%. Yet even at 5%, 2015 will be way (27%) below the 6.86% annual
average!
The
Bangko Sentral ng Pilipinas and bootlicking media were relieved to
announce that OFW remittances bounced back last September: at $20.4
billion, personal remittances expanded by only 3.9% year on year and
at $2.2 billion cash remittances likewise added only 4.3% over the
same period.
As
one would note from the above charts, the rate of growth for personal
and cash remittances has already reached an inflection point. Since
2013, the rate of growth for remittances has largely been in decline.
OFW
remittances are clearly being affected by the law of diminishing
marginal returns.
Instead
of good and service exports, the slomo boiling frog effects of the
swooning peso through the inflation tax, has only impelled for the
export of residents. Remittances, thus, has accounted for the
subsequent incomes from such diaspora. Yet considering the scale of
volume attained from sustained years of people exports, its growth
rate dynamic has been falling.
A
simple back of the napkin illustration: (based on all things being
equal) Back then for every 100,000 new OFWs, given a 1,000,000 OFW
stock, new OFWs represents 10% growth. Now for every 100,000 new
OFWs given a 10,000,000 OFW stock such would represent a 1% a growth.
So every additional 100k new OFWs which add to the 10 m stock would
see growth rates going down.
Economics
have the principal factor that determines the incentives by residents
to work abroad, as well as, the incentives by foreign employers to
hire domestic workers.
Applied
to the current slowdown in remittance growth, as example, a domestic
economic boom should lower
the incentives for local citizens to work abroad.
Mexico’s
emigration dynamics have partly manifested these.
Net
migration to the US from Mexico has been in a decline from 2009-14
(see left). Mexican immigrant population in the US also has been
shrinking (right). This means that not only have Mexicans refrained
from moving to the US, more Mexicans have been returning to their
homeland.
Reason?
According to Pew Research2,
(bold added) The
views Mexicans have of life north of the border are changing too.
While almost half (48%) of adults in Mexico believe life is better in
the U.S., a
growing share says it is neither better nor worse than life in
Mexico.
Today,
a third (33%) of adults in Mexico say those who
move to the U.S. lead a life that is equivalent to that in Mexico
–
a share 10 percentage points higher
than in 2007
And
of the 1 million Mexicans who voluntarily returned to Mexico between
2009-14, the survey noted that “six in ten (61%) return migrants –
those who reported they had been living in the U.S. five years
earlier but as of 2014 were back in Mexico – cited family
reunification
as the main reason for their return. By
comparison, 14% of Mexico’s return migrants said the reason for
their return was deportation from the U.S.”
In
other words, when
the perceived economic feasibility/advantage from the emigration-work
abroad option has been reduced, other factors, such as the importance
of the family, takes precedence in the shaping of the average
citizen’s decisions to stay home, or for migrants or overseas
workers to go home.
Such
has spurred the repatriation and the reversal of immigrant flows to
the US from Mexico.
This
goes to show that an economic boom and increasing OFWs are
essentially incompatible.
Because a real economic boom should produce an abundance of economic
opportunities, as manifested by copious jobs and the adequacy of
wages and/or earnings levels, residents would choose to stay and work
from home rather than move overseas at the cost of leaving their
families.
So
when media, mainstream experts and the government babble about an
economic boom anchored on OFWs, they are really confused about the
economic and social dynamics of OFWs.
Also
other economic factors such as slowing global economy should diminish
the incentives by foreign employers to hire.
Changes
in real
exchange rates between the Philippines and host nations of OFW
employers also significantly contribute to OFW dynamics.
Considering
that the USD have been flat or marginally weaker last September, as
exhibited by the US-Asia
JP Morgan Bloomberg ADXY (see box), or that the USD peso was
unchanged in September, the foreign exchange effects from a flat or
slightly infirm USD have partly buoyed September’s remittance
numbers.
The
BSP further noted that3:
Preliminary
reports from the Philippine Overseas Employment Administration (POEA)
indicated that for the period January–September 2015, total job
orders reached 663,112, of which 41.6 percent have been processed.
These job orders were intended mainly for service, production, and
professional, technical and related workers needed in Saudi Arabia,
Kuwait, Qatar, Taiwan, and Hong Kong
Since
the BSP gave no growth rates or comparison from previous records, one
is left hanging as to where September’s OFW activities came from.
The BSP just wants everyone to take at face value their statements.
They think that everyone’s brains have been addled.
Politics
could also serve as a non-economic force that could influence
migration and OFW flows. Any increase border controls or in labor
protectionism could limit or reduce OFWs and or emigration.
3Q
OFW Remittance Growth Rate Collapses Below 2008-9 Lows! Where Will
Household Consumption Spending Come From?
This
brings us to 3rd quarter standings of OFW remittances.
This
week is GDP week or the week where the government will announce 3Q
GDP. (That’s on Thursday November 26)
Given
that HFCE, Household Final Consumption Expenditure, accounts for over
60% of expenditure GDP (66% in 2Q 2015), the biggest factor in
determining changes in statistical GDP will be consumer spending.
So
OFWs flows SHOULD play a vital role in ascertaining the government’s
estimates of HFCE.
Get
this: September’s data represents only a month. Yet September’s
paltry recovery fails to boost, in any significant manner, the
stagnant growth in July and August.
3Q
cash remittances growth rate at 1.6% have even been LOWER
than the Great
Recession era in 2008-9 (see green arrow)!!! On a quarter to
quarter basis, remittance growth has virtually collapsed!
Growth
of cash remittances in 1Q 2009 and 2Q 2009 were at 2.07% and 3.7%,
respectively. GDP (at current prices) over the same period registered
5.5% and 2.8%, correspondingly. 3Q 2009 GDP was at 1.4%!
The
impact to GDP from a quarter of weak remittances during the Great
Recession spans the period where weak remittances took hold, as well
as, a spillover to the next quarter
So
if past should somehow mirror the present, the impact from this
quarter’s 1.6% remittance growth will likely weigh on 3Q GDP, and
more importantly, this will possibly become pronounced in the next or
in the fourth quarter!
3Q
2015’s 1.6% cash remittance growth marks the third
weakest
remittance growth level since 2002!
During
the new millennium, the correlation between remittances and GDP were
not as strong as today. Yet cumulative cash remittances at US$18.41
billion in September 2015 have been 205% bigger than the US$6.031
billion at the end of 2001. This just demonstrates of the
significance of remittances to the Philippine GDP.
Aside
from the size, the entire consumer bubble complex today (shopping
mall, casino—hotels, vertical condos and other property projects)
has been built on the assumption of the linear trajectory of OFW
remittance growth. BPOs have been seen as an additive.
Mainstream
experts continue to blubber or blurt about 6+% GDP on supposedly
domestic demand based on “strong
consumer spending”.
Yet
ironically OFW remittances, which were once what the mainstream
mainly blustered about, appear to have fallen into a vacuum.
Not
even government statistics seem to matter at all. Everything seems to
be a showcase of articles of faith!
The
government’s estimates of general retail prices in September have
been on a steady downtrend (left).
From
the Philippine Statistics Authority4:
(bold mine) The annual General Retail Price Index (GRPI) in the
National Capital Region (NCR) at 0.4 percent September was the same
rate posted last month. In September 2014, it was recorded at 3.2
percent. A
higher annual growth was seen in the index of the heavily-weighted
food at 2.1 percent.
Slowdowns were however, noted in the annual increments of the
following indices: beverages and tobacco, 3.6 percent; chemicals,
including animal and vegetable oils and fats, 1.2 percent; and
miscellaneous manufactured articles, 1.5 percent. Moreover, the
indices of mineral fuels, lubricants and related materials and
machinery and transport equipment continued to register
negative annual rates at -19.2 percent and -0.6 percent,
respectively. No movement was observed in the index for manufactured
goods classified chiefly by materials. while that for the index of
crude materials, inedible except fuels remained at 2.9 percent.
Given
that food represents the biggest weighting in the average consumer’s
basket, then higher food prices implies of greater demand for food
that have led to diminished demand for other items, thus falling
prices.
And
this by no means is just a month’s performance: retail prices have
been dropping from a year ago!
The
same applies with government’s
estimates of general wholesale prices in August, where the
wholesale industry has seemingly been sucked into a deflation vortex,
since December 2014!
So
if there has been a demand boom then why the sustained fall in
retail-wholesale prices? Too much supply?
Even
the government’s measure
of CPI has been dropping like a stone.
Except
for prices of food and alcoholic beverages, non-food items based on
BSP’s
October table have been in a sharp downtrend.
October’s
CPI has equaled September. Has October’s CPI hit an equilibrium
level? Or has this, like in February, signified a hiatus?
While
personal
savings was flat in September month on month, it has been up by
about a hefty 9.8% from October 2014 and higher by about 5.6%
year-to-date.
If
many (with bank accounts) have been saving then just how can the same
parties be spending? Spending based on manna from heaven?
Again
why are (retail, wholesale and CPI) prices going down? Based on the
law of demand, the answer is because demand
curves have been sloping downward.
Said differently:
“at
higher prices, the quantity demanded is less than at lower prices”.
(chart and quote sourced from Economics
Online). Or
prices
have yet to reach market clearing levels from which demand would
offset supply.
In
short, what the mainstream expects and conditions the public runs
contrary to rudimentary economic logic. They go against not only
against economic reasoning but also on empirical data provided by the
government from OFW remittances to the prices in the real economy.
This
is NOT about economics.
So
unless government’s numbers have been blatantly inaccurate, then
all these 6+% 3Q projections have been nothing but intended to sell
hopium or have been part of the propaganda to condition the public
for another statistical fabrication on the Philippine economy.
Of
course for the mainstream institutions, conditioning means to line up
the pockets of these institutions at the expense of the public who
will take on the risks from resource transfers encouraged by
financial repression policies.
And
for government to live up with its hype, the statistical Sadako will
come in very handy.
Which
Sectors will Deliver G-R-O-W-T-H to Buoy 3Q GDP?
And
that’s from the expenditure side. How about the industry side?
The
government’s PSA says agriculture performance stagnated in
3Q to grow by ONLY .04%!
The
government’s estimates of the price trajectory of retail
construction materials have been negative in four out of five months
based on last
September.
Prices
of construction materials at the wholesale sector have likewise
been negative since December 2014 through October 2015!
If
there has been a demand boom in the construction sector, then why
have prices been falling?
Meanwhile,
producer’s
prices or manufacturing inputs continue to suffer from price
deflation since September 2014 to September 2015.
I
have written how manufacturing sector’s value and output have not
only been in doldrums but also
suffer from signs of credit deflation. Or bank lending activities
to the biggest sector in the statistical GDP has more than collapsed;
it registered a contraction last September!
Why
would banks stop lending to the sector if the sector has been
growing? Has there been little demand for credit by the sector? How
will the sector finance its working capital or capital expansion?
And
based on annual change, current rate of losses in value by the
manufacturing/industrial
production seem at a critical juncture (lowest window). Any
deeper loss on the said sector will most likely considerably weigh on
GDP similar to 2008-9 (green boxes).
Also,
based on nominal levels, any further drop on exports
from current levels will also serve as a severe headwind for
manufacturing, and subsequently, the GDP.
That’s if 2008-9 will rhyme (see middle window).
In
2011, when exports dropped below today’s critical levels,
manufacturing growth while still positive, materially subsided (green
boxes at the middle). And the decline of both exports and
manufacturing were likewise reflected on GDP.
And
don’t forget, remittance activities resonated with the
manufacturing and the export downturn in 2008-9.
Fascinatingly
shades of 2008-9 have emerged, yet mainstream experts continue to
shout G-R-O-W-T-H!
If
the performance of major industries have been sluggish and OFW
remittances as backbone to HFCE or consumer spending has been
materially down, then just where will G-R-O-W-T-H come?
Again
from Sadako???
More
Fissures in the Real Estate Industry: Phil Realty and Rockwell Land;
GTCAP’s Massive Leveraging!
Yet
more clues on why the media went on a seeming orchestrated
publicity blitz to promote the property sector last October.
Find
the following clips from 3Q 17Q reports of select companies with some
quick numbers…
Philippine
Realty [PSE: RLT]. Though through 9 months real estate sales
spiked by 18.19%, 3Q real estate sales and rental fell 27.36% and
30.53% respectively. The huge decline in rental revenues has led to a
15.22% drop in 9 month performance.
Rockwell
Land [PSE:
ROCK]
3Q
real estate sales slumped by 29.03%! 3Q performance has dragged down
9 month performance to a negative 19%!
GT
Capital Holdings [PSE: GTCAP]
has a different picture.
Real
estate sales up 50% in 3Q was a blast!
GTCAP’s
3Q profit story was almost entirely about real estate.
As
a side note, in contrast to record after record auto sales as
broadcasted by media, curiously GTCAP’s automotive revenues grew by
only 2% over the same period! [UPDATED to add: Another irony: Toyota Motor Philippines controls 45.2% of market share, the largest among domestic car producers, based on record national automotive September sales, according to CAMPI. Meanwhile, GTCAP's 17Q report indicates of ONLY 2% growth of TMP sales for the quarter. This hardly squares with what has been reported by the industry and by media]
Yet
Php 440 million out of the Php 534 million (or 82%) generated by
other income segment came from Federal Land’s land asset swap, real
estate forfeitures and other income. So to add ‘other income’
with ‘real estate sales’, about 61% of overall 3Q revenues came
from real estate.
That’s
the wonderful part.
Yet
those huge sales numbers have been accompanied by an equally
phenomenal (+70%) skyrocketing of receivables where Php 11 billion
was accrued by real estate subsidiary Property Company of Friends,
Inc. (PCFI) and Php 5.1 billion from Federal Land.
Both
Fed Land and PCFI contributed to 89.5% of inventories which surged by
an incredible 119%!
So
supply has grown even faster than demand!
Unfortunately,
like her other bigger peers, those enormous growth sales numbers that
led to accrual accounting profits have hardly been generating
sufficient cash.
So
again like her big named contemporaries, GTCAP resorts to massive
leveraging from short term debt to long term debt!
In
case one wishes to know where these levered funds had been and will
be used, here’s the GTCAP report.
Aside
from sizeable funding for her real estate firms, a lot of these funds
are juggled on an intercompany basis!
These
developments represent a big NO NO or a red flag for Warren Buffett’s
mentor Ben Graham. That’s because GTCAP’s monumental leveraging
leaves virtually no margin of safety from the risk of errors. GTCAP’s
gambit essentially represents a one way trade.
From
Ben Graham’s classic the Intelligent Investor5…
(bold mine)
The
first and most obvious of these principles is, “Know what you are
doing—know your business.” (circle of competence). For the
investor this means: Do not try to make “business profits” out of
securities—that is, returns
in excess of normal interest and dividend income—unless
you know as much about security values as you would need to know
about the value of merchandise that you proposed to manufacture or
deal in.
All
these immense leveraging has been designed to generate “returns in
excess of normal interest and dividend income”
More
warning from Mr. Graham,
A
third business principle: “Do not enter upon an operation—that
is, manufacturing or trading in an item—unless a reliable
calculation shows that it has a fair chance to yield a reasonable
profit. In particular, keep away from ventures in which you have
little to gain and much to lose.” For the
enterprising investor this means that his operations for profit
should be based not on optimism but on arithmetic.
For every investor it means that when he limits his return to a small
figure--as formerly, at least, in a conventional bond or preferred
stock—he must demand convincing evidence that
he is not risking a substantial part of his principal.
Unfortunately,
GTCAP’s outsized leveraging represents positioning based on
optimism and not from arithmetic, thus risking a substantial part of
the company’s, as well as, creditor and investor’s principals
from tail events.
The
real estate industry has been highly leveraged from the front end
(sales) to the back end (inventory) as well as to the network chain
of firms from different industries attached or dependent to it.
And
yet a failure to meet such Pollyannaish expectations will signify a
recipe for disaster that should have a ripple effect.
With
so much at stake for the biggest names or ‘blue chips’, now it
seems much clearer why the torrent of press release masquerading as
news reports last October.
Will
There Be A Pre-GDP Play Next Week? PSEi Backs Off Support Breakdown,
Storms Back to 6,900
Will
there be a pre-GDP play next week?
There
was a pump before the 4Q GDP 2014 announcement. There was also a dump
prior to 1Q GDP 2015 announcement. The
chart can be seen here.
Unfortunately
the 2Q GDP announcement was washed over by the August 24 crash, so
whatever front running or insider play that was supposed to have
taken place might have been overwhelmed by the crash and the
subsequent response to it.
Nonetheless
I expect sharp volatility to highlight the pre-GDP announcement.
Perhaps
it may have already started last week.
On
Monday, November
16, the Philippine benchmark, the Phisix (PSEi) broke below
critical support levels. The PSEi plunged by 1.81% to close at
6,772.92. The loss could have been larger if not for a late afternoon
delight pump.
However,
the one day breakdown had immediately been countered by two
successive days of steep low volume rallies on Tuesday November
17 (+.77%) and November
20 (+1.57%).
Yet
about half of Friday’s gains came from a combination of a late
afternoon delight pump PLUS marking the close (see lower window).
What
would be of Philippine stocks without price fixing measures/ market
manipulation conducted by unseen faces?
The
two day rebound effectively erased Monday’s losses to end the week
up .51%. Year to date, the PSEi still posted a 4.12% deficit.
Monday’s
losses not only signified a breakdown of the three month rangebound
trend or from the rectangular
pattern, it broke below the intermediate price
channel formed from late October.
The
breakdown, or if not the test of the support, has somewhat mirrored
2013’s gap filling actions. In 2013’s taper tantrum, the gaps
from two incidences of 6% crashes were filled. But the two rallies
faltered and the PSEi eventually found deeper lows. The
chart can be seen here.
Monday’s
new lows partly resonated with the 2013 dynamic but needs further
confirmation.
Yet
the jury is out whether Monday’s actions represent an anomaly, a
bottom, a reinforcement of the trading range or a fulfillment of
2013’s gap filling actions.
Last
week’s activities revealed of imbalanced activities.
The
two day 2.34% run by the PSEi had been heavily tilted towards the
property sector (+2.31%). The property sector was mostly powered by
Ayala Land +5.34% and Megaworld +2.75%.
The
service sector came second largely on the rebound by PLDT (+1.52%)
and ICT (+4.03%). Gains by the financial and holding sector were
muted. Nonetheless, the Industrial and the mining sector posted
losses.
Market
breadth was mixed.
Component
issues of the PSEi were marginally predisposed towards losers. Losers
edged out gainers 15 to 14 with one unchanged.
At
the broader markets, the advancing issues eked out losing issues by a
slim 31 differential (left).
Peso
volume continues to ebb. This week’s volume accounted for the third
lowest for the year (right).
Essentially
despite this week’s gains, a volumeless rally reveals of little
conviction behind the recent push.
Additionally,
with a net foreign selling of Php 1.568 billion, this week’s
activities had largely been driven by domestic participants.
Finally,
the peso was traded only in one day during the week.
The
USD peso officially closed the week at Php 47.14 or .19% up based on
November 13’s close.
Over
the interim, the USD peso looks like in a rising wedge pattern,
whereby a breakdown may signal a temporary reprieve from current
uptrend.
Last
week’s rally in Asian currencies will likely prompt the peso to
open on a firm note—46.95 to Php 47.
However
over the medium term the USD peso looks likely headed higher. Current
uptrend support is at PHp 46.70
Given
the mounting signs of economic imbalances here and abroad, deepening
market divergences (negative swaps and soaring yields of junk bonds)
and rampant disinformation and misperceptions (everywhere), the USD,
cash and gold should serve as lightning rod against potential shocks.
_____
1
See
Phisix
7,550: Sorry Folks, But Declining Growth Rates of OFW Remittances
Represents An Established TREND! October 18, 2015
2
Pew
Research More
Mexicans Leaving Than Coming to the U.S. November 19, 2015
3
Bangko
Sentral ng Pilipinas Personal
Remittances Rise to US$2.4 Billion in September 2015
January-September Level Reaches US$20.4 Billion November 16,
2015
4
Philippine
Statistics Authority
General Retail Price Index in the National Capital Region (2000=100)
: September 2015 November 16, 2015
5
Benjamin
Graham, Chapter 16: “Margin of Safety” as the Central Concept of
Investment, The Intelligent Investor, p 249-250 Harper Business
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