And
that’s how market downturns start: investors open their eyes –
sometimes suddenly – and they don’t like what they’re seeing.
So they poke around and peel away some of the covers, and they’re
discovering risks that have been there all along, and they behold the
ugliness and smell the putrefaction, and they get skittish, and some
lose their appetite. –Wolf Richter
In
this issue
Phisix
6,450: Macro Stability:
Peso, Government Bonds and Stocks Dumped! Bears Take Command!
-Bond
Yields Surge Across The Curve as Negative Spreads Reappear!
-Tumbling
Peso is a Symptom of a Hissing Bubble, The Chinese Yuan Experience
-PSEi
Crashes Right Into the Bear Market’s Lair!
-Property
Sector Leads Sectoral Losses, Has the Philippine Property Bubble
Imploded?
-Chart
Patterns: Déjà vu 1994-1997?
-Domestic
Bank Funds in Cash; An Enrique Razon Effect?
Phisix
6,450: Macro Stability:
Peso, Government Bonds and Stocks Dumped! Bears Take Command!
The
Philippines allegedly represents a paragon of macro stability. That’s
what authorities and mainstream media, as mouthpieces for the
interests for the establishment, keeps on impressing on us. This
worked during boom. Each time mainstream media and their band of
experts hollered G-R-O-W-T-H, like Pavlov’s dogs, domestic
financial markets reverberated with a reflexive bid
on financial assets, hence the asset price boom. This marked the era
which the mainstream saw as ‘this time is different’—a
permanent path to prosperity.
And
so it was held.
Apparently
the hypnotic effect of public expectations management seems to be
fading. Today, while mainstream media and their coterie of ‘experts’
continue to screech ‘G-R-O-W-T-H’, financial markets have been
pushing back—violently.
Last
year I noted how the establishment has tediously worked to preserve
the image of the boom, even when ‘fundamentals’ have been
manifesting symptoms of deterioration or divergences
The
reason why the Philippine assets remain relatively sturdy has been
because sellers
have NOT yet been aggressive since the HEADLINES tell them so. The
establishment believes that the boom can still be maintained even
when the core has been eroding.
They are relying on HOPE. And
this is the reason behind the headline management. They
manage statistics and the markets to keep intact what they see as
‘animal spirits’.
If
market actions during the first two weeks of 2016 should resonate on
the dominant actions for the rest of the year, then 2016 won’t just
be a year of the grizzly bears but a year where the establishment’s
headline management will decisively fail to mask upcoming economic
bust.
It’s
NOT just stocks, but domestic bonds and the peso were all crushed
over the week! Yes actions at the domestic financial markets belie
assertions of macro stability!
Bond
Yields Surge Across The Curve as Negative Spreads Reappear!
With
the exception of the yields of 2 year notes, yields across the curve
for Philippine government bonds surged over the week (topmost
window). Stated in the context of prices, Philippine bonds were
dumped last week!
Yields
of 1 month bills and 5 year bonds spiked most (or were sold most).
The resultant increases in yields have led to a regression for the
belly of the curve (10yr-5yr) or the reversion to NEGATIVE spreads!
The 10yr-3yr spread has also reverted close to zero (19 bps). Recall
that the 10-3yr spread was inverted for four straight weeks during
the last quarter of 2015. So despite attempts to forcibly improve the
conditions of the curve during the previous two weeks possibly as
part of the yearend window
dressing, like stocks, bond markets have eventually foiled on
such interventions.
Moreover,
higher
bond yields eventually translate to HIGHER interest rates! If
the current trend will be sustained, then not only have the profits
from the arbitrage windows of the yield curve been closing (bane for
maturity transformation and NET INTEREST margin), interest rates are
bound to move significantly higher! This
implies for a double whammy for the financial system, specifically,
first, the cost of debt servicing will go up, and second, higher
lending rates will extrapolate to lesser demand for credit!
The
statistical economy tells us that in 3Q 2015, Php
3 of bank credit were used to generate every peso of G-R-O-W-T-H.
I believe that since statistical G-R-O-W-T-H have been inflated
through the statistical
artifice of price deflators, the ratio of credit to growth or
credit intensity should be higher than Php 3 to 1. So a credit
squeeze will essentially undermine capex, reduce profits, strain
output and accentuate debt problems. And these will have secondary
real economic repercussions on prices, jobs, capacity as well as to
the many other factors in the economy.
Curiously,
because the yields of 2 year bonds plunged (or were bid higher) as
yields of 10 year counterpart increased (bonds sold), the spread of
the 10yr-2yr fantastically widened! My guess, the half of the month
may be time were institutions (like the ADB) makes an update on the
numbers for their assessment of the Philippines. So manipulators
ensured that the key benchmark spread would look good, even when all
the rest have emitted signs of decay. Potemkin Village.
If
bond yields continue to rise, as spreads compress, which means that
the Philippine financial markets have been tightening, then
I expect the BSP to counter this by easing.
They will likely reduce reserve requirements or slash rates or a
combination of both. Add stock market turbulence to the factors that
may prompt the BSP to ease.
Yet
like China’s 6 interest rate cuts plus all other forms of monetary
financial or fiscal stimulus, whatever the BSP does will only have a
short term effect.
Tumbling
Peso is a Symptom of a Hissing Bubble, The Chinese Yuan Experience
The
peso was hammered hard last week. Based on official rates, the USD
PHP soared by a staggering 1.22%.
For
the week, among Asian nations, the USD claimed its biggest victims in
Indian rupee (+1.46%), the South Korean won (+1.28%) and the
Philippine peso. Among ASEAN majors, the USD rose most against the
peso.
In
two weeks or for 2016, the peso signified almost the median among
Asian currencies where the USD PHP has been up 1.87%.
Meanwhile,
the USD increased most against the Malaysian ringgit (+2.41%) where
the peso ranked as the second largest loser among ASEAN majors.
The
USDPHP has broken above a key resistance level (lower window). The
momentum from this breakout combined
by sustained market volatility could
signal an acceleration of the USDPHP uptrend
So
the USD’s surge against most Asian currencies from the start of the
year merely spread to the peso this week. This
is a manifestation of the worsening conditions of the Asian
currencies relative to the USD. In short, this represents a USD
dollar problem. Or the USD has become the main outlet valve for the
ventilation of the accrued imbalances (bubbles) from within the
region.
The
mainstream has fixated on China for its woes.
But
it pays to understand what actually has plagued the Chinese or how
the USD has become the lightning rod on China’s deflating bubble.
In
fear of a credit bubble bust, the Chinese government continues to
inflate the system with credit. Albeit credit takeup has been down as
state owned banks temper lending due to rising NPL concerns, the
concentration of credit activities has apparently moved from banks to
the bond markets:
Corporate
bonds became a new financing source for Chinese companies that have
difficulty in accessing bank loans as the state-dominant banking
sector typically favors big state-owned companies. In 2015, companies
raised a total of 2.94 trillion yuan by issuing corporate bonds, a
507 billion yuan increase from a year earlier. Corporate bonds also
accounted for 19.1% of total social financing, outpacing entrusted
loans as the No. 2 source of funds after bank loans for the Chinese
economy.
What
this tells us is that the Chinese economy seems increasingly being
sucked into a deflationary vortex.
Corporate bonds and entrusted loans have now become emergency
oxygen
or major sources for access to credit.
The
irony is that as the economy slows, corporate bonds will be
increasingly become vulnerable to credit risks. Given that the
Chinese economy has an estimated $1.178 trillion in USD dollar debt
(BIS as of Q2
2015), domestic deflationary pressures compounded by all the
lifeline policies thrown by the government to rescue the economy,
e.g. the stockmarket, have only increased demand for the USD. Given
all things equal, domestic inflationary policies translates to lower
domestic currency relative to foreign currency. So the pressure on
the yuan.
With
the yuan in decline, the Chinese economy needs to acquire USD just to
pay off such massive USD liabilities, at the time when exports have
been in a decline in 8 out of 9 months (as
of December) while the economy falters.
And
falling foreign exchange reserves simply implies that the stock of
USD available in the Chinese financial system have been in a decline.
Like
the stock market crash, the Chinese government blames currency
speculative attacks as the cause behind the widening of spreads
between the USD -offshore yuan (CNH)
and USD onshore (CNY).
They never seem to ask why
the currency, or the yuan, has become the object of speculative
‘attacks’. Or why stocks markets crash. Or what incites people to
sell domestic assets at a frenzied pace.
If
there is nothing wrong with China, then markets will ensure that
these shorts will get burned. Interventions won’t be required at
all. To the contrary, interventions will only amplify existing
imbalances and hasten its unraveling. And latter has become more
evident by the day.
But
because government are about force, everything is seen as docile,
compliant or submissive to the control by force. To analogize,
because the government holds the hammer, they see everything else as
nails. Markets, economies and people are seen as subsidiary to the
politics of force. Hence, the government’s focus has mostly been on
the short term. And by training their eyes on the short term, they
ignore or dismiss the longer term consequences behind their actions.
And
the zeitgeist of China’s problems has signified an offspring of
their political hubris.
So
the vacuuming of liquidity in Hong Kong had a fleeting favorable
outcome: the spreads narrowed for just one day! HIBOR rates backed
down from the record highs, but have yet to normalize. By Friday, the
spreads widened again (see above)
The
yuan predicament plus the Chinese stock market crash appears to have
partly incited a global stock selloff that has brought many important
global indices to bear
market levels.
Now
of course, subsidies are no free lunches, so stock market losses will
translate to balance sheet deficits on China’s state owned
companies which participated in the implementation of the Xi Jinping
Put. If these companies don’t have sufficient cash flows or
savings, then such deficits would have to be filled in by the
government. But how will the government finance this, by more debt or
by inflation? This again would compound on the pressures on the yuan.
Now
both Chinese and Hong Kong’s peg are under pressure.
Economic
maladjustments brought about by inflationary policies are being
ventilated on currency pegs via the rising USD. Said differently, the
problem has not been due to currency pegs, instead pressures on such
pegs have been caused by domestic bubble policies.
This
brings us back to the Philippines. China and Brazil, a few years
back, were the economic darlings which media raved on. Today their
economies are teetering to fall into an abyss.
Their
economies highlight the transition from a credit fueled economic
(phony) boom to an economic bust that have been signaled by pressures
on the domestic currency, and subsequently, has percolated into other
assets.
The
falling peso (as with the ringgit, rupiah and the baht) signifies the
same malaise that plagues these bigger emerging market peers. The
difference has been in the stages of both the business and the credit
cycle on these countries. Think of this as FIFO, first in first out,
China and Brazil boomed first, now they are the first to feel the
pressures from imbalances or malinvestments brought about by the
previous boom. The rest will follow or converge with them.
And
no statistical talismans will prevent an economic bust from occurring
as consequence to the previous credit inflation boom. What has been
borrowed will have to be paid back.
This
week’s peso dilemma came even as the BSP celebrated OFW remittances
in November which they say sustained
G-R-O-W-T-H. Yes the BSP cheers on small bounces as if it were a
major event.
The
long term trend of OFW remittances growth rate has been falling (as
shown by both cash and personal remittances—charts in upper
window). This represents a structural dynamic: diminishing
returns/marginal productivity given the scale of remittances.
Current
applause will not change the coming stagnation of remittances, as
well as the likelihood of CONTRACTION in response to a global
recession or from major geopolitical crisis which may come in varying
events as Middle East war, and or imposition of stringent social
mobility controls in response to the refugee crisis in Europe and
elsewhere or even the dissolution of the EU.
The
BSP also positively noted that October FDIs
showed marginal improvements. Since FDI flows are premised on
global economic and financial conditions, any downturn or tightening
abroad will lead to reduced FDIs. Additionally, once domestic
economic headlines show of marked deteriorations, then this will
reduce incentives for foreigners to invest, so FDI will fall too.
Curiously,
despite the sharp selloff at the PSE during the past two weeks in
2016, net outflows according PSE data remains moderate. This means
don’t blame the foreigners, the locals have joined selling spree.
Have
locals been buying USD too?
At
the end of the day, the
falling peso represents a symptom of the unwinding of domestic
economic bubble. And mainstream’s rationalization, which has blamed
the peso woes on external sources (China, the Fed rate hike), only
exhibits the self–attribution bias error and denial. And there will
be hefty a price to pay for denying reality.
Additionally,
aside
from signs of ‘shortages’, the USD has served as the traditional
lightning rod during turbulent times.
For
the USD today, tradition becomes a convention.
PSEi
Crashes Right Into the Bear Market’s Lair!
With
bonds guttered and the peso disgorged, stocks were similarly dumped
this week.
Philippine
stocks were among the biggest losers for the week and for 2016.
The
PSEi posted a 1.92% decline this week. Losses by Singapore’s STI
(-4.38%), Vietnam’s VN (-3.04%) and South Korea’s KOSPI (-2.02%)
surpassed the Philippine equivalent. In two weeks, the PSEi ranked
third (-7.23%) in order of losses which was led by Singapore (-8.74%)
and Vietnam (-6.22%)
With
all three assets fumbling, the so-called shining star of Asia seems
to be losing its glitter fast.
2016
is supposed to be the year
of the red monkey. However, based on how the domestic stock
market behaved since the start of the year, 2016 increasingly looks
like the year of the ferocious bears. [As a side note, Chinese New
Year starts on February 4th, the red monkey is supposed to be bullish
for metals]
Following
the first week’s considerable 5.42% fall, the Phisix opened this
week with a thud. On Monday, January
11, the Phisix stumbled by a petrifying 4.36%. So for the first
six trading days of 2016, the PSEi
bled by an astounding 9.78%!
What
a way to start the year!
Monday’s
4.36% dive looked very much like a technical
reaction: it signified a breakdown from three coincidental patterns:
a major and a minor head and shoulders, and a major descending
triangle. The resistance trends of two of the major patterns
originated from April 2015 record.
Yet
last Monday’s debacle represented a continuing motion from the
first week of the year’s sharp 5.42% decline.
Moreover,
based from the record April 10 high of 8,127.48, Monday’s meltdown
brought the PSEi, which then nursed a 22.63% deficit, into the bear
market or a downturn of 20% or more…over at least a two month
period, as defined by Investopedia.
From
Monday’s panic selling, bulls fought fiercely back to recover the
losses. Unfortunately, languid volume, partly compounded or
aggravated by external events, doused cold water on the week’s
rally. So by the end of the week, the bulls were able to pare losses
down by just 56%. PSEi closed 1.92% lower.
Year
to date or in two weeks through 2016, again losses have accrued to
7.23%.
Despite
the reduction of this week’s loss, at 6,450, the PSEi remained a
captive of the bears down 20.65% from the zenith.
Monday’s
meltdown combined by the excessive volatility during the succeeding
days of the week seems to replicate the August episode.
If
Monday’s closing price of 6,288.56, which was at the session low,
holds over the coming days, then the PSEi may likely go on a
consolidation or rangebound phase. Here, 6,288.56 will serve as
support while 6,600 the resistance. The PSEi may go on a gap filling
phase, by testing the resistance. [I posted the charts below]
Again
for the PSEi to push back against the bear market forces, it
would need to, not only hold on to the present support levels, but
importantly, build sufficient volume at current or at improved price
levels.
Only from here can a successful breakout of the resistance level
occur.
Otherwise,
with a dearth of volume, the PSEi may struggle to find support even
at current price levels. This means that the recently carved support
level may be tested, and possibly, may give way or relinquish to
sellers where a new lower base would be established.
Volume
has been the key as to why the Phisix continues to wither.
(upper window)
It’s
a bad sign to see volume rise when the indices have been dominated by
sellers. Add to such troubling sign is when benchmarks rise on thin
volumes. But this has been the character of the volume performance
for the rest of 2015 through today. Even the path to etch April’s
record high had been a showcase of conspicuous divergence.
Additionally
broad
market health needs to markedly improve.
(lower window)
It’s
the second straight week of intense selloffs for both PSEi and non
PSEi isssues. The first week’s spread, which was lopsidedly in
favor of sellers at 366, was a record
margin. This week, sellers still dominated by a huge 223 margin, one
of the largest five since 2015.
Two
weeks of broadbased selloff suggest of oversold conditions. But in
bearmarkets, oversold conditions may remain oversold for a lengthy
time. This is converse to bullmarkets, where overbought conditions
may remain overbought for an extended period.
It’s
not just the broad market, among PSEi issues, 24 posted losses while
only 5 closed up. One issue, Robinsons Land, was unchanged.
And
based on sectoral performance, the mining sector endured the most
selling. This was followed by the property and the service sector.
Least affected was financials. Again this represents a curious
development considering government bond yields soared across the
curve (with the exception of the 2 year) as discussed above.
Property
Sector Leads Sectoral Losses, Has the Philippine Property Bubble
Imploded?
Fascinatingly,
outside mining, the property sector now leads the losses among major
industries for this year (-10.74%).
The
property sector was second to the holding sector in 2015 as best
performers. Both generated positive returns when all the other
sectors bled. Early gains have provided sufficient cushion for these
sectors to counter the spreading of losses going to the close of the
year.
Now
the story appears to have radically changed. If the property sector
continues to hemorrhage and lead the losers, not only should the
loses diffuse into banking stocks, (where property/ real estate
sector remains the top client or borrower of the banking system with
19.63% share of production loans as of November 2015) and to equities
of the top holding companies (whom are mostly heavily exposed to the
real estate sector), this should
highlight a real downturn in corporate fundamentals during the last
quarter of 2015.
Yet
if current price actions have been manifesting of a magnified
slowdown of Q4 fundamentals of the industry, then the mythical
domestic demand G-R-O-W-T-H story will soon be in shambles!
Government
statisticians will have little room to wiggle and employ their
statistical tools to embellish the GDP.
And
since the centerpiece of the Philippine G-R-O-W-T-H bubble has been
in the property-shopping mall sectors, which alongside has been
supported by bubble in hotel-casinos, and finance, the collapse of
the property bubble will shatter the credit fueled house of cards
underpinning the Philippine G-R-O-W-T-H bubble!
[As
a side note, crashing casino stocks seem headed towards becoming
centavo stocks!]
The
one way trade from the ‘this time is different mentality’ will be
exposed for what it truly is—a sham—brought about by
redistributionist easy money policies.
And
don’t forget some of the property majors have substantial exposure
in China! Worsening conditions in China will only compound on their
domestic predicament.
Chart
Patterns: Déjà vu 1994-1997?
Given
the eerie resemblance of the three bear market strikes in 2013 with
that of 1994-1995 bear markets, I then asked,
If the past should repeat then we should see a final blowoff phase
rally prior to the capitulation.
Well
here are the updated charts now
Mark
Twain once said that history doesn’t repeat but it does rhyme.
The
three bear markets of 1994-95 (upper window) showed that the Phisix
wanted to meaningful correct but for some reasons this was postponed.
The Phisix hit a bottom in November 1995. So instead of a correction
the Phisix zoomed by 48% from November 1995 to February 1997. This
marked the terminal blow off phase of the era’s bubble.
So
when the fourth opportunity to sell arose in 1997, the bears never
gave the bulls any leeway. 19 months after, the Phisix collapsed by a
shocking 68.6%! And the story behind the crash emerged: the Asian
crisis.
Instead
of three bear markets, in 2013, the taper tantrum sent the Phisix to
the bear market zone THRICE. The bulls tried to lift past from the
bear market zone twice but they failed. So somewhat like 1997, there
were three hits at the bear market levels. The last touch on the
bearmarket was on December 2013. And like 1997, it took a fourth try
to succeed. So instead of a correction, like 1997, the Phisix zoomed
by 41% from December 2013 to April 2015. This seemingly marks the
terminal blow off phase of today’s real time bubble.
Since
things have been in state of flux, the title for the present events
have yet to be established.
But
unlike 1997 where the crash has been fast and furious, so far the
Phisix decline has mostly been gradual. But the declines during the
first two weeks of 2016 have picked up speed and intensity. Yet the
jury is out whether the rate of declines will crescendo or will
remain incremental or will mark the bottom phase.
The
bear markets of 1994-95 were connected to the shaping of the 1997
climax. In the same manner, the procrastinated bear markets of 2013
helped produced today’s bear market.
But
unlike 2013, today’s bear market have been accompanied by a steeper
fall in the peso, higher bond yields, flatter yield curve and even
signs of inversions, slowing credit growth, a recent slump in money
supply growth, falling prices everywhere, a huge increase in debt
levels, a contraction of PSE listed firms’ NGDP and a loss of
earnings in 2Q, reduced statistical GDP, manufacturing and export
slump and plunging job placements.
Yet
if 1997 will rhyme, then the rate of declines will crescendo as the
year deepens.
Bear
markets have significant messages, I
wrote about this in 2013. But just because it didn’t happen
then, doesn’t mean it won’t or never happen. The lack of
fulfillment of a full pledge bear market does not imply an evidence
of absence. That would be the Loch Ness fallacy/ or appeal
to ignorance
Will
the chart patterns of the 1990s rhyme?
Domestic
Bank Funds in Cash; An Enrique Razon Effect?
To
paraphrase Jackie Chan as Karate
Kid mentor most people think with their eyes so they are easily
fooled.
In
dimension of economics, theories hardly ever appeal to them because
it requires extensive mental rigor and effort. So most people just
outsource their thinking to what mainstream media says. They rely on
‘experts’ or popular talking heads, who are paid immensely, to
merely echo on their biases (confirmation bias).
Also
most people depend on opinions of institutional ‘experts’, which
have been garbed with economic variables and statistical numbers and
presented as economic outlook/s or paper/s, when in reality these
represent nothing more than sales pitch/es, intended to generate fees
or commissions by unloading the latter’s inventories on the public.
And
since many people, including the above ‘experts’ think with their
eyes, the same set of people will not be convinced by risk reward
conditions as shaped by theories that have been backed by evidences.
It’s only tangible developments or numbers that will convince them.
For
instance, people think that those who call on market tops when the
bull market is raging is a kook or a screwball naysayer. Now that
markets have been crashing most of the same people have been
scratching their head, if not drowning in sorrow.
And
as I have been saying here no matter how the establishment tries to
promote the boom in order to benefit from BSP trickle down policies,
hissing bubbles will only force reality on them.
So
upon stumbling on a
Bloomberg article, I was surprised to read that some major bank
funds particularly BPI and Union Bank preferred to stay out of the
market and on the sidelines, in cash.
Now
you know why volume has been drying up.
While
the author of the article pressed that valuations have significantly
dropped, the position of the quoted fund managers seemed a puzzle to
the writer. The article cited mainly China, the bear market and investors ignoring
fundamentals as factors determining the position of these fund
managers.
The
news essentially exposes on the growing fissure within the
establishment of the once unanimous bullish outlook.
Serious
doubts have begun to rear its ugly head. Yet positions that pins the
source of mistakes as internally generated has been avoided. Denial remains strong as with the influence of political correctness on media’s
framing of the bad news.
Yet
most of the cited reasons are flimsy. This makes me suspect that
there may be something more behind the decision to stay away from
stocks. Perhaps these managers have said only what the writer of the
article wanted to hear.
I
could be wrong but perhaps these managers may have been ordered
by their big bosses to stand
down.
I
call this supposition the Enrique
Razon effect.
Recall
that ICTSI honcho Enrique Razon said in
a recent interview at the Nikkei Asia, which was censored or not
aired by domestic media, that he expected another crisis to happen
‘just around the corner’.
While
domestic media can ignore Mr Razon’s outlook, Mr. Razon has clout
on his business and social peers.
Of
course, all these connections establish nothing but represents guess.
However,
if I am right Mr. Razon has influenced the Aboitizes and the Ayalas
to take a conservative stance. And that the batten down the hatch
position may have filtered down to the organizational hierarchy of
their companies.
So
it might have been a memo from the top of the hierarchy for the bank
fund managers to stay on the sidelines.
The
only way to confirm or falsify my suspicions will be from the CAPEX
announcements of Aboitiz’ AEV and Ayala’s AC. Should they
announce CAPEX budget for 2016 SIGNIFICANTLY LOWER than the previous
year, then these elites may have joined forces to conserve their
resources in anticipation of a crisis.
This
also means that the current position of bank managers were most
likely at the behest of the big bosses.
Otherwise,
my theory is falsified.
Regardless
of who was responsible for cash on the sidelines by some the said
bank funds, at the end of the day, the bullish headlines have been
wearing off. And that’s what matters most.
____
