More Bubble Troubles: Astounding Divergence in Data Between Philippine GDP and the Philippine Property Sector!

The Philippine government manufactured another eye captivating GDP number. They reported that real GDP was a sensational 7% in 2Q and 6.9% in 1H while NGDP was at 8.7% and 8.2% over the same period.

 

The spectacular GDP brings to the fore the most remarkable and intriguing discrepancy: why has growth in government revenues been up by only 1.1% in 2Q 2016 and 1.014% in 1H??? That’s a galaxy of difference! (Bureau of Treasury data here)

Moreover, just what happened to PSE 30’s eps growth of 12.3%??? Shouldn’t such outstanding eps performance postulate to more tax revenues for the government?

And worst, why has GDP been in a deviating path with the government’s revenue intake since 3Q 2014????It’s not anomaly, it is a trend.

Yet the divergence has become even more pronounced.

And it would seem that G-R-O-W-T-H doesn’t equal to taxes.

Have these been due to burgeoning tax leakages since 2H 2014?

Or has the government been immensely overstating GDP? Or could it have been both.

And another thing, I previously noted again in June: Since GDP is about money based spending and since bank credit growth accounted for more than 70% of money supply growth, then this means that the core segment of GDP has accrued from bank credit growth. In short, bank credit growth is the quintessence of GDP performance.  So the target of reversing the decline in credit growth trend may have been intended to boost statistical GDP. 

2Q’s NGDP was at an astounding 8.7% up from 7.7% in 1H, 5.4% and 4.6% in 4Q and 3Q 2015. 1Q and 2Q numbers have accounted for a HUGE LEAP from 3Q and 4Q 2015.

And as noted above NGDP has tracked bank credit growth. The correlation signifies a stunning .98!

Have the government been basing their GDP numbers on bank credit conditions? Or has the correlation represented a fluke?

Last week I wrote that the chief international exponent of the Philippine property sector, the Global Property Guide (GPG), seem to be suffering from schizophrenia. That’s because while increasing problems continues to emerge to plague the sector, the apologist for the real estate bubble seem to be having an increasingly difficult time in defending the populist concept: property inflation EQUALS G-R-O-W-T-H.

And at the last segment of the treatise, I showed the real estate NGDP of the 6 PSE listed firms which seem to be hurtling towards earth.

Now, I expanded the scope to include all PSEi firms with property subsidiaries PLUS issues composing the property index.

And if the 2Q and 1H outcomes would continue, then this will continue to confound GPG. And they will even have more arduous time defending the status quo.

More importantly, current conditions reveal that the BSP’s silent stimulus may not be as effective at all. While eps did jump, the effects on topline numbers of the real estate sector reveals of a significant sputtering.

This means that the BSP would need to intensify injections of monetary narcotics to keep the property sector from ditching.

As an aside, but I thought narcotics should mean death? Why doesn’t the administration apply the same treatment to monetarism? Or to those who implement them? Because the administration benefits from it?

By the way, inflationism is much much much much much much deadlier than drugs or grassroots criminality. Besides, part of the drug and crime menace has been rooted from inflationism.

The great author and journalist Henry Hazlitt**, who echoes JM Keynes on Lenin’s best way to demolish a capitalist system, on why inflationism leads to criminality and to societal breakdown

Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.

Venezuela should be a real time example of havoc inflicted from inflation financed socialism

**Henry Hazlitt CHAPTER 22 The Mirage of Inflation Economics in One Lesson p 157

And see now you see why the Philippines have embraced a leftist government? This has emerged mostly from the desire to solve social ills via “desperate remedies”. Or short termism in the form of the populist superhero effect spawned by bubbles!

Now back to the property sector

 

For the 1H figures: NGPD or growth of aggregate gross property sales of indicated property companies* has slumped from 2014’s 12.23%, 2015’s 9.4% and 2016’s 2.81%.

Curiously government’s real estate NGDP was 9.9% in 2015 and 12.4% in 2016 over the same period. It is as if government’s number and revenues declared by listed companies have been elicited from different countries.

*Companies included: Ayala Land, SM Prime, Megaworld, Vista Land, DMC Holdings, Filinvest Land, Century Property, 8890 Holdings (HOUSE), Robinsons Land, LT Group, Aboitiz Equity Ventures and Belle Resources. Global Estate Resources (GERI) is part of Megaworld.

For 2Q figures which included high flying Double Dragon: the property NGDP also reverberated 1H’s material downtrend 15.64% in 2014, 5.4% in 2015 and 4.1%.

Fascinatingly, the government’s numbers again totally depart from what the industry says: 12.3% 2014, 9.7% 2015 and 12.1% in 2016.

Again the Philippine real estate industry operates in two different worlds?

As a side note, despite the hoopla over Double Dragon (stocks up +145% year to date with PER 238.94 based on 2015 eps) property sales fell -7.54% in 2Q! It is why bubbles are so enthralling, people will attribute anything just to justify price chasing actions.

And to add to the list non property index and PSEi firms Shang Properties and Rockwell Land, 2015’s NGPD would be 4.4% and 6% for 2016. In short, for 2Q, the performance of the property sector had fundamentally been little changed in 2015 and 2016. But both have collapsed in the context of 2014 growth rates

Back to 1H, to add SHANG, ROCK, Santa Lucia Land, Crown Equities, GTCAP’s Federal Land and Property of Friends, the sector’s NGDP improves by a slim margin to 3.7% in 2016.

The lack of historical numbers by some of these firms has limited their inclusion to my assembled data.

 

Now of course, property firms are not a one size fits all thing. Nevertheless the overall numbers gives us a temperature, or a pulse or a measure of the industry’s health conditions regardless of what their eps numbers say.

Another insight would be from the distribution of growth per firm.

And the topline numbers of PSEi component firms and firms constituting the property index have been telling.

In 1H 2016, 5 firms posted NEGATIVE growth rates in property sales while four firms registered lackluster sales growth with less than 5%. In total, 9 firms or 56.3% of the above firms have performed below par.

Even worse has been the continuing huge crash in property or condo sales of Century Property (CPG) even as the company continues to massively pile up inventory and debt. 

This is how CPG rationalized the crash: “For the six months ended June 30, 2016, the Group recorded revenue from real estate sales amounting to P=2,972.61 million and posted a decrease of 40.3% from P=4,978.34 million in the same period of 2015. The decrease in real estate sales is attributable to less revenue recognized in the first six months of 2016 for projects that turned over in the prior years. A significant portion of revenue from these projects were already recognized in 2015 and prior years.

Why use technicalities as pretext for the sales slump? What happened to G-R-O-W-T-H or to the fantastic 12.4 real estate NGDP????

And as shown above, those niggardly growth numbers have not just been from a single firm, the relative performance (for those with numbers) of many issues has materially deteriorated today compared to 2015 and 2014

And more importantly, it’s not just about competition but economic imbalances that have so far been influencing the downturn in property sales. Since economic activities are entwined, those weakening numbers will eventually spread to other sectors.

At the day’s end, the accrued ferocious race to build supply has begun to take its toll. Also those excessively priced property issues will very soon face a rude awakening.

PSEi 7,930: BSP’s Silent Stimulus Just Kicked Upstairs 2Q and 1H EPS Growth by 12.3% and 3.9%!

Last June, I observed that the BSP engaged or implemented a dramatic “silent” stimulus in 4Q 2015 and 1Q 2016. I say “silent” because none of this has been discussed at media or by establishment outfits (as I know of). The BSP has made no such disclosure.

But actions speak louder than words.

The BSP enforced the stimulus by prying open the drastically flattening (or even the slightly inverting) yield spreads. Like in 2009, the forcible widening of spreads had been designed or engineered to reverse the tightening of liquidity in the financial system.

Credit tightening has been seen via the reduction in bank loan activities which resonated through the crash in M3, and subsequently got vented on the slide in CPI.

So aside from widening spreads of domestic sovereigns, the spikes in the balance sheet of both the BSP and the banking system has accounted for as the smoking gun evidence of the silent stimulus

I proposed three reasons for this: 1) To finance election spending, 2) to overturn the trend of falling price levels (thereby support claims to GDP advancement), and finally 3), to save the domestic stock market from the August 2015-January 2016 crash.

As for the second motivation: In 2015, the Philippine government repeatedly announced that the GDP (statistical economy) has been rising. Yet ironically, the supposed G-R-O-W-T-H dynamics emerged, again, in the face of falling bank credit growth, liquidity and falling prices.

So the cosmetic GDP activities have deviated from many real economic events. And part of such disparity or contrasting scenario has been at the corporate levels.

While GDP supposedly rose, PSE’s corporate performance actually went into the opposite direction. This was eventually reflected on the stock market through the crash.

And so the masquerade of propping up statistics will only be exposed if the discrepancies continue. Hence, the political imperative targeted to desperately bolster eps and the GDP or the statistical economy, by the BSP, through the monetary policy mechanism.

 

In short, the above suggests that the BSP’s action has prioritized the rescuing of the stock market.

The nominal changes of the Philippine treasury yield curve in 1H 2016 exhibits the odd man out. Yields of 10 year yield rose as the entire curve plunged. This accounts for further proof of yield management practices by BSP.

And the opposite directions taken by the yields of the 10 year and the rest have extrapolated to the broadening differentials or variance. (see upper window)

Last July I wrote, “I do not discount that the sudden spike in bank credit growth from 4Q to the present could provide a TEMPORARY boost to NGDP and eps.”

By forcibly widening the yield curve, this entails the following:

-Widening spreads translates to higher net interest margins. And higher NIMs encourage bank lending (ceteris paribus). Hence, this would redound to the expansion of nominal bank credit volumes.

-Higher interest margins translate to more profits from banks.

-Bank credit expansion help power asset prices higher.

-The inverse of vastly lower yields are higher bond prices. Since bonds are mainly traded by financial institutions thus rising bonds prices adds to the financial system’s portfolio gains.

-Bank credit expansion has moved along with PSEi index but with a time lag (lower window). This means that PSEi’s vertical price movements have likewise been financed by credit.

-Higher asset prices means higher collateral values. And higher collateral values can be used to generate even more leverage. And more leverage leads to higher prices. Thus the feedback loop mechanism pillared on credit expansion.

This also means that higher asset values inflates on the banking system’s non interest income such as gains from trading, commissions, fees and others

-Inflation of bank lending also leads to magnified consumer spending.

So Ladies and Gentlemen, allow me to present the impact of the BSP’s silent stimulus to the performance first of 1Q and 2Q eps in the context of the PSEi 30.

 

First a correction. Last July I placed 1Q eps growth at 2.25%, I inadvertently interchanged ICT’s eps of 2016 and 2015. So the revised numbers reveal that 1Q slumped by wicked 5.5% or double the 2.25% earlier indicated.

Second, the BSP has answered the supplications of PSE officials. PSE officials will now scream in glee and in elation. This will impel the PSE to move out of their shells or from hibernation to pompously broadcast on 2Q earnings. That’s because 2Q eps zoomed by 12.3%!

Also this would prompt for the spreading of more disinformation anchored on GDP equals EPS equals G-R-O-W-T-H, therefore VERTICAL price pumps.

 

Third, because of 2Q’s scintillating performance, 1H eps growth accounted for an eps recovery of a modest 3.9%.

Fourth, headline eps growth hasn’t been a rising tide lifts all boats dynamic. Instead 1H eps signified a story of huge divergence—superb outperformance by a slim majority as against a substantial number of underperformers

In the 1Q, there were only 6 issues which posted declines in eps growth, 1 suffered outright loss while 8 posted lower than 10% growth. The underperforming firms afflicted HALF of PSEi companies!

In the 2Q, 9 issues posted declines in eps growth (50% increase relative to 1Q), while 5 issues underperformed. So 2Q 12.3% growth was mainly due to 16 or 53% of the issues which accounted for substantially enormous eps growth numbers.

In the 1H, 7 issues registered negative growth, while 4 issues were subpar for a total of 11 or 37% of the PSEi firms. While the number of underperformers whittled down to 37% from 50% in the 1Q, the quality of eps growth more than the quantity matters. This leads to the fifth factor.

Fifth, much of those big numbers were either inflated by BSP’s silent stimulus and or through non core or non-recurring events.

Example of beneficiaries of BSP silent stimulus:

BDO: 17% surge in NET interest income on loans and other receivables which grew by 14% from consumer loans and 50% surge in interbank loans. Other income soared 35% based on Php 2 billion of trading gains, service charges and fees up 20% and trust fees higher 9%.

BPI: “Net interest income at P10.7 billion, increased P1.2 billion, or 13.1% on account of the P176.8 billion, or 12.6%, expansion in average asset base and increase in yields. Interest income stood at P14.7 billion, up P1.9 billion, or 14.6%...” More… “Other income at P9.2 billion was P4.1 billion, or 80.9% higher than the P5.1 billion earned in the second quarter of 2015: Trading gain (loss) on securities at P4.8 billion, increased P3.9 billion, or 435.7% due to gains derived from the sale of the reclassified portion of certain held-to-maturity securities to AFS as disclosed in the Notes to Financial Statement Disclosure Portion of this document. Other Operating Income at P2.3 billion, increased P160.6 million, or 7.4%, mainly due to higher trust fees and miscellaneous income” Trading gains accounted for about 44% of BPI’s net income accountable to equity holders which served as basis for eps

AEV: “ Share in net earnings of associates rose by 86% YoY (₱4.16 billion vs ₱2.24 billion in 1H2015) largely due to the growth in net income of UBP resulting from higher net interest income, fresh equity earnings contribution of infrastructure group, and higher ancillary revenue of SNAP-Magat…. The 34% increase in consolidated net income combined with 1270% surge in AEV's share of an associate's unrealized mark-to-market gains on its available-for-sale (AFS) investments, accounted for this growth.

AEV and AP’s other non-core income: “Other Income increased by 488% YoY (₱1.85 billion vs ₱314 million in 1H2015) mainly due to TSI's collection of insurance proceeds from settlement of liquidated damages, AP's gain on step acquisition of EAUC and lower foreign exchange losses.

JG Summit: inclusion of the petrochem’s freshly integrated operations fervidly energized 1Q eps by a staggering +59.52%! But since 2Q has seen normalization of operations, JGS’s eps plunged to just +5.77%. Nevertheless the legacy of 1Q eps outgrowth meant that 1H eps growth remained at a majestic 31.02%! This gives us a clue why taipan and patriarch of JGS Mr John Gokongwei sold $250 million in JGS shares.  

The above are just some examples of the many that have emerged to have prompted eps growth to be kicked upstairs in 1H 2016.

Or many of the magnificent numbers have accounted for acutely expansive dependence on the BSP’s sustained leveraging of the system through financial repression or trickle down negative rates policies channeled through the sustained manipulation of interest rates and the yield curve. These are broadly seen at the front end (demand side), the back end (supply side), through credit intermediaries (interbank and intercompany loans, bonds and other credit based money substitutes) and sustained asset inflation (bonds, currency, property, stocks and derivatives). These leveraging comes in many forms as accounting profits from mergers and acquisitions, as well as project expansions, asset arbitrages, transactional fees and related charges, loan issuances, marketing of big ticket items and many more.

And by juicing up credit through the silent stimulus, as I wrote in July, “Nonetheless, the bank credit response to the BSP’s silent stimulus would postulate to an enlargement or the amplification of an already existing excess capacity in bubble sectors, the accretion of deeper mispricing (as seen in the vertical pumping of stocks, but has yet to be seen in property), significant degeneration of balance sheets of credit recipients and credit providers, and most importantly, the loss of purchasing power by Philippine resident consumers.”

Those risks have become palpable from the valuations perspective.

From the official 2015 PER as indicated at PSE, despite this week’s marginal .32% decline, the average PER of the PSEi 30 whizzed by 1.32% while the market cap weighted PER bolted 1.1% to respective LANDMARK HEIGHTS of 27.64 and 28.5 respectively.

Interestingly the PSEi remains at 7,930 but valuations continue to soar as vertical price actions rotate into the PSEi bench players or the lower half of the headline index such as LTG 8.49%, ICT +7.61%,  EMP 4.32%, BlOOM 4.04% and DMC 3.42%. SCC’s 11.11% pump was in reaction to last week’s 13.85% dump. 

This week’s market cap weighted PER of 28.5 has already flown past the January 1997 high of 28.21. This also means that the average PER at 27.64 has signified a hair away from 28.21. From the PSE published records these numbers have already attained a breakthrough in historical prism. Since the 1997 zenith has been surpassed, thus part of momentous history has already been made!!!

Even if to apply the 1H 2016 eps (annualized), the average PER would still be at 23.86 while the market cap weighted PER 22.11. This assumes that the current conditions will be retained towards the year end

And yet it has been a bizarre episode to recently see the BSP chief subtly censure the fund management industry as “not to be oblivious to financial stability issues”. Unfortunately like Pavlov’s dogs, the establishment has been programmed to conditionally respond to the stimuli thrown at them via artificially lowered interest rates.  Therefore, without taking off those psychological influencing conditions via monetary policies, a stricture on self-discipline alone would not do the work since these agents have become dependent on them.

Yet to maintain the present tempo of monetary stimulus inflated eps, the BSP would need to see the banking system continue to churn loans at a far faster rate than the present. Or as the great Austrian economist Friedrich August von Hayek once explained, such perceived boom*

“requires not only continued inflation but inflation at a growing rate. Because, as we have seen, it will have its immediate beneficial effect only so long as it, or at least its magnitude, is not foreseen. But once it has continued for some time, its further continuance comes to be expected. If prices have for some time been rising at five percent per annum, it comes to be expected that they will do the same in the future. Present prices of factors are driven up by the expectation of the higher prices for the product—sometimes, where some of the cost elements are fixed, the flexible costs may be driven up even more than the expected rise of the price of the product—up to the point where there will be only a normal profit.

But if prices then do not rise more than expected, no extra profits will be made. Although prices continue to rise at the former rate, this will no longer have the miraculous effect on sales and employment it had before. The artificial gains will disappear, there will again be losses, and some firms will find that prices will not even cover costs. To maintain the effect inflation had earlier when its full extent was not anticipated, it will have to be stronger than before. If at first an annual rate of price increase of five percent had been sufficient, once five percent comes to be expected something like seven percent or more will be necessary to have the same stimulating effect which a five percent rise had before. And since, if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which, in spite of rising prices, many firms will be making losses, and there may be substantial unemployment. Depression with rising prices is a typical consequence of a mere braking of the increase in the rate of inflation once the economy has become geared to a certain rate of inflation.

We have seen this happen in 2013, the effect became evident in 2015.

Now the BSP just doubled down.

*Hayek, Can We Still Avoid Inflation? Mises.org

Attachments area

TEL’s Dump Flubbed GDP Day’s Maginot Defense!

I had been oblivious that today was GDP day. It took me almost the close of today’s trading session to discover this through international news.

Two reasons why I didn’t expect GDP day

One, pre-GDP days have usually been accompanied by huge volatility. The precursor to the 2Q 2015 GDP announcement had been an enormous dump. The next three “much improved GDP” were all highlighted by massive pre-GDP pumps! Pumps and dumps signified either heavy speculations on expectations of GDP outcomes or trades which emanated from insider tips or both. 

This time seemed unusually quiet. 

Of course, the irony appears to be that this bizarre tranquility emerged even as 2Q GDP has accounted for best number since 2013.

  

Perhaps the pump will come tomorrow. 

Two, previous announcements were done at the close of the month. For instance, the 2Q GDP was released in August 27, 2015, 3Q GDP in November 26, 2015 and 4Q GDP in January 28, 2016. It must have been a change of schedule which began in 1Q 2016 where GDP was released in May 19, 2016 

So this was unexpected on my part.

Nevertheless when the GDP was announced, like Pavlov’s dogs, panic buying ensued. Unfortunately, selling pressures reappeared and brought the PSE back to neutral. From here the headline index bobbed and weaved between marginal gains and losses.

But then again, since the Maginot 8,000 line has to be defended, thereby every session has to end with a marking the close. 

Unlike yesterday when losses were materially trimmed (about one third of pre-market intervention phase), today looked a lot benign. The PSEi closed with “humble” .08 gains 

Yet again headline numbers don’t tell of the story behind the scenes.

​ 

There was a significant attempt to push the index higher via the marking the close pumps by three major sectors—holding, industrial and financials 

Unfortunately, some people decided to play the role of a spoilsport. That’s because the service sector had been dumped at the close! (lower right window)

While these issues were key to the upside move for the respective sectors, TEL was brutally sold. Tel’s 1.95% marking the close dump accounted for 60% of the day’s 3.26%! Had there not been a TEL selloff, the Phisix might have risen by at least .3%! Note SECB isn’t part of the PSEi 30. 

It’s truly amusing to see how Philippine stocks have been overwhelmed by violent price actions.

As one of today’s major PSEi gainers, URC (+3.15%) bounced off the bear market while TEL appears to approach the May lows. Pause for a rotation? Or Newton’s law in motion? 

Given today’s dump perhaps TEL will likely lead the winners tomorrow. 

​ 

On the other hand, vertical price actions appear to have spilled over even to the bench players where ICTSI and LTG prices have also gone vertical! 

Again these are not normal times. 

Instead, such signs of escalating violent price actions or momentum combined by unethical behavior or severe overvaluations signify history in the making.