The
riskiest thing in the world is the belief that there is no risk. When
people think there is no risk, they do risky things. By contrast,
when people think there is risk than they behave in a safe manner and
the world becomes a safer place. That’s why I welcome the recent
developments. They remind us that today the risks are substantial and
they should be undertaken only with considerable forethought. My dad
used to tell the story of the gambler who went to the race track and
said: “I hope I break even because I need the money.” The market
is not an accommodating machine. It will not go where you want it to
go just because you need it to go there. So if you’re talking about
money that you can’t afford to lose then you can’t say: “Just
give me the highest yield.” Howard
Marks
In
this issue
Phisix
6,575: Good Bye 2015: Year of Propaganda! Hello 2016: Year of the
Grizzly Bears?
-Happiness:
The Freedom of Choice
-My
Predictions Came True in 2015; Tremors from the Chinese Bubble Fault
Line
-Goodbye
2015: A Year of False Expectations, Propaganda and Manipulations
-False
Expectations, Manipulations and Deceptions
-Government’s
Propaganda Through Statistics
-Media’s
Worship of Bubbles
-Mainstream’s
Peso Babble; My 2016 Target for the USD-PHP 50, Crisis Target Over
56.45
-Technical
and Behavioral Perspective: 2015 The Transition From Overconfidence
to Doubt
-First
Week of 2016: The Shift from Doubt to Nascent Fear; The Story of 2016
-
Will History Rhyme? Will 1979 Serve as Template for Seven Years of
Famine?
Phisix
6,575: Good Bye 2015: Year of Propaganda! Hello 2016: Year of the
Grizzly Bears?
Happiness:
The Freedom of Choice
It
may be late for me to greet you a happy new year. But it is better
late than never.
But
for some, because stock markets have been sinking, they see 2016 as
signs of coming unpleasantness. It shouldn’t. Not even a crisis
should stop anyone from being happy.
Let
me just say that happiness is about one’s expectations of life. And
expectations are shaped by our preferences and values. Yet for as
long as expectations can be adjusted, one can remain happy regardless
of the environment. And changing expectations represents a CHOICE
that is available to everyone.
World
War II holocaust survivor Viktor
Frankl, an Austrian neurologist and psychiatrist, during the
dreariest moments of his incarceration or darkest moments of his life
found the essence to live1:
The FREEDOM to CHOOSE (bold mine)
We
who lived in concentration camps can remember the men who walked
through the huts comforting others, giving away their last piece of
bread. They may have been few in number, but they offer sufficient
proof that everything can be taken from a man but one thing: the
last of the human freedoms—to choose one's attitude in any given
set of circumstances, to choose one's own way.
And
there
were always choices to make. Every day, every hour, offered the
opportunity to make a decision,
a decision which determined whether you would or would not submit to
those powers which threatened to rob you of your very self, your
inner freedom; which determined whether or not you would become the
plaything of circumstance, renouncing freedom and dignity to become
moulded into the form of the typical inmate
Aside
from the suffering from imprisonment, Mr. Frankl lost his mother,
brother and wife in the holocaust.
And
applied to my headline quote above from the Chairman
and co-founder of investment firm Oakwood capital Horward Marks2,
where many have come to think that gambling in the central bank
distorted stock market represents an ENTITLEMENT or an ESCAPE
MECHANISM from their financial, social or personal dilemmas—a
source of rigidity in expectations—then it’s where these people
will find themselves in deep disconsolation. Reason? The markets as
pungently stated by Mr. Marks, are not an accommodating machine. They
will do what they are supposed to do regardless of your desires.
I
hope that my readers will find Mr. Frankl’s enlightening insight as
a guiding light, not only for investments but for facing personal
challenges in 2016 and beyond.
My
Predictions Came True in 2015; Tremors from the Chinese Bubble Fault
Line
Pls
allow me a moment of triumph.
In
going against the populist boom or the one way trade or where every
single mainstream “expert” forecasted the Phisix to zoom or where
nada, zero, zilch, zip among the same “experts” saw a negative
outcome for 2015, here was my prediction at the start of 20153
At
the start of 2014 I wrote of potential black swans
The
potential trigger for a black swan event for 2014 may come from
various sources, in no pecking order; China, ASEAN, the US, EU
(France and the PIGs), Japan and other emerging markets (India,
Brazil, Turkey, South Africa). Possibly a trigger will enough to
provoke a domino effect.
The
black swans have arrived. Crashes have become real time events. But
so far they appear as fragmented series of events than a global
systemic issue. 2015 will most likely see the spreading and
acceleration of this process.
Bingo!
Market
crashes have indeed been spreading, converging and accelerating, the
Phisix
notwithstanding. I warned that the post August 24 crash, one
day crashes have hardly been a one day event. This week’s
actions only fulfilled and validated my admonitions.
2016
will most likely be an extension, and importantly, an escalation and
aggravation of the unraveling of the massive malinvestments that has
manifested itself initially with the taper tantrum, and segued or
transitioned into the intermittent tremors of 2014-15 and now as a
global seismic dynamic.
More.
On
the Chinese yuan’s exposition of the global bubble malaise as
manifested by its depreciation (not purposeful devaluation by the
government), I wrote last December4
Defending
the US dollar soft peg required access to US dollars. Unfortunately,
such window has been closing for the Chinese economy. Moreover,
outflows and or capital flight have been compounding on the supply
conditions of an already scarce US dollar. Finally, domestic credit
expansion to save the stock markets translates to relatively more
money supply vis-a- vis the US dollar (whether the Fed tightens or
keeps policies at current levels). This implies supply side
influences on the yuan’s weakness.
Hence,
inflationism PLUS the scarcity of US dollar supply reveals why the US
CNY soft peg cannot be sustained. Acting
like a relief valve, China’s
central bank, the PBOC, simply relented on the building pressures on
the peg. The PBoC responded by allowing the markets to partially
revalue the yuan. Hence the devaluation! ...
And it may not just be about capital flight but likewise, imploding bubbles should translate to money supply destruction. And this can be seen through the slack in money supply (M2) growth, slumping growth of CPI and deepening deflation in manufacturing input prices or the PPI
Importantly, considering China’s immense US dollar debt exposure, borrowing to pay back debt will only reduce US dollar supply. How much more when highly leverage companies default?
And this compounds on the US dollar dilemma which has now become a global phenomenon.
So while the USD CNY’s advance may not have been as steep as last August, the USD-CNY broke out from its allotted bandwidth.
The last time the USD-CNY materially advanced (again last August), the USD Php spiked, and global financial markets tremored.
Despite
the Chinese government’s whac-a-mole policies, financial pressures
have been ventilated somewhere in China’s porous financial markets.
Not
only has the yuan been depreciating, the spread between the less
controlled offshore yuan (CNH)
and tightly controlled onshore yuan (CNY;
+1.56% week on week) has been dramatically widening. The Chinese
government has responded by
imposing tighter capital controls by suspending banks, particularly
DBS and Standard Chartered Bank in conducting foreign exchange
transactions.
Even
more, Hong Kong
Interbank Offered Rate (HIBOR) has
been skyrocketing (lower left chart courtesy of Alhambra
Partners), despite the government effort to facelift the markets last
week.
Further,
Chinese stocks dived 9.97% last week despite heavy
state intervention last Friday January 8.
The
Chinese government’s latest imposition of circuit breaker has even
exacerbated the crash this week. The circuit breaker consisted of a
15 minute trading pause when a decline of 5% have been reached and
adjourned trading for the day when stocks fall to the 7% level. The
result of the new rule was to halt trading activities in just a
stunning 29 minutes (29 minutes includes the 15 minutes hiatus from
5% trigger) after the opening bell last Thursday! The January 7 panic
spawned “chaos
and a race to sell” as the yuan
dived. January 7th was a swift KO of the bulls by the bears.
The
Chinese government quickly
suspended the circuit breaker mechanism. Moreover, the harried
Chinese
government extended the share sale ban on major shareholders last
week.
And
last December, where everything looked calm and placid, the Chinese
government paid a heavy price for cosmetic stability. The Chinese
government drained
a whopping record $108 billion of her much vaunted forex reserves!
The
China’s soft peg regime is being undone, under the cover or
propaganda of “liberalization”. In reality, current market events
have indicated of the intensification of China’s imploding bubble.
Such bubble implosion has mainly been expressed as liquidity
shortages through the USD. Liquidity woes will eventually become
solvency issues.
Simply
put, the Chinese government seems to have lost control in restraining
its colossal bubble from bursting.
The
Chinese bubble fault line continues to and will continue to emit
tremors.
At
the height of the Phisix bubble, I recall that someone in the
internet circle sarcastically labeled me as “the boy/man who cried
wolf”. Apparently, the wolves have arrived.
Goodbye
2015: A Year of False Expectations, Propaganda and Manipulations
While
imprisoned for “political crimes” for mounting a failed putsch in
Munich, Nazi leader Adolf Hitler completed a two series book, Mein
Kampf, which partly dealt with how to successfully implement
propaganda5.
All
propaganda must be presented in a popular form and must fix its
intellectual level so as not to be above the heads of the least
intellectual of those to whom it is directed. Thus its purely
intellectual level will have to be that of the lowest mental common
denominator among the public it is desired to reach. When there is
question of bringing a whole nation within the circle of its
influence, as happens in the case of war propaganda, then too much
attention cannot be paid to the necessity of avoiding a high level,
which presupposes a relatively high degree of intelligence among the
public.
The
more modest the scientific tenor of this propaganda and the more it
is addressed exclusively to public sentiment, the more decisive will
be its success. This is the best test of the value of a propaganda,
and not the approbation of a small group of intellectuals or artistic
people
It
appears that 2015 was characterized by Hitler type of propaganda.
Thus
I bid good riddance to the year of intensive false expectations,
manipulations, propaganda, and deceit
The
story of 2015 can be seen from the charts below.
The
above exhibits on the valuations, in terms of PER and PBV of the 30
issues comprising the headline index, PSEi. The EPS had been based on
PSE’s website as of January 7 and the BV from the second quarter
reports as indicated on the PSE’s November monthly report.
Basically
the above issues represent the PSEi at 6,600. That’s about 8% lower
from the close of 2014, which became the base for 2015.
Even
at today’s 6,600, the numbers above have generally signified
nosebleed levels of valuations. To read high cap rates on such
valuations will be tantamount to committing financial hara kiri.
And
it’s not just the Philippines, the ASEAN majors, Indonesia,
Thailand and Malaysia have all been plagued by massive mispricing,
based on average and median Price to Cash Flows, Price to Book Value,
Price to Sales and Price to Earnings.
All
ASEAN 4 majors have virtually ranked within top 10 as the priciest in
ALL categories among emerging markets based on Gavekal’s
end of the year calculation.
The
Philippines ranked second highest based on average price to cash
flow, and fourth based on average price to sales.
I
warned
in 2014 that valuation levels then were reminiscent
of valuations of pre-Asian crisis levels. Today, valuations of
Philippine and the other major ASEAN equity bellwether have been at
par or have exceeded the 1996 or pre-Asian crisis benchmarks!
As
reminder, the respective denominators for the said ratios have been
calculated during times of the fading artificial boom. How much more
will valuations skyrocket if denominators fall without or with little
accompanying decrease in the numerator?
Yet
the above 6,600 valuations represented much of the story of 2015. A
year that featured false expectations, deceptions, propaganda and
manipulations.
False
Expectations, Manipulations and Deceptions
Coming
off 2014’s 22.76% returns, mainstream ‘experts’ were right to
forecast that the PSEi would hit the 8,000 mark, but went awry when
they predicted 8,000+ as a yearend target for 2015. Media quoted on
the
crystal ball readings of some these experts to justify their
equity market targets with expectations that PSE’s earnings would
zoom to an incredible 16%!
The
PSEi ended the year 2015 at 6,925.08 down 3.85%. Way way off their
targets.
These
‘experts’ hardly provided any economic explanation as to how
these will be attained except to generate wild assumptions predicated
that money grows on trees.
They
have ignored the effects of 10 months of 30%+++ money supply growth
and the subsequent inflation on profits and consumer spending, and
likewise, the effects of a massive flattening of the Philippine yield
curve.
For
these experts, the only prices that mattered were stocks and
property. And rising prices of the principal objects of bubbles, all
premised on statistical G-R-O-W-T-H, have been perceived to travel in
a sustained trajectory.
Hardly
anyone has given any afterthoughts to the possible consequences of
soaring prices of these assets on the real economy or on the
financial system.
Almost
every market participant and economic observer had been enthralled by
rising prices which they associated with a sustainable boom.
Apparently, none have learned from history.
Since
the January breakout from the May 2013 highs, officials of the PSE
celebrated each fresh highs until the “26
record finishes”.
Yet
they have ignored how record highs have been a product of repeated
rampant and massive manipulations, particularly by serial employment
of “marking the closes”. Even the last
three trading days of 2015 had been sullied by brazen headline
price fixing through marking the closes.
The
PSE regaled the public with “this time is different” as the
Phisix sailed to 8,127.48. Yet hardly they or anyone from the
mainstream reported on how record highs had been attained by
rotational
pumps from 10 of the 15 biggest market caps, even when
HALF of the PSE universe had been sliding into the fold of the
bear market!
Some
people love to talk about how the public should avoid scams, but how
about scams perpetuated by the establishment?
The
PSE even hailed that the milestone highs as derivative from political
dynamics that has led to “investor confidence”. Really? Now
at 6,575 where oh where has the politics based “investor
confidence” been? Just what happened to farcical G-R-O-W-T-H and
all the inflation worship?
Palpably,
a deafening silence from the PSE.
And
yet what happened to all those massive price fixing all year round?
What happened to all those third party (depositor, fiduciary or tax)
money used to prop up the index?
And
when events turned against their favor, the PSE’s reports showed of
a startling blackhole on how listed firms of the PSE performed in 2Q.
It
turned out that the PSE
censored the 2Q activities because the NGDP
of listed firms fell by 3%, as profits dived by 7.5%!
Importantly,
1Q
performance already paved way for the 2Q performance. Even when
profits in 1Q jumped 13.9% primarily due to extraordinary gains from
a few issues, 1Q NGDP rose by a measly 1.6%! 1.6% transitioned to -3%
which led to a 1H NGDP of -.85%.
Thus,
the August 24th crash was barely about China’s currency revaluation
but about the deteriorating fundamentals in the face of a one way
trade!
Government’s
Propaganda Through Statistics
The
same dynamic can be seen in the government’s reported GDP.
The
government reported an improvement in 3Q GDP which rose to 6%. It
turned out that
for the past three quarters government statisticians have used
cascading CPI to magnify statistical GDP via
base effects! So even when NGDP has dropped to 4.5% in 3Q,
constant based GDP flew to 6%! Given the record low CPI prior to
November 2015, it would seem the
first time ever for constant based GDP to surpass NGDP!
Constant
GDP technically is called real GDP. But given the statistical
artifice, phony GDP just cannot be reckoned as real. It’s a lie.
Moreover,
statistics can turn stones into bread or negatives have been made
positive by the same statistical alchemy. The negative performances
of manufacturing and exports had remarkably been upgraded into
positives also during the 3Q!
Importantly,
government’s
NGDP and the PSE’s NGDP can’t even square…or even at least
reflect on some consonance, as they appear to be pointing at opposite
directions!
In
addition, government
statisticians declared that employment and unemployment rates rose to
record highs in 2015. Curiously, this comes in the face of a
striking collapse in online job postings for three major online job
platforms.
Just
where has jobs been coming from to fill the record employment levels?
A reversion to the traditional means of advertisement—the
newspaper? Viral or direct ways of recruitment ala multi-level
marketing? Or through mental telepathy? Or has this been another
statistical ruse to keep the façade going?
And
funny how establishment rationalizes online job crash from a slowing
of investments with a prospect of recovery due to the ‘strong
consumer spending’ meme. Yet if there are little jobs and where OFW
remittances growth has been flailing, just where will consumers get
resources for them to spend? Manna from heaven? Or from statistical
Sadako?
Such
represents 2015’s bubble logic.
And
speaking of OFWs, 3Q
GDP has even rendered the contributions by the OFWs as
inconsequential. Government statisticians have essentially
stripped away the glorious role of OFWs as economic heroes.
It’s
bad enough for OFW’s remittance growth to have languished. It’s
even worse when the Saudi-Iran feud may turn into a full scale war.
And it would be the end of the world if and when the proxy wars of US
(Saudi) and Russia (Iran) morphs into a direct confrontation between
them, where both have been armed with nuclear weapons to the teeth.
Bizarrely,
the BSP
sees this brewing Saudi-Iran feud as “some
temporary setback” on remittances, “because of logistical
difficulties and deployment may slow”. If war erupts between Saudi
and Iran, then this will translate to a wide scale turmoil that will
likely spread and wreak havoc on most of Middle East. Such mayhem
will have no precedent.
And
this may even involve direct participation of superpowers. So it
won’t be just logistical difficulties, because since war means
economic dislocation, it means OFWs will be streaming back home. Has
the BSP been blind to how the Syrian civil war (really another proxy
war between US-Russia) has incited a refugee crisis in Europe?
Again,
another outlandish relic of bubble logic.
And
speaking of the BSP, earlier the BSP reported a spike in NPLs
of auto and real estate consumer loans in 1Q 2015. This should
signify a natural consequence to a slowing GDP. However, in the 2Q,
suddenly NPLs of auto and real estate consumer loans vanished even as
statistical GDP hardly improved. These are kinds of twisted logic
being presented to the public as economic facts.
Media’s
Worship of Bubbles
Of
course, bubbles have also been amplified by media.
Mainstream
publishes only information that reinforces biases in favor of the
boom. As explained before that’s because media protects the
interests of their major clients or advertisers.
For
instance, domestic
media virtually censored the warnings of ICT magnate Enrique Razon
that another financial crisis is coming. It took an overseas
media outlet to air Mr. Razon views. Perhaps domestic media believes
that the Philippines will be immune to one.
Yet
the bigger the denial, the greater the risks.
Press
releases masquerading news became a dominant character of news
reporting.
Examples.
An
outrageously
laughable survey commissioned by an insurance company depicted that a
third of the Philippine residents believed that the nation had
attained first world status! Paradoxically, this comes even as
only a third of the population are banked and where a third of the
population reportedly believes that they are self-poor (ironically
this comes from the same pollster)
Celebrity
endorsement of investing in blue chips (regardless of how
expensive they have been).
Endorsement
by buyside experts that the “perfect
time to invest is today” (published August 19, 2015 Phisix
7,344.73)
A
two
week media blitz that simultaneously promoted the property sector
on various media outlets. I suspected that such concerted action
manifested a sign of emerging weakness. Apparently I have been
validated!
Media
kept pontificating that due to G-R-O-W-T-H, Philippine auto sales
growth continues to rip even when the 3Q 17Q report from GTCAP showed
that sales growth of Toyota
Motor Philippines crashed during the quarter!
As
a side note, media has been totally obsessed with everything with a
Philippine tag on them. The recent crowning of Ms Universe to a
Philippine based candidate has prompted them to profusely rave over
her victory. It appears that the question
and answer segment was pivotal in delivering the crown to the
Philippine representative. The Philippine candidate seemed like the
statist exemplar of the five candidates. The winning answer; she says
that she welcomes a US military presence in the country. This was
music to the ears of the neocon and military industrial complex which
has a stranglehold over Washington!
At
the close of December, media also celebrated Rizal’s
Day or the commemoration of the death of the Philippines national
hero. Mr. Rizal was a staunch nationalist who fought and died for
independence of his homeland against Spanish colonialist. If Mr.
Rizal would be alive today, would he cheer over the victory of Ms.
Universe 2015? Or would he condemn or lambaste her for selling out
her country to imperialist? Media appears to be caught in a severe
cognitive dissonance.
For
mainstream media, it’s about any ‘feel good’ thing that sells.
Mainstream’s
Peso Babble; My 2016 Target for the USD-PHP 50, Crisis Target Over
56.45
Media
even swaggered
about how the Philippines will NEVER run out of US dollars due to
BPOs and OFWs. Media’s extremely prejudiced views or bubble
zealotry ignores Saudi Arabia or China or even global
forex reserves conditions which have been in a slump.
Add
to this myth mainstream’s
view that a weakening of the peso would be beneficial to the
economy. In 46 years or from 1959 to 2005, the USD soared from Php 2
to Php 55. Just where exactly can we find prosperity from consumption
spending or from G-R-O-W-T-H driven by a crash of the peso?
Also
if true, then hyperinflation should miraculously transform every
society from poor to rich. Yet empirical evidence or reality tells us
the opposite, the way to poverty is to crash the currency. Modern day
examples: Zimbabwe, Venezuela and Argentina.
The
USD Php closed the year at 47.06 up 5.02% from 44.72 at the close of
December 2014.
I
saw only UBS
as having accurately predicted the peso’s close at Php 47 in
2015. Congrats to them.
In
citing strong macro fundamentals, all the rest of mainstream analysts
substantially underestimated on the peso’s fall. The mainstream
spent the year revising on their outlook as the peso plumbed lower
through the year.
The
BSP forecasted
the peso at Php 43-46 range for 2015, while the Philippine
government’s Development
Budget Coordination Committee (DBCC) saw
the peso at P42-45 “based on the recommendation of the Bangko
Sentral ng Pilipinas (BSP)”.
If
these guys got the forecasting of the peso all so terribly wrong,
then why does everyone seem to think that they can accurately see
where the system’s risks are? Because they say so? Because media
and their bevy of apologists says so?
Moreover,
can government not be subjected to regulatory capture, aside from the
knowledge problem, for them to overlook on balance sheet risks? Or
how about the public working around regulations via legal loopholes?
Now
to my crystal ball.
My
crystal ball portends that the USD PHP in 2016 may hit 50 or may even
jump past 50. USD
Php
50 would be my end of the year target.
At 50, the USD PHP would translate to an annual 6.02% gain.
Should
a crisis (regional or global) surface, then the 56.45 high during
October 13, 2004 will most likely come into picture.
For the USD PHP to reach the 2004 level means that the USD will soar
by 19.95% against peso.
Let
me put a historical context on this.
When
the Asian crisis emerged in 1997, the USD Php vaulted 12.42% or from
Php 26.216 to 29.471 (average BSP data). The following year or in
1998, where crisis went in full motion, the USD skyrocketed to Php
40.893 or by a terrifying 38.76%! Thus, in two years or 1997-8, the
USD spiked by a staggering 55.98%!
Applying
the historical complex to my current projection: an emergence of a
crisis will likely send the peso past 50.
However, it may or may not hit 56.45 this year. This will largely
depend on how the
crisis evolves. Nonetheless, the USD PHP 56.45 threshold will be a
cinch to break should a regional crisis occur. The 56.45 target,
thus, represents my secondary target subject to a crisis in motion
that is not limited to an end of the year target.
And
speaking of crisis, last week billionaire crony and investing savant
George Soros has warned of the likelihood of a China triggered global
crisis
that echoes 2008 this year.
Additionally,
corporate debt downgrades in Korea, according to a report from
Forbes,
have already reached 1998 or the Asian crisis levels.
I
may miss on the timing, but in observation of the economic process, a
(global or regional) crisis seems now inevitable.
And
it’s more than just the risk of economic crisis, 2016 could likely
be the year of a major geopolitical crisis.
Technical
and Behavioral Perspective: 2015 The Transition From Overconfidence
to Doubt
Let
us look at the domestic markets from a behavioral and techical
viewpoint.
2015
was a showcase of radical changes in sentiment.
The
year started with confidence oozing from the establishment.
The
sucessful breakout from the record high set on May 2013 in mid
January led the Phisix to a string of record highs…yes 26 of them
(according to the PSE)…which climaxed at 8,127.48 last April 10
2015.
From
then, events segued from overconfidence to doubt. Sellers began to
reassert their presence as the strenght of the bulls faded. The
Phisix lurched about first by consolidation, then eventually followed
by decline.
Yet
what you see depends on where you stand. For the optimist, a pattern
of alternating returns may yet deliver the goodies for 2016. Since
2010, returns of the Phisix had rotated between outperformance to
underperformance. Nonetheless all underperformances were positive.
Still
for optimist, 2015’s deficit may yet turn out to be a staccato of
resplendence. Hence, the Philippine national elections have become
the fountain of hope for a recovery in the eyes of the mainstream.
Yet
as Alexander Pope observed
of the nature of man, hope springs eternal.
Even
so, the patterns of the rate returns suggests of a dwindling base.
2016 may end the year in positive but it would less likely in the way
that the optimist would want them. Since 2009, the rate of returns
has not only been very volatile, but importantly, these have been in
a decline (see blue trend lines)
Furthermore,
historical numbers of the rate of returns translate to little
significance in projecting future outcome/s. Reason? The myriad and
complex factors that shaped the past are fundmanetally DIFFERENT in
the future.
Although
of course, there are connections between the past and the present.
Connections that are predicated from the action-reaction feedback
mechansim of the millions of moving parts of the economy.
For
instance, a general dearth of investments will mean little income,
earnings or jobs growth in the future.
On
the other hand, overinvestments will lead to excess capacity, which
again will be a prospective drag.
Or
high price inflation (affecting all prices in the economy) will also
mean reduced profits and investments for commercial entities and
disposable income for consumers.
So
if there were fewer investments or overinvestments or high inflation
in 2014-2015 then the effects from these should be manifested today.
Understand
that economic activities signify a process. They do not emerge out of
the TV screens.
Going
back to 2015.
The
negative returns by the headline index was hardly shared by all the
sectors. Reason? Because most of the BUYING activities going into the
April record high had been concentrated to a few heavyweight issues.
So when doubt emerged, the big gains racked up by these during the
first quarter pump were merely clipped.
That’s
unlike most of the issues which were down and hardly participated
during the buying pumps even when the headline index stormed to
landmark highs.
In
particular, the general softening trend at the last half of the year
allowed the the holding and the property sectors to keep some of
their gains.
And
broken down into specifics, the distribution of returns for the
composite members of the headline index largely favored the top 10
largest market cap issues. That’s because as noted above, most of
them had been beneficiaries of targeted or concentrated buying
activities that led to April’s milestone.
So
at the close of 2015, SM’s annual return of +6.01% and AC’s
+8.93% cushioned the index from bigger losses. Both had a combined
market weight share of 16.16% at the close of the year. Yet these two
were supported at the flanks by peers: AEV (+9.96%), GTCAP (+27.91%)
and MPI (+13.04%).
Meanwhile,
SMPH almost had singlehandedly been the force behind the gains of the
property sector in 2015 with a fantastic return of 27.35%, the second
largest next to GTCAP. SMPH closed the year with a market weight
share of 6.2%
On
the other hand, stock prices of its rival, the largest property firm,
ALI, while closing the year still on a positive note with +2.23%, has
sputtered and consumed much of the enormous gains at the early year.
To
top it all for the Phisix 30, in 2015: 12 issues posted gains, 17
issues were in the red while one was unchanged.
First
Week of 2016: The Shift from Doubt to Nascent Fear; The Story of 2016
2016
has signaled a seismic shift from Doubt to Fear.
If
2015 ended with a masive swelling of doubt, the first week of 2016
has evinced that doubt has morphed into nascent
fear.
The
PSEi tailspinned by a shocking 5.42% at the first week of 2016! What
a way to greet the new year.
This
week’s massive loss ranks the third
largest since the 2013 taper tantrum. The 2013 antecedents: August 23
-5.59% and June 14 -6.86%.
In
the last week of August 2015, where the PSEi crashed by 6.7% in a
single day, the PSEi closed down by only 2.48%. This meant that the
bulls fervidly fought to recover more than half of the losses from
the August 24 meltdown.
It’s
a different character last week. Instead of a single day crash, two
sessions combined to deliver the gist (84%) of this week’s loss.
There was little signs of past aggressiveness by the bulls.
Curiously,
in the two days where the bulk of this week’s losses were accrued,
particularly on January
4 (-1.7%) and January
7 (-2.86%), foreign trade registered positive. This meant that
the stampeding sellers came from the locals.
Yet
Friday’s big net foreign selling brought upon an outflow of Php
641.34 million for the week.
Moreover,
last week’s carnage was broad based. From a sectoral performance
perspective, all sectors bled. This was led by the mining (-7.04%)
and property sectors (-6.82%).
For
the property sector, Ayala Land’s entry to the bear market with
this week’s -7.84% crash, spearheaded the property sector’s
decline.
Yet
where ALI goes, the market goes.
This can be seen from the chart of ALI (black candle) and the Phisix
(red line). ALI’s has the second largest market weight share on the
PSEi basket: 8.18% as of Friday.
And
of the 30 component issues of the Phisix, 28 posted deficits while 2
issues; GTCAP and SMC bucked the trend.
Declining
issues walloped advancing issues in all five sessions, to tally the
LARGEST ever (since I began tabulating these in 2011) margin at 366!
And
what’s even more remarkable has been the sustained shrinkage of
peso trading volume (bottom)
Average
daily volume has shrivelled to a mere Php 4.445 billion, the lowest
since January 2014.
January
4th or Monday’s 1.7% loss came with just Php 2.99 billion of peso
trades!
It
would be easy to say that last week’s volume may be due to holiday
hangover. But falling volume has been the overall
trend throughout 2015. (blue trendline)
Volume
during April’s record 8,127.48 temporarily spiked but generally
came amdist a declining trend.
Yet
volume during the first week of January 2013 and 2015 registered Php
6.5 billion and Php 10.3 billion, respectively. Hardly a holiday
issue. That’s largely because performance as seen in volume then
represented a carryover from the upswing of the closing period of the
previous year.
This
shows how the peso volume reflects on du jour investor sentiment.
January
2014’s lethargic volume came during the bottoming phase from the
May 2013 taper tantrum.
Today’s
deepening slack in volume amidst an accelerating price downtrend
simply means that buying support at current levels appear to be
losing ground…fast
In
other words not only has doubt been spreading, doubt appear to be now
accompanied by fear.
Price
actions reinforce such message.
The
two consolidation phases (blue rectangles) during the second half
eventually broke down. All these reinforces the transitional dramatic
time induced changes in the market’s psychology.
This
week’s breakdown has only underscored the shifting behavioral
dynamic balance which has been underpinning actions at the PSE.
And
as noted above, foreigners have hardly been the culprit for the
downcast mood now. Locals have began to question the viability of the
boom. If sustained, eventually headlines will exhibit the same mood
shift.
And
it’s not just the Phisix.
The
strong USD or the USD PHP (blue candle) has only highlighted their
inverse relationship: Strong USD Php translated to weak PSEi, and
alternatively, a strong PSEi extrapolated to a weak USD Php.
The
USD PHP closed this week at 47.165 up by .2%
The
peso, the Phisix and prices/yields of sovereign bonds have been
converging. Philippines financial markets appear to be in symphony.
With
this week’s close at 6,575.43, PSEi is just 73.446 points or 1.1%
from the bear market threshold at 6,501.48 or 6,500.
And
as remindeder: bear
markets in stocks have hardly been an isolated phenomenon too. By
isolated this means ramifications of bear markets will be manifested
on real economic activities, and will likewise have social-political
consequences.
Even
those brazen price fixing actions will have consequences.
This
will be the story of 2016.
Will
History Rhyme? Will 1979 Serve as Template for Seven Years of Famine?
Will
history rhyme?
Remember
this?
In
September 2014, I transposed the generational highs of the previous
market tops into the May 2013 levels to get their contemporary “high”
equivalent.
Then
I wrote6:
The
two generational or secular highs (1969-79 and 1994-97) during the
topping process showed how previous highs had been exceeded. The
cyclical top of 2007 likewise reveals of the same dynamic but at a
more muted dimension.
As
I have been saying the issue is about financial instability rather
than of reaching specific price levels. The two generational/secular
stock market bubble cycles did not only result to a stock market
crash but metastasized into financial crises.
The
cyclical top of 2007 only resulted to a stock market crash but not to
an economic event. But the 2007 top which has been a cyclical
phenomenon has connected with current developments from which
originated in 2003. 2003-2014 marks the secular bull market to the
topping phase.
In
the economic context, 2014 has been associated with 2007 because the
policies implemented then (automatic stabilizers) to forestall a
recession on the formal economy and the ensuing shift to aggregate
demand (monetary easing) paved way for both the 7,400s of 2013 and
2014 undergirded by the property and property related bubbles.
In
short, the higher the price levels, the greater the financial
instability.
Eerily,
the first row seem to have resonated with this year’s milestone
record at 8,127.48 last April
Will
history rhyme with 1979 as template, where the Phisix may fall by
80%?
Will
there be seven years of famine after 7 years of plenty (Genesis
41)? It took about 7 years for the secular stock market crashes
of 1979 and 1997 to bottom out.
___
1
Viktor
E. Frankl Man's
Search for Meaning AN INTRODUCTION TO LOGOTHERAPY, Beacon Press
p.33, http://ir.nmu.org.ua/
2
Mark
Howards, The
Risks Today Are Substantial Finanz and Wircshaft December 28,
2015
3
See
Phisix
at Record 7,400: Be Fearful When Others Are Greedy January 12,
2015
4
See
Phisix
6750: Update on the Seven Reasons Why the PSEi is Headed South! Why
The Popular Clamor for a Strongman Rule is a Bubble December 14,
2015
5
Adolf
Hitler, Mein
Kampf p 156 greatwar.nl
