Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

The Skyscraper Index offers an opportunity to look inside at the business cycle in action. Artificially low interest rates stimulate the demand for land, especially in central business districts. Higher land prices create an incentive to build taller buildings, and taller buildings require new technologies in building systems, such as air conditioning, plumbing, and elevators, as well as new building technologies such as lifting cranes and cement pumpers. Such processes permeate throughout the economy, not just skyscrapers. In this manner you see how central bank policy can have pervasive negative effects throughout the building as well as throughout the economy—Professor Mark Thornton

In this issue

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

-Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

-Emergent Divergences Exposes More Cracks on the Property Bubble!

-Expect GDP Week Volatility 

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

Trust not to appearances

Ne fronti crede “Trust not to appearances”—signifies a maxim attributed to the Roman poet Virgil (Publius Vergilius Maro)

Ne fronti crede can be applied to what’s going on in the Philippine financial markets.

For instance, the PSEi closed this week down by only .08%. While such largely insignificant number has accounted for a second straight week of seeming placid weekly performance for the headline index, it’s also the second week where internal volatility has been camouflaged by engineered attempts to cosmetically spruce up the Phisix.

Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

First and foremost, end session pumps and dumps again punctuated this week’s enhanced but ensconced volatility. Pumping contributed 18.79 points or +.26%, while dumping delivered 46.34 points or -.64% of the week’s outcome. In all, the PSEi 30 gyrated by .9% over the past week mostly from a two session pump and dump!

All actions have consequences. As incessantly explained here, while price fixing has been portrayed as a legitimate function out of technical reasons (specific volume required in defining “marking the close”), such convolutes the price coordination mechanism that works to foster imbalances. And market distortions have not been limited to the absurd mispricing of equity securities, but as prices, they project false signals into the economy.

Such false signals unduly and undeservingly nourish and feed on economic maladjustments—specifically the frenzied contest to seize market share through unbridled supply side expansion financed by credit.

Next, symptoms of divergences seem to have reemerged in this week’s trading session. 

 

  

The property sector, which astonishingly zoomed by 2.52% and partly helped by the service sector which was up 1.33%, essentially negated losses by industrials (-1.71%), finance (-1.27%) and holding (-.18%) sectors for the PSEi to close almost neutral.

The service sector’s rise was principally due to TEL’s +1.76. This emerged as losses of the lesser significant market caps GLO (-1.06%) and ICT (-1.66%) had been eclipsed by TEL’s gains

Of the PSEi 30 basket, 2.33 issues declined for every issue that rose. The skewness of the distribution of price changes can be seen in the upper right window.

An incredible THREE of the top 5 issues, which accounted for 40.09% of the PSEi’s market cap were up 2.5% and above. Or the average weekly return for the 40% of the PSEi’s market cap, or the top 5, was at 1.47%!!!

Meanwhile, since the top 15 of the PSEi basket accounted for 80.73% of the index market cap weighting, theaverage return for the top 15 collapsed to a NEGATIVE .29%. This means losses by most overrun gains of the top 5 based on the average.

Applied to the entire index, the average return dropped to a NEGATIVE .51%.

Essentially, because of the highly skewed market cap weighting system, SMPH, ALI and JGS neutralized the performance of the entire index!

That’s how the index can be or has been gamed or manipulated.

Nevertheless, the headline index, or its components, wanted to take profits, but invisible forces decided to repeal the laws of economics by virtue of selective or targeted asset pumping and price fixing!

Emergent Divergences Exposes More Cracks on the Property Bubble!

My initial impression to the panic bidding on property issues was to suspect some refreshing news in the industry. But seen from the overall performance of the sector, particularly from the 7 largest market cap, which comprised 95.64% of the property sector’s market cap (as of January 20), that’s hardly the perspective.

That’s because not only has the gains been limited to two of the biggest market weighted firms, in specific, SMPH and ALI, the other two much lesser PSEi market weighted property firms went into the opposite direction! Or, MEG and RLC suffered enormous losses -1.32% and -3.27% respectively!

Meanwhile, FLI was down -1.8% for the week, whereas DD and VLL were unchanged. In short, such vicious gains were restricted to only two of the biggest property firms!

Even more, divergent outcomes can be seen in the price trends of the components of the property index. The chart on the lower right reveals of the shocking disparity between record setting SMPH (blue) compared to the rest, all of which have been strenuously recovering from their December lows. Only DD has so far outperformed.

It remains to be seen whether momentum and leadership by SMPH will succeed, in the interim, to pull out her peers out of the morass. Or, if the underperformance of the industry will eventually weigh on SMPH.

Fascinatingly, last week I noted of the observation by Global Property Guide that high end residential property prices has been suffering from downside pressures: “In The Philippines, the average price of 3-bedroom condominium units in Makati CBD fell by 5.14% during the year to Q3 2016, in sharp contrast with y-o-y increases of 5.41% during the same period last year. Housing prices dropped 1.15% q-o-q during Q3 2016.” (Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2017

 

Data from the Bank for International Settlements has corroborated GPG’s findings.

3Q residential commercial nominal property prices (flats) in Makati plunged into negative territory (-2.99%) as shown in the upper left pane! BIS data here.

HIGH end user or consumer property prices have been in a sharp decline for the SIXTH consecutive quarter or from year end of 2015!

Paradoxically, the sharp fall has occurred even as the BSP launched a secret/silent Php 200 billion bond buying stimulus in the 1Q of 2016! In short, the BSP’s action has, so far, failed to reignite demand for end user properties.

Instead, it has been commercial land prices that have been energized by the BSP. Makati commercial land prices vaulted 24.78% in the 3Q 2016 (see upper right window)! In 2Q, the growth rate was 20.44%! That’s two quarters of 20% growth rate. BIS data here.

Makati commercial land prices troughed in the 3Q of 2015 and recovered (V-shaped) sharply coincidental when the BSP begun its stimulus in 4Q 2015 and greatly expanded this 1Q 2016.

Surging commercial land prices suggests that property developers and mall operators have been in a bidding frenzy to acquire properties for future inventories!

So while faltering prices suggest of relatively weaker demand to supply, property developers have engaged in a fierce competition to acquire land for future development! 

In short, such dynamics represents a splendid manifestation of the discoordination between demand and supply! The outcome of which will be to ramp up credit financed overcapacity!

Of course, all these have transpired as credit expansion continues to rocket!

The banking system’s loans to the property sector in the 3Q registered a blistering 19.16%! Though this has been lower than in the 1Q’s +23%, the pace of growth seems to be picking up anew (see lower left pane).

Yet the torrid pace of credit growth in the property sector has landed the Philippines in second place, after Mexico, in IMF’s 2Q “real credit growth over the past year” data for the world!

And here’s more. To reiterate, since falling prices means demand for high end properties has been overshadowed by supply, yet supply continues to roll unabated!

Proof?

The Philippines even captured the world ranking, fifth in terms of global skyscraper output for 2016 (lower right window)!  From Quartz.com: “In 2016 the world saw the completion of 128 skyscrapers, up from 114 in 2015, according to the US-based Council on Tall Buildings and Urban Habitat (it defines a skyscraper as being higher than 200 m, or 656 ft).” 

Such developments remind me of the “skyscraper curse”, see infographics from Visual Capitalist).

Skyscrapers can function as key symptoms of the business cycle in progress or “they are simply a very visible manifestation of the business cycle phenomenon brought about by artificially low interest rates.”* (Boyle, Engelhardt and Thornton 2016)

Additionally, like any malinvestments, they are caused by false price signals: “Skyscraper Curse would arise if the same psychological factors that lead to overvaluation in asset markets also lead to skyscraper construction”. Hence, skyscrapers can serve as a useful indicator of boom bust cycles. Or skyscrapers may symbolize “monument to the successes of the past and as a harbinger of the suffering that is to come.”

Interestingly, the deluge of supply of skyscrapers has simultaneously emerged in ASEAN majors, particularly Indonesia, Philippines, Malaysia, Singapore and Thailand.

*Elizabeth Boyle, Lucas Engelhardt, and Mark Thornton Is There Such a Thing As a Skyscraper Curse? The Quarterly Journal of Austrian Economics (2016)

 

As a final observation, even from the government’s own GDP data (3Q or first 9 nine months), the combined share of retail, real estate and construction to NGDP has been rapidly growing to account for nearly 40% (left window). 

The same industries accounted for 38.3% share of loans from the banking system as of November 2016. Real estate loans may be inaccurately reported due to the BSP’s regulatory caps.

Yet such is a clarion sign of mounting concentration risks!

The above excludes the banking share of NGDP and banking loans. Banks, after all, are the chief financiers of the present bubble!

This only reveals that such awesome price bidding frenzy on select property equity prices comes in the face of ballooning risks!

Expect GDP Week Volatility

By the way, the Philippine government is slated to announce 2016 GDP next week. GDP week has almost always been accompanied by pre-GDP volatility (mostly massive pumping see right window).

Since 2015, in 6 occasions the PSEi has been frantically pushed up 2-3 days prior to the announcement. If I am not mistaken, last week’s pump could be a precursor to the coming week.

Yet not all has been about pumping. There was a GDP week dump in 2015 when 2Q GDP was reported at 5.6% and 1H GDP at 5.3%. There was also a bizarre insouciance in 2Q 2016, even when GDP was reported at 7.0% 2Q and 6.9%1H! Could it be that there was no insider tip for the 2Q 2016???

So yes, expect GDP to serve as classical conditioning for the Pavlov dogs to wildly go on a pumping spree!

Interesting Pre- Trump Inauguration News: The Trump Duterte Secret Link as Foundation to Bilateral Ties? JP Morgan Capitulates to Widodo and Libertarian Xi Jinping?

Tomorrow marks Mr. Trump’s inauguration. Yet many fascinating unfolding developments.

Will this define US-Philippines bilateral relations? From Quartz (“Donald Trump is likely on the payroll of a Filipino government official thanks to his new Manila skyscraper” January 16, 2017)

The Trump Organization’s partners around the world have been seen as potential conflicts of interest ever since Donald Trump announced he was running for US president. With his inauguration just days away, more attention is being paid to these conflicts, and the head of the Office of Government Ethics insists that Trump must sell off his business in order to be an ethical president.

One of the most most glaring conflicts is set to open up this quarter: Trump Tower Manila, a 57-floor skyscraper inside Century City, in a gentrifying area of Manila’s business district. It’s a joint project with Century Properties Group, Inc. (CPGI), a Filipino real estate development company owned by Jose E.B. Antonio, who is also a special trade envoy to the United States. If the partnership between Trump and Antonio is structured like many of his other business deals, with Trump licensing his name in exchange for ongoing payments, Trump will essentially be on the payroll of a member of controversial Philippines president Rodrigo Duterte’s government.

While Trump has vowed to turn over the running of his business to his two sons, ethics experts say that isn’t enough to prevent potential conflicts of interest. Only by completely selling off his business will Trump match the ethics standards set by other presidents, and required of other employees of the executive branch of the US government.

I withhold from further extrapolation.

Speaking of conflict of interests, recall the Indonesian government’s war against stock market bears which I raised this weekend?

Well, JP Morgan made a volte face, which came to the delight of the Widodo government.

From Bloomberg (January 17):

JPMorgan Chase & Co. upgraded its assessment of the Indonesian stock market, reversing an earlier bearish call that prompted Jakarta to stop doing business with the U.S. bank.

The bank’s analysts raised their "tactical" view of Indonesian equities one level to “neutral” in a report dated Monday, saying volatility in emerging-market bonds following Donald Trump’s U.S. election victory in November should now subside. The upgrade came two weeks after Indonesia’s government cut business ties with JPMorgan, citing a two-notch equities downgrade by the bank in November.

“Our tactical downgrade two months ago was driven by the risk of Indonesia underperforming the Asia Pacific ex Japan and EM indices as investors de-risked," analysts led by Adrian Mowat said. "Redemption and bond volatility risks have now played out, in our view.”

Indonesia welcomed JPMorgan’s new assessment. The neutral recommendation is more in line with fundamentals, Coordinating Minister for Economic Affairs Darmin Nasution told reporters in Jakarta on Monday. The finance ministry had earlier said it would stop using JPMorgan as a primary dealer and an underwriter for sovereign bonds.

Such would signify a sterling example of the agency problem. Yes, this should be one for the textbooks.

Why? Because JP Morgan’s interests have been demonstrated to promote that of their political patron than that of their clients and or of the investing public. Or the latter will be sacrificed for the former.

Remember, the Indonesian government’s interest (access to cheap credit) is different than from the investing public (return on capital invested/savings)

So move aside fake news, like the Philippines, now we have "fake analysis", "fake prices" and "fake markets".

Next.

Here is an awesome quote from Davos (CNN)

We must remain committed to free trade and investment. We must promote trade and investment liberalization…No one will emerge as a winner in a trade war.

No, that wasn’t from a libertarian kook or from a classical liberal fruitcake. 

That was from China’s president Xi Jinping; the recently anointed ‘core leader’ of the ruling communist party which essentially puts him at par with Mao ZeDong and Deng Xiaopeng.

The communist 'core leader' used libertarian premises to defend globalization (against the incoming Trump regime)

How I wish that the intent has been as good as the rhetoric.

But sadly, since politics represents a smokescreen, this just hasn’t been so.

Proof?

Action speaks louder than words (or in economics ‘demonstrated or revealed preferences’)

From Reuters [Capital curbs push Chinese firms to risky, costly dollar bonds, January 17, 2017] (bold added)

China's efforts to support its currency and cool its hot property market are encouraging more Chinese companies, including many state firms, to take on extra cost and risk by raising foreign-currency bonds in Hong Kong and other offshore locations.

Despite the yuan's nearly 7 percent slump against the dollar in 2016, Chinese companies including state-owned Bank of China (601988.SS) raised a record $111 billion in offshore dollar bonds, according to data from Dealogic, up from $88 billion in 2015.

JPMorgan analysts, using their own dataset, are forecasting another rise this year, even though many economists expect the yuan to fall further, making the loans more expensive to service and repay.

The list includes issuers who need dollars to pay for overseas acquisitions and deals but are unable to use their yuan after China tightened its grip on capital outflows last year to support the currency.

"It's getting increasingly difficult to move money out," said Shen Weizheng, fund manager at Ivy Capital, which invests in stocks and bonds in Hong Kong. "So for Chinese companies eager to invest overseas, the dollar bond market becomes an easier funding avenue."

State firms are also doing so because the government has made it easier for them to tap offshore markets, and there is pressure on them to bring more dollars onshore, investment bankers said.

Some property firms have also been left with little choice but to raise money offshore as government measures to contain a property bubble have included lending restrictions onshore.

Both the Shanghai and Shenzhen stock exchanges have tightened bond issuance rules for real estate firms since October, and regulators have repeatedly urged Chinese lenders to restrict property lending.

Chinese property developers have $7.9 billion in loans falling due in 2017, according to Thomson Reuters data, which could push more into offshore markets if they need refinancing.

On top of the exchange risks, the borrowers also have to swallow much higher borrowing costs.

As one would note, the above represents the ramifications of Mr. Xi’s anti-libertarian regime characterized by the explosion of stringent capital controls.

Chinese firms including state-owned firms have been intensely leveraging up with US dollar liabilities overseas in response to such controls (law of unintended consequences), thus increasing balance sheet risks, US dollar shorts (currency risks) AND market risks despite the huge rally by the yuan. 

The yuan rally was more than in response to the drastic capital controls, it was further aggravated by Mr. Trump’s comments on the US dollar: “too strong…killing us” and on the yuan’s “dropping like a rock” “because they don’t want us to get angry.”

Shibor rates (interbank loan rates) have been going out of whack or have gone really berserk, despite record injections by the PBoC!

 

No such has hardly been about holidays. Shibor rates have been soaring since 4Q 2016!

Capital controls signify an assault on property rights. Or such political controls denotes of the limitations of choice on one’s property. Such include, sending money overseas, investing overseas, conversion to foreign exchange for household or corporate savings, choices on the assets to own (domestic or international), constraints on trading activities and more (slippery slope controls, eventually social controls).

Such proscriptions also represent FORCED choices on the path of actions for the public or actions restricted to which the government wants or desires.

Indirectly, capital controls serve as protectionist tool—it is intended to safeguard the interests of the Chinese government at the expense of its citizenry, as well as exogenous forces. Of course, again, this is channeled through the implicit confiscation (financial repression) or redistribution of assets owned by the public for the benefit of the powers-that-be.

Sadly protectionism signifies the de rigueur geopolitical and domestic trend, that’s even before the advent of Trump administration!