Breaking News: Bank of Japan Embraces Negative Interest Rates!

What the casino stock markets have been drooling for has finally arrived. 

Since stock markets are not allowed to sink, so desperate times calls for desperate measures. The global war on interest rates has only deepened

From the Financial Times:

The Bank of Japan has adopted negative interest rates in their first benchmark rate move in five years, but has also chosen not to expand its quantitative and qualitative easing programme beyond its current level of buying Y80tn assets a year.

The BoJ has adopted a benchmark rate of -0.1 per cent, from a previous level of 0.1 per cent. It is the first time they have moved interest rates since October 2010.

Most economists had expected the BoJ to stay on the same course, although investors are looking to central banks for additional support given falling stock prices. Deflationary pressures – largely energy-related, as oil prices remain low – and the risks they pose to the BoJ’s inflation expectations are consistently cited as a likely motive for further easing.

Breaking: Philippine GDP 4Q 6.3%, 2015 5.8%

From Trading economics.com 

The Philippines economy grew an annual 6.3 percent in the December quarter of 2015, accelerating from an upwardly revised 6.1 percent expansion in the previous three months and above market consensus. For full year of 2015, the GDP Growth came in at 5.8 percent. GDP Annual Growth Rate in Philippines averaged 5.14 percent from 2001 until 2015, reaching an all time high of 8.90 percent in the second quarter of 2010 and a record low of 0.50 percent in the third quarter of 2009. GDP Annual Growth Rate in Philippines is reported by the Philippine National Statistical Coordination Board

The reaction at the Phisix for the past four session have been a dead give away.

This has been the dynamic since end 2015 to date. I called this the GDP week play. The Phisix either gets pumped or dumped a few days prior to the announcement. The action at the PSEi signals whether GDP will go up or down. It's only during the August meltdown where the GDP week play had been sidelined or interrupted.

With three days of frantic pump, the industry must have gotten some hints from the insiders.

Considering the recent financial market pressures, the Philippine government and the establishment will do anything to ensure of the sustained positive headline effects. I noted of this last weekend,

But given that the government has ensured that such critical statistical number has aligned more or less with the consensus expectations for the past three quarters, there will unlikely be a substantial deviance for the coming announcement. 

So what the GDP means is that everyone should stampede into buying severely overpriced assets so as to sustain the invisible redistribution or transfers, facilitated by BSP policies, from the public to the elites and the government.

Let us see if these cosmetic statistics will prevail over reality.

Chart of the Day: In Europe, Negative Rates and War on Cash Reinforce 'Cash is King'

The Bloomberg chart of the day shows a robust surge in cash in circulation in the Eurozone

The Bloomberg explains (hat tip Mises Blog)

Europe’s ATMs worked overtime in 2015. A record 1.08 trillion euros ($1.17 trillion) of banknotes were in circulation, almost double the value 10 years ago, according to data compiled by the European Central Bank. That’s a counterargument to some bankers who say that electronic forms of cash will replace paper money sooner rather than later.

The value of banknotes in circulation rose 6.5 percent last year, the most since 2008. There are financial reasons - including negative rates on deposits - but part of the increase could be related to the influx of refugees, who don’t have bank accounts.

Negative rates and the war on cash will push more and more people to use cash

US Stock Market Rally Fizzles as the Fed Backpedals from Hawkishness; Implicit Admission of Policy Error?

I wrote last weekend that because of government support (magic from the central bank put) plus oversold conditions this week should be a big moment for the bulls.

Well, the  US FOMC meeting just concluded, and the reaction by US stocks hasn't been lively.

Here's what mainstream media had to say of the Fed meeting (Wall Street Journal):

The Federal Reserve signaled renewed worry about financial-market turbulence and slow overseas economic growth but was noncommittal on whether these threats would throw its interest-rate plans off course.

The U.S. central bank raised short-term interest rates by a quarter percentage point in December and has penciled in four more quarter-percentage-point rate increases this year, the next one possibly as soon as March.

A policy statement released by the Fed after a two-day meeting raised new doubts about whether it would follow through with a rate move in March. Futures markets place just a 25% probability on rate increase by then. But the central bank sought to keep all of its options open while it assesses a potentially shifting economic landscape.

The changes in the Fed statement as shown by the Wall Street Journal. 

So in echoing the Fed's concerns prior to the December rate hike, the FED backtracked to use global anxieties to convey their supposed 'openness' or a seismic shift from hawkish stance to neutral. Might I say admission of policy error?

And here is how US stocks reacted (above table from stockcharts.com). 

Not even the 5.4% surge in oil prices helped mitigate yesterday's activities. Today's losses only eroded much of the gains acquired for the week, which leaves US stocks still drifting near January lows.

So far my big moment for the bulls have been divergent.

Chinese stocks have failed to live by the government hype where the latter would intervene to fight off speculators for the benefit of  investors.

Oh yes, the Chinese government was all over yesterday afternoon to help stanch what would have been another blood bath...

The Shanghai index plunged to a depth of 3.8% post lunch, where the Chinese National Team went on a furious pump. 

Unfortunately, the Chinese government had been unable to hold on to the slight gains from their interventions, to close the day still down. This marks the biggest two day loss since August.

So far Europe's gains have been modest, and it's been Japanese stocks that has seen quite a big bounce (aside from the Philippine Phisix) as Japan's gamblers awaits the outlook from Bank of Japan's meeting on Friday. 

Will the BoJ expand easing?

So far central bank magic have hardly provided a meaningful boost to global stocks. Yet what happens when the magic fades?

Two days left for the big moment.

Signs of Crack-up Boom in China? Copper Premium Surges as Yuan Weakens

Bloomberg’s chart of the day shows that copper prices in China appears to be diverging from global prices copper due to the yuan's weakness…

Even as London copper prices remain mired near their lowest since 2009, the premium paid for the metal in the Chinese port of Yangshan is at a three-month high.

Buyers who haven’t locked in long-term supply are driving gains on fears that further depreciation in the Chinese currency will only make the metal more expensive in yuan terms, according to analysts at SMM Information & Technology Co. and Maike Futures Co. in Shanghai.

The above chart from Stockcharts.com shows of the USD price of copper.

When people buy commodities not because of economic demand but on fear of devaluation (inflationism), they represent flight-to-real values or the attempt to safe keep savings via commodities/real assets or the crack-up boom

The great Austrian economist Ludwig von Mises once warned, (bold mine)

The policy of devaluation has to some extent altered this typical sequence of events. Menaced by an external drain, the monetary authorities do not always resort to credit restriction and to raising the rate of interest charged by the central banking system. They devalue. Yet devaluation does not solve the problem. If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion. But one day the crack-up boom will annihilate its monetary system.

So how does the crack-up boom emerge? The great Dean of the Austrian school of economics Murray N. Rothbard explained: (bold mine)

At first, when prices rise, people say: "Well, this is abnormal, the product of some emergency. I will postpone my purchases and wait until prices go back down." This is the common attitude during the first phase of an inflation. This notion moderates the price rise itself, and conceals the inflation further, since the demand for money is thereby increased. But, as inflation proceeds, people begin to realize that prices are going up perpetually as a result of perpetual inflation. Now people will say: "I will buy now, though prices are `high,' because if I wait, prices will go up still further." As a result, the demand for money now falls and prices go up more, proportionately, than the increase in the money supply. At this point, the government is often called upon to "relieve the money shortage" caused by the accelerated price rise, and it inflates even faster. Soon, the country reaches the stage of the "crack-up boom," when people say: "I must buy anything now—anything to get rid of money which depreciates on my hands." The supply of money skyrockets, the demand plummets, and prices rise astronomically. Production falls sharply, as people spend more and more of their time finding ways to get rid of their money. The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable—other metal, foreign currencies if this is a one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation.

Has rising domestic copper prices in China been revealing of the incipient transition phase towards a crack-up boom?

Moody's Warns on Rocketing US High Yield Spreads as Raising Risks of Recession

I am no fan of credit rating agencies, but current developments appears to prompt even the establishment to worry about the unpleasant ramifications of  deteriorating credit spreads on the economy.

From John Lonski at Moody’s (bold mine)

Volatility is king. Markets have been indifferent to claims that the latest broad sell-off of equities, lower quality corporate bonds, and certain emerging market currencies exaggerate any worsening of observable fundamentals. However, observable is the key adjective in the prior sentence. The two latest recessions were partly the consequence of markets not knowing the full extent of deteriorations in household and business credit quality. Not everything can be quantified, if only because some very critical things are hidden. Never underestimate the importance of thorough accounting. For now, it’s hard to imagine why the equity market will steady if the US high-yield bond spread remains wider than 800 bp. Taken together, the highest average EDF (expected default frequency) metric of US/Canadian non-investment-grade companies of the current recovery and its steepest three-month upturn since March 2009 favor an onerous high-yield bond spread of roughly 850 bp. Recently, the high-yield spread approximated 800 bp. (Figure 1.)

A wider-than 800 bp high-yield spread reflects elevated risk aversion that will reduce capital formation and spending by non-investment-grade businesses. In addition, ultra-wide bond yield spreads favor a continuation of equity market volatility that should sap the confidence of businesses and consumers.

M&A’s record pace may prompt more M&A-linked downgrades As derived from data supplied by Bloomberg, mergers and acquisitions (M&A) involving at least one US company soared higher by 19% annually to a new zenith of $3.336 trillion for yearlong 2015. A cresting by M&A may offer valuable insight regarding the state of the business cycle. The two previous yearlong peaks for US company M&A were set in Q3-2007 at $2.213 trillion and in Q1-2000 at $1.745 trillion. Recessions struck within one year of each of those peaks. Also, both previous peaks for M&A preceded a topping off of the quarter-long average for the market value of US common stock. (Figure 2.) For 2015, US-company M&A approximated 162.3% of pretax profits from current production and a record 18.6% of US GDP. The erstwhile record high ratio of M&A to GDP was the 17.8% of the year-ended Q1-2000. Year-end Q3-2000’s 215.1% still serves as the apex for the ratio of M&A to profits. During the early stages of an upturn by M&A, M&A-linked credit rating revisions show more upgrades than downgrades. For example, M&A-linked rating changes showed more upgrades than downgrades during 2010 through 2012, or after M&A activity had bottomed in 2009. However, M&A figured in more downgrades than upgrades once new record highs were set for M&A in 2000, 2007 and 2014. (Figure 3.)

Read the rest here

So What Else is New? Chinese Stocks Crash Again (Shanghai Index Plunged 6.42%)!

It looks as if I’ve been mistaken (momentarily) to expect that this week would be a big moment for the bulls.

Chinese stocks market bulls may have a difficult time to recover from today's astounding crash. The Shanghai index plunged 6.42%. The rest of the markets profusely bled as shown below.

Here’s the Bloomberg on today’s bloodbath in Chinese equities

China’s stocks tumbled to the lowest levels in 13 months amid concern capital outflows will accelerate as the economy slows and support for the yuan eats into the nation’s foreign reserves.

The Shanghai Composite Index plunged 6.4 percent to 2,749.79 at the close. All industry groups slumped, ranging from commodity shares to new-economy sectors such as technology. Besides data showing outflows hitting an estimated $1 trillion last year, investors were concerned about a possible liquidity squeeze even as the central bank flooded the financial system with cash before the upcoming Chinese new year holiday. Some of the nation’s most accurate forecasters said the stock index may not bottom until it falls to the 2,500 level…

Tuesday’s loss was the steepest since Jan. 7, when the Shanghai gauge plunged 7 percent, the second selloff of more than 6 percent in a week that prompted the government to cancel its circuit-breakers program after four days. Stocks dropped even as the People’s Bank of China injected 440 billion yuan ($67 billion) into the financial system using reverse-repurchase agreements, the most in three years. Policy makers are trying to keep borrowing costs from rising as they contend with the slowest economic growth in a quarter century.

China’s gross domestic product growth is seen slowing further to 6.5 percent this year, from last year’s 6.9 percent. Outflows jumped in December, with the estimated 2015 total reaching a record $1 trillion, more than seven times higher than the whole of 2014 based on Bloomberg Intelligence data dating back to 2006.

Yuan yuan yuan, now they see the link.

Today’s crash essentially reinforces on the recent breakdown of the lows of February and August 2015 sparked by the bear market of 2016 [see above] (all charts from Bloomberg)

This comes even as I pointed last Sunday that the Chinese Vice President Li Yuanchao asserted that the government is “willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors”.

So whatever happened to interventions to safe keep the interests of regular investors? Have speculators been too much for the Chinese government to handle? Or could it be that China’s whack a mole policies can’t really deter or prevent the escalating imploding bubbles from surfacing? And could it be that financial markets have been too complex for the government to manipulate?

The bear market of Chinese stocks should be a wonderful example of the adversarial repercussions from the outrageous disrespect of the markets by the government through their egregious interventions or manipulations.

Of course, there are still 3 days to go for the Chinese authorities, the Fed and the ECB to prove to me that this should be a big week for the bulls.

Infographic: The US Banking Oligopoly in One Chart; The Roots of Too Big to Fail

How "too big to fail" (technical vernacular: Systematically Important Financial Institutions/Banks) US banks emerged as summarized  by the following infographic

First, a few remarks from the provider of the image Visual Capitalist

The “Big Four” retail banks in the United States collectively hold 45% of all customer bank deposits for a total of $4.6 trillion.

The fifth biggest retail bank, U.S. Bancorp, is nothing to sneeze at, either. It’s got 3,151 banking offices and employs 65,000 people. However, it still pales in comparison with the Big Four, holding only a mere $271 billion in deposits.

Today’s visualization looks at consolidation in the banking industry over the course of two decades. Between 1990 and 2010, eventually 37 banks would become JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup.

Of particular importance to note is the frequency of consolidation during the 2008 Financial Crisis, when the Big Four were able to gobble up weaker competitors that were overexposed to subprime mortgages. Washington Mutual, Bear Stearns, Countrywide Financial, Merrill Lynch, and Wachovia were all acquired during this time under great duress.

The Big Four is not likely to be challenged anytime soon. In fact, the Federal Reserve has noted in a 2014 paper that the number of new bank charters has basically dropped to zero.

From 2009 to 2013, only seven new banks were formed.

“This dramatic reduction in new bank charters could be a concern for policymakers, if as some suggest, the decline has been caused by increased regulatory burden imposed in response to the financial crisis,” the authors of the Federal Reserve paper write.

Competition from small banks has dried up as a result. A study by George Mason University found that over the last 15 years, the amount of small banks in the country has decreased by -28%.

Big banks, on the other hand, are doing relatively quite well. There are now 33% more big banks today than there were in 2000.

So zero bound rates helped shift the balance of the US banking landscape, viz the erosion of small banks in favor of "too big to fail" oligarchy 

Courtesy of: Visual Capitalist

Awesome 'Marking the Close' Pump sends Phisix up 3.64% on Low Volume!

So my hunch was right, I noted last night that severely oversold conditions plus central bank magic would mean that this should be a big week for the bulls. 

Well, this post isn't about the above. Rather this post has been about documenting the brazen price fixing activities at the PSEi

The charts from colfinancial, technistock and Bloomberg above shows two things: One, today's massive 3.64% jump came with hardly an improvement in peso volume even when the rate of gains accelerated from last Friday's 2.03%. Today's volume (see below) at Php 6.676 billion was only 8.25% better than last Friday's (January 22) peso volume of Php 6.167 billion. Yes massive price gains backed by puny volume, a familiar trait of a sucker's rally.

The second, and more important, that the market intervention (or pre closing) price of the PSEi was at 6,365, and in an instant or suddenly, or at the official close, the PSEi was at 6,434.08 or up 3.64%! This means that 69.08 points of the 226.03 points or 30.56% of the days gains came from a massive synchronized 'marking the close'. The charts above looks like the PSEi took a viagra!

Due to insufficient volume, manipulators can only depend on fixing closing bids higher during the market intervention window. That's because these manipulators can't seem to spike the prices during the normal operating session. 

And it's obvious that the biggest beneficiaries of the oversold pump have been the year's biggest losers, particularly the Property sector and the Holding sector. Nonetheless, all key major sectors were recipients of the end of the session pump!

And gains had been concentrated on the market biggest caps (or within the top 10), while the rest or the PSEi minors underperformed. It's clear that today's actions had been orchestrated to embellish the index.

And here are the biggest beneficiaries from today's price fixing pump…

64.16% of SMPH's end of the day advance of 5.1% came from a massive 3.27% last minute pump!

56.87% of parent SM's end of the day advance of 5.68% emerged from a massive 3.23% last minute pump!

And all these market distortions from gaming of the system have been part of the reason why bear markets exists! 

When people don't respect the markets, markets come back to haunt them.

Phisix 6,200: Imploding Real Estate Bubble: Gradually And Then Suddenly?

Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief…It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something…The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up…The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly.—William White OECD chairman of the Economic and Development Review Committee (EDRC) and ex-BIS Chief Economist, in a recent speech at Davos

In this issue

Phisix 6,200: Imploding Real Estate Bubble: Gradually And Then Suddenly?

-Developed Economy Governments Panic over Stock Market Meltdown: Mounts Rescue Campaign

-Phisix 6,200: Will the Taper Tantrum Levels be Tested Soon?

-The 2016 Bear Market Represents an Offspring of the Past Bear Markets

-The Real Economic and Social Consequences of Bear Markets

-Oversold Conditions: Sectoral Performance and Market Breadth

-Divergence to Convergence: Price Levels, Market Breadth, Volume and the Peso

-Imploding Real Estate Bubble: Gradually And Then Suddenly

-Debunking Objections of Overdone Selling and the China Bogeyman

Phisix 6,200: Imploding Real Estate Bubble: Gradually And Then Suddenly?

Developed Economy Governments Panic over Stock Market Meltdown: Mounts Rescue Campaign

Following a violent return of risk OFF conditions, authorities rushed to rescue of global stock markets at the last half of the week with dovish statements anchored on promises of more easing (redistribution or subsidies to stock markets).

In what seemed as a coordinated signaling by global authorities, ECB’s Mario Draghi opened the stock market bailout campaign with an assurance that policy rates would “stay at present or lower levels for an extended period", that there would be "no limits" to reflate the Eurozone and seduced the markets with “review - and possibly reconsider - monetary policy at the next meeting in early March”. In a meeting the press, Mr. Draghi’s encore slogan was “We don’t give up”. This only meant of the possibility of the implementation of moar and moar of the failed inflationist policies. Yes, despite ongoing QEs (LTROs, Covered bonds and Asset Backed Securities) and negative rates, European markets have been sinking, inflation numbers has been way below the ECB target, and importantly, there has hardly been any meaningful improvements in bank lending to the economy. As a side note, Europe’s major equity bellwethers have recently entered the bear market but the Draghi put has lifted them away from the bears

Meanwhile, in a media interview, the Chinese Vice President Li Yuanchao asserted that the government is “willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors”. Yes their sustained interventions has led Chinese stocks into a second major bear market in less than a year! And words turned into deeds, last week, the Chinese government injected 400 billion yuan ($61 billion) into the financial system the largest in 3 years via repos.

The Bank of Japan, which will hold this meeting this week, has reportedly been under pressure to expand its current easing programs, in spite of growing internal opposition or division within the BoJ’s ranks to present policies.

Yet like the ECB, hardly any of the objectives by the BOJ has been met. Even stocks have lately been under sustained selling strains. The Nikkei and the broader benchmark the Topix fell into bear markets this week. But promises of rescue have only pushed the Nikkei off the bear market with Friday’s magnificent 5.88% pump. As I have noted here, even the more astounding 7.7% surge in September 9th 2015 has not prevented the Nikkei from tumbling back to test the recent bear market. And much like in 1989-1992, increasing frequency of market volatility (sharp upsides and downsides) have likely been symptoms of a ‘topping’ market.

US stock markets have also been under severe pressure, with some of the benchmarks trading at (S&P 500, Dow Industrials and NASDAQ) or below the August lows (Russell 2000, Dow Transports, and NYSE Composite). Hence, expectations have been weighted towards a dovish Fed during next week’s meeting (January 26 to 27) to sustain recent gains.

So with central banks behind their backs, and provided that the central bank magic can be sustained, then this should be a big week for the bulls.

Yet since whatever gains today will only compound on the imbalances, this means that over the longer term, present gains will only be temporary, and eventually, bears will likely retake command.

Phisix 6,200: Will the Taper Tantrum Levels be Tested Soon?

For the third consecutive week of losses, the PSEi stumbled by another huge 3.74% this week. Since 2016 started, the index has now accrued a stunning 10.74% deficit.

At 6,200, the PSEi has plumbed to its lowest level seen in early 2014 or during the post taper tantrum shock. At 5,762.53, the taper tantrum low now serves as the most critical support. And this level has now been just 7.2% away.

A breach of this crucial level would mean a transition from a technical bear market to a full scale or full blown bear market.

And on an historical basis, the odds are low for the PSEi to recover from here. Only once in half a century has the PSEi bounced back from such level (that was in 1995).

And speaking of bear market, as of Friday’s close, the PSEi was off 23.62% from the April record at 8,127.48. Friday’s 2.03% rebound mitigated the PSEi’s bearish predicament, which found a momentary climax last Thursday on a depth of 25.65%

Over the interim, given the FOUR consecutive weeks of decline (this includes the last week of December 2015), the PSEi has dramatically been oversold, so a technical bounce may be on the immediate horizon. Friday’s 2.03% gain may herald on such a bounce.

Besides, speculation on 4Q GDP and 2015 GDP, which is slated to be announced next week, may provide rationalizations to the rally.

That’s aside from the sudden appearance of RISK ON conditions around the world sparked by the jawboning of central bankers.

As an aside, any downside print by the GDP numbers could be an obstacle to the rally. But given that the government has ensured that such critical statistical number has aligned more or less with the consensus expectations for the past three quarters, there will unlikely be a substantial deviance for the coming announcement. As I have pointed out here, 3Q GDP was a RECORD, or a first ever, surge of constant (real) GDP over current (nominal) GDP. The anomalous constant GDP pump came from the base effect of price deflators. This has little to do with the real economy.

Or simply said, any significant downside surprises will barely be the outcome. GDP signifies principally a political construct more than it represents the state of the economy. And since it is election season, the likelihood is an upside print, or at least a number that falls within the range of consensus expectations. The last time presidential national elections were held in 2010, GDP printed an incredible 8.4% and 8.9% (constant based) in Q1 and Q2. But this hasn’t entirely been due to elections as the BSP’s pivot towards enhancing ‘domestic demand’ via monetary accommodation in 2009, fired up the initial boom phase of the Philippine credit bubble.

Will the PSEi tumble to test the taper tantrum levels in the coming months? We shall see.

The 2016 Bear Market Represents an Offspring of the Past Bear Markets

As I have repeatedly been saying here, the PSEi bear market will have real consequences to domestic financial conditions and the economy.

To help understand this, allow me a short narrative of the past and present conditions, its linkages, as well as, identify the differences between them.

The present is a product of the past.

The incipient boom phase in stocks (2004-7) came mostly in response to a 7 year post Asian crisis drought (1997-2003). Then the Philippine economy had little balance sheet imbalances. Debt levels were relatively substantially low.

Then the Great Financial Crisis came. The domestic bear market of 2007-2009 was largely in response to the capital outflows from the US financial crisis. Although the Phisix bear market of 2007-9, which constituted a 54% loss peak to trough, dragged down with it the statistical GDP, the Philippines escaped recession. Statistical GDP bottomed at .5% (constant GDP) or 1.4% (NGDP) in 3Q of 2009.

With relatively clean books, the economy was warmly receptive to the BSP’s adaption of the US FED’s easy money policies. Hence, the quick recovery and the ensuing headline boom of the coming years.

BSP’s 2009 bailout resulted to the 2013 bear market

From 2009, the principal conduit of the BSP’s trickle down policies via negative real rates had been the asset markets. This means that subsidies to creditors inflated asset prices like stocks, bonds and properties that percolated to the real economy in the form of inflated profits/earnings, incomes, investments, wages, and consumption. This boom benefited primarily those few with access to bank credit and or to capital markets.

This also marks the year where the BSP inflated corporate earnings became the staging point for the current stock market boom bust cycle.

The initial effects of the zero bound had been an asset-economy boom.

And given the extra loose financial conditions, the reflexive feedback loop of soaring prices and bullish expectations and actions sent the Phisix to a record in May of 2013. During the same year, the Philippines had been gifted by major credit ratings agencies with credit rating upgrades.

Additionally, easy money policies represented indirect and direct subsidies to the government via soaring tax receipts, lower debt payments (via subsidized interest rates) and inflated GDP. The credit rating upgrades virtually amplified such dynamic, which then, had been manifested via record low interest rates. Philippine interest rates even fell lower than her ASEAN peers and interest spreads relative to many developed economy nations have narrowed to record levels. I called this then the convergence trade.

2013 bear market as forebear to 2016

In May 2013, the Phisix suffered its first bear market since the GFC.

Like the GFC, the bear market has been triggered by external anxieties, primarily, the FED’s proposal to taper her monetary easing subsidies. Unlike the GFC, Philippine balance sheets were bloating to excessive levels.

Nonetheless those RECORD low interest rates, which were likewise reflected on record low yields at 3.48% (April) of 10 year bonds in 2013, inflamed on the 10 successive months of an astounding 30%+++ in M3 growth that virtually saved the Phisix from a full blown bear market!

Differently put, along with skyrocketing M3, sizzling bank credit growth stopped the bear market dead in its tracks! (see upper window)

But the reversal of the bear market with M3 growth came with an enormous cost or a tradeoff. CPI soared! And the upsurge in CPI became a political event. As such, the Philippine central bank, the BSP, panicked. The BSP ordered twice increases in reserve requirements, SDA rates, and interest rates. The BSP also mandated a stress test on the banking system, as well as, to require banks to raise capital, using the ASEAN integration as a smoke screen.

The combination of high inflation and mild tightening efforts by the BSP eroded on the disposable income of consumers, put pressure on profit margins, narrowed yield spreads which subsequently began to chip away on bank credit growth. And since GDP had largely been inflated by credit growth, the slowdown in credit growth eventually reflected on the government’s GDP. This became evident by 2015.

Also in 2015, as bank credit growth fell, M3 growth collapsed. The effects of the M3 crash had been manifested on money prices in the real economy. The various price measures of the BSP (producers prices, wholesale and retail prices, construction wholesale and retail prices) were ALL headed downhill. Some even posted DEFLATION, some registered sharp slowdowns. For instance, the BSP’s CPI (see lower window) plummeted to a record low .4% in September and October before its sharp upswing in November.

Moreover, manufacturing went into a contraction mode in April to October. As seminal signs of recession, loans to the manufacturing sector even contracted in September. Manufacturing showed partial recovery only last November. Additionally, populist fire safety mandates on manufacturing firms added to the industry’s woes.

Meanwhile, the PSE reported a sharp slowing of 1H profits and a downturn in the NGDP of listed companies. The PSE censored 2Q performance because 1H activities had mainly been due to 2Q’s material deterioration.

On the real estate sector, despite the media’s campaign to whitewash deteriorating performance, signs of fissures on the sector emerged in 3Q.

So the collapse in M3 resonated in the real economy.

Yet one of the lagged effects from the M3 inflation has surfaced via a record Phisix high last April 2015. Aside from M3, the Phisix record had been a product of a manipulated pump. Phisix raced to record highs even when fundamentals were in corrosion. Now events at the PSEi have turned to align with reality.

Another legacy sign of M3 inflation has still been raging property prices. Despite signs of slowdown, frenzied property speculation has resulted to 3 bdr condo units in Makati soaring by 5.41% in Q3 2015 year on year according to Global Property Guide. This is a sign of widening divergence which, like stocks, is about to converge. (see below)

Ostensibly the 2016 bear market has signified an offspring of the 2013 bailout of the Phisix through record low interest rates that was manifested in the surge in credit activities. The extension of imbalances, through the postponement of the market clearing process, had led to its worsening. Now the violent response.

In addition, the policy response by the BSP to the 2007-2009 bear market mainly caused both the bear markets of 2013 and 2016. Deflating bubbles are products of previous policy induced inflationary booms. No phony booms, no economic bust.

The Real Economic and Social Consequences of Bear Markets

Unlike in 2007 were bear markets had been cyclical, the 2016 bear market looks secular. That’s because the latter represents the surfacing, the gradual to accelerated recognition and the eventual agonizing market clearing phase of the malinvestments accumulated from the BSP’s zero bound rates.

Since this looks likely a secular bear market, then it entails real economy consequences through intertwined factors of balance sheet losses, debt liquidations, loss of confidence, and the narrowing, if not reversal of the invisible redistribution platform from the BSP’s policies.

Since many firms have used the boom phase to generate earnings/profits or cash flows through rampant yield chasing activities, then the bust phase would translate to balance sheet losses as well as reduced cash flows for the same firms. And sustained balance sheet losses would entail possible write downs on impaired assets, thus leading to balance sheet compression.

For buy side institutions that had anchored their liability matching process with asset chasing through stocks, the bear market will translate to growing balance sheet deficits that may lead to negative equity. This increases the risk of failure to comply with outstanding liability schedules.

For loan or margin portfolios collateralized by stocks or equities, bear markets translates to lower value of collaterals. Such may prompt creditors to demand additional collateral requirements. If the latter can’t be complied with, then margin calls will lead to forced liquidations, thereby amplifying downside volatility.

This I suspect could be one major reason behind the latest brutal unwind

In terms of psychology, bear markets represents a loss of confidence. Since markets can be characterized as operating under reflexive feedback loops, where prices influence expectations and thereby actions and vice versa, bear markets extrapolates to magnified risk aversion and its ramifications. To be specific, risk aversion will lead to heightened demand for cash at the expense of economic activities. Risk aversion may also lead to reduced credit exposure or require higher interest rates to compensate for increasing perception of risks (or a risk premium)

Such will eventually get reflected on the headlines as lesser investments, reduced capital expansion, job layoffs, reduced earnings and consumption that will be manifested on headline GDP.

Additionally, the BSP’s artificially fueled bullmarket has previously enabled and facilitated the transfer of resources and risks from listed companies to the public through various fund raising activities (equity placements, IPOs, bond issuance and etc.). The reversal of which essentially reduces or takes away such resource transfer process.

And with smaller access to funds, listed firms will have to pay higher yields to attract financing, or depend on banks for access to money or downscale on economic activities. Given that balance sheet pressures compounded by heightened risk aversion will likely spur a constriction of credit conditions (via reduced supply of credit) even in the banking system, higher interest rates will also put a squeeze on profits, investments, earnings and curtail consumption activities

In summary, increased risk aversion, ballooning balance sheet deficits, tighter credit conditions and reduced access to financing except through substantially higher rates will likely lead to escalating losses, intense debt liquidations, compression of economic activities and exposure of excess capacities in bubble industries.

And the government may not be able to conceal via its statistical mirages.

As author Bill Bonner wrote in a recent essay¹

In a bull market, investors are content with hope, hype and earnings tomorrow. They are patient and don’t ask too many questions. But in bear market, hope goes into hiding, patience fades… and the question marks come out in the open.

And once the bear markets spreads to real economic activities, then this will likewise permeate into amplified social frictions or even political tensions.

Finally, since the elites have greatly benefited from the BSP inflationary boom, then I expect some of them to try to put up a passionate last stand to prop up the sham boom.

Oversold Conditions: Sectoral Performance and Market Breadth

Last week’s activities have been quite revealing.

Outside the mining sector, among major industries, the property sector was once again the object of the selling carnage this week (see upper pane).

The property sector has been accompanied by the holding sector to drag the benchmark to its substantial weekly loss.

The service sector defied the gloomy mood with the remarkably oversold PLDT (+4.56%), GLOBE (+1.36%) and BLOOM (+11.04%) providing most of the bounce or a booster to the benchmark.

On a year to date basis, among the major industries, aside from the mining sector, the property sector has led the losses, followed closely by the holding sector. (lower pane)

It’s been interesting to observe that last year’s two industry outperformers or the two industries which has flouted on the bears have now become the selling fixation.

The commercial-industrial (blue) and the services (black) were the two industries that peaked out first from the record highs. Interestingly, both industries inflected on February or ahead of the PSEi’s April record high.

The other three, the property (red) holdings (orange) and banking & finance (green) climaxed along with the PSEi’s milestone.

The components of sectoral indices include both PSEi heavyweights and non-PSEi issues. Albeit the PSEi heavyweights, which constitute the largest market cap share of the sectoral basket, basically dictate on the direction of the index. As example, when the PSEi, along with the banking index, soared to record highs, 9 out of 13 issues in the banking index were in bear markets! So the index had been pushed up even as the general issues had been weighed down. Such divergence eventually dragged the outperformers to join the majority.

The above charts tell us of the contagion process. The service and commercial indices deteriorated first, which means major caps of these issues were the first affected, then the decay spread to the darlings which constituted the bubble industries. In 2016, the darlings have more than caught up with the early decliners as they profusely hemorrhaged.

Now to the general markets.

Among the 30 PSEi issues, for the week, 7 advanced, 21 declined while 1 was unchanged (SMC).

And there had been NO reprieve yet to the bloodletting as declining issues swamped advancing issues by an enormous margin of 155 this week.

The 3 consecutive weeks of severe broad market losses may be a record of sorts. And they likewise could be indicative of the substantially oversold conditions.

Realize that no trend goes in a straight line. The question is whether the coming bounce would be tradeable or not. Or will attempts to trade them become equivalent to catching falling knives.

Divergence to Convergence: Price Levels, Market Breadth, Volume and the Peso

With the intensity of the selloff in sectoral performance and market breadth almost on the extremes, there have been little signs of any reversal to the positive even in the context of volumes.

Peso trading volume remains lackluster. And worst, volume builds on the selling side as against the buying side.

For instance, in two days where the PSEi gained January 19 (+.34%; Php 3.693 billion) and January 22 (+2.03%; Php 6.167 billion), peso volume had been significantly less than days where the PSEi slumped January 18 (-1.77%; Php 5.579 billion), January 20 (-1.53%; Php 5.33 billion) and January 21 (-2.8%; Php 7.4 billion).

Seen from the average, the up days posted Php 4.93 billion as against the down days at Php 6.103 billion. Or there had been 24% more volume during the downside or during the selloffs. And this is why the selloffs have happened: There has been little volume or bids in support of prices levels during the previous week and or weeks.

Peso volume, market internals (breadth) and price actions have to show massive improvements. Otherwise any increase in the index, but unaccompanied by volume and market breadth should likely indicate of a ‘bull trap’. In other words, the markets have remained unconvinced that the selling pressures have abated.

And I believe that they will not only remain unconvinced but ultimately join in the transition towards fear and depression or a full scale bear market.

The conspicuous divergence during the April record highs was a fantastic harbinger to the current activities. The PSEi rose to a record alright, but this emerged in the face of declining volume and deteriorating market breadth which had been generally in favor of decliners and where half of the listed issues were slumping into bear markets.

And the important lesson: the current developments have only converged with the previous divergent trends. Or simply put, the previous internal frictions within the market have been unified or harmonized. Unfortunately the result has been the bear market.

And it is not just peso volume, market internals (breadth) and price actions, for the PSE to improve, the domestic currency the peso must rally.

Thanks to the promises of more stimulus from ECB’s Mario Draghi and speculations that the BoJ will compliment the ECB and the Fed’s coming two day meeting January 26-27, the pesos’ plight has been partly eased.

The USD-Php increased by only .13% to Php 47.805 from last week’s Php 47.74.

Nonetheless the central bank risk ON will likely spillover to as an ephemeral firming of the peso.

This should be a buying window for the US dollar or USDPHP.

Imploding Real Estate Bubble: Gradually And Then Suddenly

As noted above over the past three weeks or since 2016, the property sector has been in the forefront or the raison d'etre for the present bear market.

The holding sector has heavy exposure on the property sector which is why they have been equally slammed. Many of the listed property firms signify as subsidiaries to their similarly listed parent holding companies. And this includes holding firms with unlisted property subsidiaries such as GTCAP with unlisted subsidiary Federal Land and Property Company of Friends.

As of Friday, the property sector represents 16.57% share of in terms of market cap while the holding sector has 37.31% or the largest market cap share. Combined, these industries command over half 53.88% of the market cap. So when both got toast, both brought down the index and most of the PSE universe with them.

While current developments have been worrisome, they have been moving in the direction as I have been anticipating.

This week’s selloffs have not only been dramatic but widespread.

Importantly its been a succession of the violent or intense selling or a wave of selling: 16.15% of Property sector's market cap dissipated in THREE weeks!

All major property components of the PSEi and the Property index have been severely buffeted.

Friday’s 2.03% ramp only eased some of their benighted conditions.

The coming rally should help alleviate present conditions but these may not be enough to amend or restore the major damages seen from the recent underlying price actions of the said stocks.

The PSE’s property issues reveals of an asymmetric topping phase. Megaworld (violet) has been the first to reach a zenith in April. ALI (green) followed suit in May 2015. Both have been on an incremental downside path, until the August meltdown. Both rallied fiercely off the August lows. Unfortunately their rallies lost momentum. And from November, both issues lost altitude fast…real fast!

Curiously, Robinsons Land (red) reached a peak in late October even as both MEG and ALI had long flipped over. RLC then joined MEG and ALI in late November with a stunning crash!

And the most eye catching of them all, SMPH (blue).

SMPH’s equity prices pinnacled last December 14, and was principally shaped by a last minute or marking the close pump. During that day, 58.2% of the incredulous 8.25% pump to the record Php 22.95 came from marking the close. Fascinatingly, the December 14 acme was etched even as all her three contemporaries (ALI, MEG, RLC) were already in the process of crashing!

Gosh. Perhaps an entity or some entities must have been so desperate as to push up the headline index or just wanted to show the markets that SMPH was beyond the force of gravity.

And I wonder whatever happened to those who deliberately spiked SMPH to Php 22.95? Are they still long or have they cut losses?

The ALI-MEG story has echoed on the price actions or price trends of the other major issues of the property index. VLL (red) topped out just a few days before the PSEi record in April, while FLI (blue), which failed to surpass the May 2013 record, likewise climaxed a month after the PSEi record. On the other hand, BEL (green) inflected as early as September 2014 when casino stocks began their torturous march towards hades. Bel owns Premier Leisure Corp which in partnership with Melco operates the City of Dreams.

Current price actions represent a demolition of the one way trade. If everyone thinks the same, then NO ONE is thinking.

As I recently noted, panics are created by reality overwhelming embedded or entrenched misimpressions, misperceptions and deceptions.

Realize that the property sector represents the most interest rate sensitive non-finance industry. That’s because the property sector’s business model from the frontend (sales via vendor financing) to the backend (construction of inventories for sale or for rent) have been heavily dependent on leverage or credit.

Based on BSP’s data, the property sector accounts for a 19.63% share of banking loans to the production industry, as of November.

I believe that the reported banking loans to the property sector has been grossly understated because banks have surely gone around, the BSP’s regulatory ‘macroprudential’ limits, through manifold loopholes or regulatory arbitrage. You can add to possible regulatory capture dynamics to circumventing regulations.

Yet for now, the markets seem to have overlooked the important link between banks and the property sector through such loan exposure.

Considering that bond yields have been rising (which implies interest rates has been rising), that has led to the intense flattening of bond spreads (with sporadic accounts of inversion or negative yield) the consequence has been a decline in banking credit growth. Such decline in bank credit activities has been mirrored through the collapse of (money supply) liquidity growth from the 10 straight months of 30%+++ to just the current range of 8-9%.

And the crash of M3 has percolated to the general economy, which have been falling for most of the year (as noted above) as reported by the BSP

All these suggest that liquidity or leverage conditions, which the real estate industry breathes on, has been significantly tightening.

BSP surveys don’t reveal of actual financial conditions. Prices do.

And the tightening of liquidity would be baneful for the symbolic property industry. I say 'symbolic' because the property sector has epitomized and has been sold by the establishment as the mythical domestic demand story which has underpinned the phony boom.

And such fable has been crumbling right before our very eyes!

Real world signs of such tightening have emerged. ALI cut capex by 20% in the 3Q of 2015 to supposedly implement “tighter cash management”. Security Bank sold its property arm in the 4Q. Despite a two week media blitz to camouflage property weakness in late October there were crashes in sales for some property issues during the 3Q: Philippine Realty, Rockwell Land and Century Properties. Some industry people have admitted that sales on the property sector have slowed in the 4Q.

The recent crashes have only opened the Pandora’s Box of malinvestments.

Such malinvestments will be exposed in an interlocking feedback mechanism of declining equity prices, financial losses, excess capacity, cash flow shrinkages, debt problems and restrictive access to credit and vice versa.

And despite popular conviction of the boom, which became a politically correct theme, and consequently the vehemence to any opposition of the boom…

I predicted the casino bubble in April 2013, the collapse began in late 2014

I predicted the shopping mall and property bubble in January and October 2013 respectively, the implosions have begun in late 2015.

Pieces of the jigsaw puzzle have been falling into place.

In a conversation between two characters in Ernest Hemingway’s The Sun Also Rises.

One asked 'How did you go bankrupt?' 

The other replied 'Two ways. Gradually and then suddenly.'

Applied to the imploding Philippine real estate bubble: Gradually and then suddenly

Debunking Objections of Overdone Selling and the China Bogeyman

My terse comments on two popular objections on the current stock market crash: the selling have been ‘overdone’ or ‘excessive’ and the China bogeyman.

Selling Overdone.

Even at current 6,200 level, many of the top 15 issues of the PSEi remain ridiculously overpriced (see above).

And we are talking of PAST performance where the E in the PER was valued in a still economically strong environment. How about when the E in the PER falters as the economy stumble? Won’t happen?

And what has led to ‘excessive’ selling? Do these people know? Has it not been from excessive mispricing? What has led to excessive mispricing? Has it not been to because of excessive buying?

So excessive buying or greed is rational while fear or excessive selling is irrational? Or could it be instead that excessive buying (greed) leads to excessive selling (fear)? Or that both are causally linked to signify boom bust cycles?

Let it be understood that in boom bust cycles, the economic bust will almost be in the same the proportion to the imbalances acquired from the inflationary boom

As the great Dean of the Austrian School of Economics, Murry N. Rothbard explained².(bold mine)

The recession or depression is then seen as an inevitable re-adjustment of the production system, by which the market liquidates the unsound “over-investments” of the inflationary boom and returns to the consumption/investment proportion preferred by the consumers.

In stock market lingo, the obverse side of every mania is a crash!

Next, China.

Unless Chinese nationals have been the key buyers of the inventories of major domestic property developers, just what has China got to do with crashing property stocks?

Has it not been popularly held that robust domestic demand has pillared the Philippine boom? So where have such domestic demand been now to support fundamentals and prices of the property sector? And if true, should this not serve as a shield or a cushion to any negative impact from China? Or could domestic demand really have come from Chinese consumers?

Or could distortions, brought about by the farcical boom, have been uncovered by some market participants to have sparked a stampede but opted blame China instead?

Tremors from China’s dynamics would only account for as an aggravating factor to an internal malaise or maladjustment.

If bull markets create geniuses, apparently bear markets spawn clowns.

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1 Bill Bonner Beware… This Tech Darling Is Due a Big Fall

2 Murray N. Rothbard Mises’s Contribution to Understanding Business Cycles Mises Institute September 29, 2014