Monday, November 09, 2015

Phisix 7,100: Surprise! ICTSI Chief Enrique Razon Warns: Another Financial Crisis is COMING!!!! SM Plays with Fire!



All fixed set patterns are incapable of adaptability or pliability. The truth is outside of all fixed patterns.—Bruce Lee

In this issue

Phisix 7,100: Surprise! ICTSI Chief Enrique Razon Warns: Another Financial Crisis is COMING!!!! SM Plays with Fire!
-Surprise! ICTSI Chief Enrique Razon Warns: Another Financial Crisis is COMING!!!!
-SM Group Plays With Fire: SMPH’s Race to Build Capacity Financed by Debt
-More Playing with Fire: SMIC’s Declining Earnings Trend as Capacity Expands
-BSP and Media’s Up is Down,  High is Low, More is Less
-Phisix 7,100: Sluggish Trading Actions as US Dollar-Asia/Peso Likely Higher on US Jobs Report

Phisix 7,100: Surprise! ICTSI Chief Enrique Razon Warns: Another Financial Crisis is COMING!!!! SM Plays with Fire!

Surprise! ICTSI Chief Enrique Razon Warns: Another Financial Crisis is COMING!!!!

Wow, this is absolutely stunning!

For me, this explosive revelation by International Container Terminal Services Chairman and President Enrique Razon’s signifies a thundering breakthrough!

Mr. Razon reverberates on my theme in this interview with Nikkei Asian Review[1]… (bold mine)

Q: You have been critical on how monetary authorities are addressing economic issues through stimulus programs.

A: I think it's nonsense, and we will pay a big price for this. What is happening is that asset valuations are growing. Debt is being taken on in unprecedented scale by everybody in the last five to six years. The economy is suffering from overcapacity and lack of demand. So capacity is more than demand, but people are still expanding. I think this is a recipe for something not good.

Q: Do you agree with those who say another crisis is on its way?

A: I think that is for sure. The crisis is getting bigger and bigger because there is more money. Another Asian crisis is possible, probably just around the corner with currency devaluation. We just hope companies are better prepared.

Why breakthrough?

This comment hasn’t come from an opinion writer or a lowly investor, like me. And they are not statements from multinational agencies like the Bank for International Settlements, the IMF or the OECD. Instead, Mr. Razon, whose wealth emerges out of economic rent or as per Wikipedia—“benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities”—from the political (monopolistic) privilege granted by the government to operate a port company, represents one of the entrenched politically connected elites.

Mr. Razon according to the updated Forbes November 5 data, has an estimated wealth of $3 billion. He ranks FIFTH in the Philippines wealthiest roster and holds the 291st spot among the world’s wealthiest.

In essence, with this interview, Mr. Razon seems to have broken ranks with his colleagues! (more on this below)

And by stating that “another Asian crisis is possible”, and given that Asian crisis means a crisis of several nations within region, as exhibited by the 1997 episode, it shows that he may believe that the Philippines would be involved. Though he did not make this explicit in the public discussion with foreign media. (Keeping quiet on local front would be understandable)

However, notice that Mr. Razon attempted to deodorize on his premises he propounded on. That because if another “Asian crisis is possible, probably just around the corner with currency devaluation”, which has been pillared from “capacity is more than demand”, that presently is being aggravated by people who “are still expanding”, then obviously it would be logically incoherent to think and say that “companies are better prepared”. 

Crises exist because people go to the extreme ends to blindly IGNORE risks while imbibing immeasurable amount of leverage. Or in general, if people running companies have been prepared, then there won’t be a crisis at all! 

There would not be a massive clustering of entrepreneurial errors or malinvestments from the brazen misreading of the economic environment. Since the accumulation of such maladjustments and imbalances are unsustainable, they lead to an eventual unravelling or a disorderly market clearing process. And this counterbalancing process would be expressed or ventilated through recessions, or at worst a crisis.

Debt is a merely a symptom of malinvestments.

And such concentrated scale of misallocation of resources can only occur through the tampering of money prices through inflationism (e.g. negative rate policies).

Well, MR. RAZON should know of what he admonished about. His businesses span the world.

Moreover, this partly explains ICTSI’s 50% capex cut for 2015. The capex cut was announced last October that was INTENDED for THIS year.

Yet if he is serious about his prognostication, then ICTSI and BLOOM’s capital expenditures should be ALL about capital replacement NOW!

CAPEX or capital expansion should be done at the peak or during the heat of the crisis! Yes, you read me right…EXPAND WHEN EVERYBODY SELLS or WHEN EVERYBODY ECONOMIZES!

Crises are sources of MAJOR economic opportunities. It’s where market share can be expanded (as competition ebbs)! And it’s where the TEN baggers are made!

And crisis investing was exactly how the legendary John Templeton built his empire! In the post-great depression era, Sir Templeton famously leveraged (borrowed money) to buy 100 shares in 104 companies that had been priced at a USD dollar or LESS! Mr. Templeton’s bargain hunting included 34 companies in bankruptcy! Sir Templeton deftly played the law of averages to convert a heap of garbage into a mountain of gold!

But I am not sure Mr. Razon’s casino venture has been prepared. Of course, that’s unless if he had subtlety insured this for himself in means that have not been visible to the public…yet.

But this could come at the expense of the other equity holders and creditors, or even domestic media. Said differently Mr. Razon may be going against the interests of his and ICTSI/BLOOM’s present business and social network. But that’s unless, again, if he has commenced to reconcile his recently revamped views with his networks.

This would also mean going against the political tide of propping up a farcical boom predicated on “capacity is more than demand” financed by “debt is being taken on in unprecedented scale by everybody”.

So taking on a full frontal with the view that a ‘crisis-is-coming’ and ‘another Asian crisis is possible’ could mean relational or network strains.

And if he has been preparing for a crisis, considering that he foresees “another Asian crisis is possible”, through “currency devaluation” then this should mean that much of his personal money (or even ICTSI’s money) must have shifted or may have likely gravitated, or has been in the process of transferring, to US dollars or US dollar denominated assets (T-bills?). 

Oddly, last August, ICTSI raised USD $450 million. Borrowing US dollar where the firm’s revenues are mostly in pesos would mean more pesos to service USD liabilities. And a weak economic environment here and abroad should magnify the repayment strains.

So getting exposed with USD liabilities can only be sign of (previous) bullishness or cash flow predicaments.

Mr. Razon’s change of heart: Bullish August—then suddenly—bearish October?

If so, ever wonder why the peso remains weak?

How much more if the other elites join the bandwagon? (Of course, markets will force them eventually)

Will the USD Peso break 55?

And where will the Phisix be headed for under Mr Razon’s scenario? 10,000 or 3,000?

And what will happen to domestic “capacity is more than demand” and of big companies run by people who “are still expanding”?

Curiously, Mr. Razon’s opinion appeared in foreign media and NOT in domestic media.

Will he be censored here? So far I have seen no extended coverage of this comment.

Will he retract, or sanitize or downplay or say that he had been misquoted from this radical politically incorrect perspective? Certain quarters will likely take his dissenting view with vehemence.

Or will he boldly pursue “we will pay a big price for this” because “debt is being taken on in unprecedented scale” which should escalate on the snowballing sentiment that would hasten the reversal process of this quack boom?

Mr. Razon’s ICTSI share prices had been thrashed by an astounding 13.7% this week! Could this have signified a backlash from his latest ‘politically incorrect’ from his out of the box views?

Finally, it’s really fascinating for him to criticize monetary measures in addressing current conditions where he says as “I think it's nonsense and we will pay a big price for this”. Basically, he and his firms had been major beneficiaries from such invisible transfers/subsidies.

In effect, Mr. Razon seems to have had a surfeit of such subsidies to say enough is enough! He appears to have recognized of the massive imbalances that arose and accreted from these which may have begun to affect his interests.

And now he seemed to have renounced it—a proselytization! Curiously, aside from personal experience, what other influences could have prompted his tergiversation?

And if my interpretation is right about his conversion, then kudos to Mr. Razon!

Mr Razon can help awaken, educate, inspire and lead the public to a crusade to put to an end to such unscrupulous redistributive practice from central banks. Such policies are the nucleus of crises. Yes this should include the BSP’s financial repression policies.

SM Group Plays With Fire: SMPH’s Race to Build Capacity Financed by Debt

The statement “capacity is more than demand, but people are still expanding” represents what I call as the race to build supply financed by debt. The outcome from such carefree activities will not just be excess capacity but tensions in the credit environment.

There is no splendid example than to witness SM Group’s SMPH first declare a ‘strong’ 3Q earnings, then a day after, announce the issuance of Php 15 billion worth of retail bonds to finance “mall expansions and refinance loans of the company”.

People are entranced by the surface. They seem to hardly care about what’s under the hood.

For me, there would be no problem to raise money to “finance mall expansions”. But it would be a different animal when bonds are raised to “refinance loans of the company”.

Just what happened to all those supposed “strong earnings”?  Just where exactly are those earnings to be found? Why haven’t the firm been generating enough cash flows enough to cover internal debt refinancing to prompt them to borrow externally?

Does anyone care?

Of course, through negative real rates, borrowing from the public means not only the transfer of resources via claims on SMPH’s future revenues, but likewise the transfer of various risks from SMPH to creditors predicated on SMPH’s business undertakings. Or simply said, if SMPH’s ventures fail, savers who lent money to them take the hit.

Borrowing to refinance loans are symptoms of neo-Keynesian Hyman Minsky’s Ponzi finance pathology. For Minsky, insufficient cash flows generated to pay interest and principal from operations makes a ‘Ponzi’ borrower mainly dependent on sustained appreciation of asset values to refinance debt. This is aside from debt rollovers to bridge the financing gap.

To be clear, I am not saying SM Group is into Ponzi Financing, instead I am saying that SM’s current business template appears to be headed for one. Besides, I am only using the SM Group as representative of the conventional debt financed ‘capacity is more than demand’ dynamic. By market cap, SM accounts for the LARGEST domestic firm at the PSEi, while subsidiary SMPH accounts for the FIFTH largest (as of Friday). This demonstrates of the scale of resources and financing involved by the SM Group relative to the formal economy.

I wrote about SMPH’s booby traps in the 1H, apparently such dynamic has only been amplified…

The following excerpts are from SMPH’s 3Q 17Q report published at the PSE[2]. (bold mine)

Rent: SM Prime recorded consolidated revenues from rent of P29.41 billion in 2015, an increase of 11% from P26.44 billion in 2014. The increase in rental revenue was primarily due to the new malls and expansions opened in 2013 and 2014, namely, SM Aura Premier, SM City BF Parañaque, Mega Fashion Hall in SM Megamall, SM City Cauayan, SM Center Angono and SM City Bacolod Expansion, with a total gross floor area of 652,000 square meters. Excluding the new malls and expansions, same-store rental growth is at 7%. Rent from commercial operations also increased due to the opening of SM Cyber West and Five E-Com Center. Also, rentals from hotels and convention centers contributed to the increase due to improvement in average room rates and occupancy rates.

Real Estate Sales: SM Prime recorded a 4% increase in real estate sales in 2015 from P15.97 billion to P16.62 billion primarily due to increase in sales take-up and higher construction accomplishments of projects launched in 2010 up to 2013 namely, Jazz, Wind, Green, Breeze, Grace, Shore and Trees Residences accounting for 60% of total revenues from real estate sales. Actual construction of projects usually starts within one year from launch date and revenues are recognized in the books based on percentage of completion.

SM Prime’s malls business unit has fifty four shopping malls in the Philippines with 6.8 million square meters of gross floor area and six shopping malls in China with 0.9 million square meters of gross floor area. For the rest of 2015, the malls business unit will open one new mall located in SRP Cebu, as well as expansions of SM City Iloilo and SM City Lipa. SM City Cabanatuan and SM Center Sangandaan were opened in October 2015. By end 2015, the malls business unit will have 55 malls in the Philippines and six in China with an estimated combined gross floor area of 8.3 million square meters. SM Prime currently has twenty seven residential projects in the market, twenty five of which are in Metro Manila and two in Tagaytay. For 2015, SM Prime’s residential unit will launch about 12,000-15,000 units in total in the cities of Taguig, Quezon, Mandaluyong, Las Piñas, Parañaque and Pasay at the Mall of Asia Complex. SM Prime’s Commercial Properties Group has five office buildings with an estimated gross leasable area of 203,000 square meters. Currently, Three E-Com Center is under construction scheduled for opening in 2018.

Let us simplify by dividing the above disclosure into growth in terms of demand and supply.


Demand side growth: (year to date) Total rental 11%. Same store rent 7%. Real Estate 4%

Supply side growth:

-Mall (year to date): 6,148,000+652,000 sqm= 6,800,000 sqm or 10%
-Real Estate: SMPH’s declared inventory 79,741 units from 2003 (not in the above, but from SMPH’s presentation). Additional 12K equals 15% or 15k equals 18.8%.

Analysis

Rent: A back of the envelop calculation tells us that 10% of new stores delivered ONLY FOUR PERCENT 4% of overall year to date growth! So whatever happened to the other new stores or the 6% of inventories? They remain as vacant spaces? So store occupancy rate must falling even as earnings rise.

Given the huge surge in property prices as discussed last week, same store rent are most LIKELY about RENTAL INCREASES more than they are about royalty (overriding) fees on sales.

And despite the new store inventories (10% growth), year to date rental growth has fallen marginally from 11.72% in 2014 to just 11.24% in 2015 (see right).

Again why are growth rates falling when massive inventories are being added? As Mr. Razon noted, because capacity is (growing) more than demand?!

The law of diminishing returns as defined by Wikipedia, “the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant”.

Has the law of diminishing returns been plaguing the main source of revenue of SMPH: shopping mall rentals?

For now it isn’t problem. But later it will be a big problem, particularly when costs overwhelm sales.



Let us move to real estate.

In an investor presentation, SMPH noted that since 2003 its real estate segment SMDC produced 79,741 units. So in the past 12 years the firm produced an average of 6,645 units. This means that the current proposed and launched projects have been more than double the average.

But SMDC’s expansion spree has only been from 2010 (see left). So it would be better to vet on SMDC’s activities from 2010.

From SMPH’s SMDC data, I estimate that 80% of unit launched were declared as units sold. That’s could because in 6 years, there has been only 2 years where unit sold exceeded unit launched. As noted above, units launched are pre-selling projects, where construction happens a year after the launch. So sales can take place even when the project is yet to be constructed.

In 3Q 2015, SMDC posted a sales growth of just 6.89%. This is substantially lower from last year’s 18.11%. But from a year to date basis, real estate sales grew by just 4.11% from last year’s 1.11%.

So real estate sales of SMPH have been slowing (in the 3Q) which somewhat dovetails the slowdown shown in other real estate companies.

Importantly, condo units inventory (year to date) shows that based on peso, supply of condo units ballooned by 36.245% even as sales posted only 4% growth!

So beneath those rosy numbers seem to be developing mismatches between supply and demand.

Take note. No matter how one tries to shift the angles, supply side growth has zoomed disproportionately relative to demand side growth.

Of course, media regales the public with reservation sales as they did in 2014 but this has yet to be converted into sales and importantly cash flows!

You see now why SMPH needs to borrow? The cost to finance supply expansion has been greater than demand growth (sales)

More proof.

I earlier asked “Just where exactly are those earnings to be found”?


Well, trade receivables serve as a big part of that answer

Trade receivables, as defined by SMPH, are from sale of real estate which “pertains mainly to sale of condominiums and residential units, at various terms of payment”.

In short, trade receivables are manifestations of SMPH’s vendor financing scheme platform. SMPH lends to its real estate customers, say down payment, which the latter pays in installments or “various terms of payment”.

To be clear, there is no money transfer from the developer to the buyer, lending comes in the form of staggered payments or installments on agreed portions of the sale contract (say down payment) that are internally financed by the company.

So while trade receivables are considered in accounting as “current assets” or as defined by Investopedia, “the value of assets that can reasonably expected to be converted into cash within a year”, it is worth emphasizing that the uncollected or due sales translate to future and NOT present cash flows.  Down payments, for instance, can extend by more than a year (up to five years).

SMPH’s earnings are thus tied to the collection of these receivables which means the company’s profits are mostly ‘accounting profits’. That’s because NO collection means NO realization of profits.

Yet trade collections are by no means a guarantee. They could most likely be subject to economic fluctuations.

SMPH’s trade receivables (uncollected sales) account for nearly a third of the company’s current assets.

Trade receivables have slightly been down this year from last year, but this may partly be due to the low rate of sales growth and partly from the completion of earlier down payments and its consequent migration to bank financed loans for the balance of the sales contract, as well as, to full cash payments.

So given the rate of inventory (condo units) expansion that has been insufficiently backed by cash collections derived from accounting sales, naturally a financing gap arises.

Besides, as earlier noted, the rate of supply side expansion has been growing faster than even top line growth

SMPH’s cash flow statement reveals of its heavy dependence on bank credit to finance BOTH its sales and the delivery of its products.

And that financing gap—particularly from supply side expansion growing faster than top line sales and from cash collections—signifies what the Php 15 billion retail bond offering has been about—which officially has been stated as to finance “mall expansions and refinance loans of the company”.

This is the essence of SMPH-SMDC’s real estate growth story: an economic model heavily based on leverage.

The problem with SMPH’s leverage model is that when an economic downturn takes place, this will likely hit FIRST SMPH’s real estate market through its potential and existing customers. This will affect not only topline sales, but then filter and spread into trade receivables (via loan impairments), cash flow and overall debt, notwithstanding, the excess inventories and those jobs and supplier-creditor networks attached to them.

In addition, a weak real estate market will compel companies operating like SMPH to become increasingly dependent on access to debt in order to finance existing debt—Debt IN Debt OUT—hence the pathway towards Ponzi financing.

So SMPH-SMDC depends on a trajectory of sales growth predicated on sustained expansion of credit. Or stated differently, because the company’s business model relies heavily on credit expansion for its prosperity and for survival, the company depends on a continued inflationary boom, as evidenced by the continuing surge in prices of properties, facilitated and enabled by BSP subsidies.

Moreover, the swelling of trade receivables are manifestations of the invisible redistribution mechanism of the BSP’s financial repression policies. Easy money policies have only stoked artificial demand for properties through credit accommodation, in particular, through vendor financing.  The artificial surge in demand from mostly a small segment of society has ignited unsustainable property inflation which has serious economic wide side effects.

Unfortunately, there is no such thing as free lunch forever.

Thus with little margin for error, SMPH’s current real estate growth model would be tantamount to playing with fire. And to play with fire, one risks getting burned.

More Playing with Fire: SMIC’s Declining Earnings Trend as Capacity Expands

In 2013 SMDC was merged with SMPH. Here is a guess why the merger took place. SMPH’s shopping malls has been popularly seen as a cash cow. Perhaps SMDC or the real estate segment has been seen by the owners as a fragile venture. Through the merger, the revenues from shopping malls are supposed to hide such fragilities or subsidize any deficits that would be incurred by SMDC in the event of a downturn. On the other hand, a boom on the real estate would amplify or compliment mall revenues. This seemed like a neat strategy. But this strategy depends on the premise that SMPH’s shopping malls would continue to serve as cash cows.

Since SMDC was merged with SMPH in 2013, the real estate data provided by SMPH has been limited.

Nonetheless 3Q results from parent SMIC was also announced last week. But the announcement came without the corresponding 17Q yet. So I will just quote relevant portions of the disclosure based on media.

First parent SMIC reported earnings grew by 7% for the first 9 months.

Next the retail operations: Retail operations under SM Retail, Inc. netted P4.6 billion in the nine-month period, up 21% year-on-year, on the back of a 6.5% jump in total sales to P145.3 billion. At end-September 2015, SM Retail had a total of 294 stores, comprising 51 department stores, 41 supermarkets, 43 hypermarkets, 130 Savemore stores and 29 WalterMart stores…[3]

From another report…The group’s food retail group, SM Markets, expanded in both urban and rural communities in various parts of Luzon, Visayas and Mindanao.  This unit added 20 new stores, mostly standalone Savemore stores.[4]

I find these reports intriguing due to the absence of same store sales number in media’s report.

In the 1H, I posted that same store sales growth (year on year) for SM department stores at 3.7% and  for SM food retailing group 1.2%. In the 1H, SMIC earnings grew by 10%.

So with income down by 3 percentage points how did same store sales perform? Why is this important?

Same store sales provide an insight of consumer spending activities in the lens of the largest retail chain.

The government says that household consumption grew by 7.2% and 7.1% in 1Q and 2Q (at current prices) even when the network of the largest retail stores grew by below half of the stated government numbers. Perhaps competition has eroded or muted SM’s performance or perhaps government has been overstating consumer activities, or such might be a combination of both.


Same store sales also provide an outlook for the prospective earnings growth for the SM’s shopping mall, the core of SMPH’s revenues and also of the health of SM’s real estate segment

SMIC’s top line growth rate declined to 6.16% in 1H 2015 from 7.17% in 1H 2014 (upper window). This was mostly due to the combination of diminishing growth rate of retail sales and rents. Real estate has posted insignificant growth rates.

Yet 2014 and 2015 performance have been halved from 2013 and 2012’s numbers at 16.14% and 14.18%, respectively.

Overall, SMIC’s growth rate has been plunging.

Curiously, this comes even as SMIC has aggressively been expanding capacity. Why have growth been dropping when capacity continues to swell? Why have all those extra capacity not been adding to the growth rate of SMIC and her subsidiaries? Law of diminishing returns at work? Or has consumer spending been falling? Or both?

Ironically, SMIC’s real estate performance hardly reflects on the massive price inflation from Makati, Ortigas and Rockwell during the same period. SMIC’s real estate segment provided a major boost only in 2012. The underperformance of SMIC reveals that so called ‘demand’ that fueled 1H property price inflation has been only in some areas and hardly applies to all.

Global Property Guide could be right; there could be an ongoing expansion of ‘ghost cities’ or ghost condos serving the middle class.

A portion of the 1H performance can be seen in the 2Q activities (see lower window). Since both tell of the same story, then they resonate on the 1Q performance, except that 2Q top line sales was weaker +4.83% than the 1H performance. So this means 1Q lifted the average.


SMIC’s 3Q and first 9 months activities from 2012-2014 (no data available for 2015 yet) shares the same tale; slowing top line revenues mainly from descending performances in retail and rents. Real estate outperformed only in 3Q 2014.

Moreover, SMIC profits rose 10% in 1H 2015. In 9 months of this year, profits rose by only 7%. This means that the profit growth rate for 3Q significantly slumped! And that number could just be about 1.2%! That’s why I noted that the absence of media’s report on same store sales for me seems intriguing. Because they seem to be hiding something unpleasant. Something that would not only expose on health of the resident consumers as seen in the purview of retail outfits, but most importantly decompose on the populist myth of the political fabrication called as the consumer economic growth ‘success’ story.

More, the downhill performance of retail sales suggests that SMPH’s rental growth 3Q 2015 of 13.7% and for the first 9 months at 11.24%, have considerably been due to rental increases rather than from royalty fees or consumer spending growth. So if true, money illusion via property inflation (aside from new mall spaces) had been a significant contributor to 3Q earnings growth. Hardly a sound economic model.

Yet if profit growth rate has been headed toward stagnation, then just how will SMIC and her subsidiaries finance all her aggressive expansions? Part of this is through bond issuance.

Also what justifies those stock market ridiculous valuations?

I believe that a lot of companies have embarked on the same business model as SM Group. They better make sure that they have many channels to access to credit. SM, through their subsidiary bank BDO, has that privilege.

That’s because once Mr. Razon would be proven right, many people will pay a big price for their recklessness. And access to credit will be the premier concern for survival.

As clue to this, a retailer BW Gaisano dived its IPO offering by a shocking 35%!!!

The Gaisano IPO account hardly signifies a sign of a boom. Rather, it looks likely a symptom of desperation to gain access to financing!  Why??!!

BSP and Media’s Up is Down, High is Low, More is Less

In the dystopian novel 1984, George Orwell coined the slogan of “war is peace, freedom is slavery, and ignorance is strength” to demonstrate of doublespeak or the corruption of language to control people through their thoughts.

I was reminded by these when I came through an article where the Bangko Sentral ng Pilipinas would reportedly “tighten rules” on the banking system’s treasury operations in order to minimize risks. And minimizing risks will be coursed through new regulations that supposedly will prevent investors “from transacting in financial products for which they are unsuited[5]

Astounding! Just how on earth will the BSP know which financial products are suited or not suited for individuals???? Does the BSP know every person’s risk tolerance profile for them to make such a claim???



Instead of treasury products let us apply such ‘fatal conceit’ on stocks.

The above represents the price to cash flow (or a ratio of market price relative to its cash flows) of the MSCI Philippines (21 component) as constructed by the fabulous Gavekal team.

Do the above numbers indicate a buy or a sell for the MSCI Philippines or for specific sectoral based performance, for me or Juan or Pedro? Does the BSP know? What are the profit or loss probabilities for a position on them, for me or Juan or Pedro? How does one apply a position, short term or long term based on the above, for me or Juan or Pedro?? Does the BSP know? What are the risks for me or Juan or Pedro, or to the general markets from the above valuations? Does the BSP know?

What do the above valuations indicate relative to “the proper conduct of client suitability is, therefore, deemed a crucial part not only of consumer protection but also of the self-protection of supervised entities against adverse claims”?


How about the next image? These are related to the price to cash ratio. How? They account for as the numerator of the ratio. However, the figure exposes on the price fixing actions by certain groups through “marking the close” which had 3 incidences last week. Marking the close based on SEC mandate has been stipulated to be illegitimate. So how do such manipulative actions serve to protect consumers? What is the BSP’s role in them?

In the same article Deputy Governor Nestor A. Espenilla, Jr was quoted as saying new regulations are needed to minimize risks of mis-selling treasury products, “In a low-interest environment when there may be great temptation to chase yield, sellers may be too aggressive and buyers too careless.”

The BSP has hardly ever bothered to make an official comment on whether current equity market valuations have been products of the “great temptation to chase yield”. Although to be fair, the BSP chief did issue implied warnings during two of his speeches in August 2014 (“complacency and chasing the markets”) and in October 2014 on (“mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market”). Yet unless one follows the speeches of the BSP leaders, hardly anyone would have known since there hardly has been public coverage on this.

Especially not with biased media (or what political analyst and trend forecaster George Celente contrived as “presstitutes”). For biased media, unless it is about personality based politics, nothing can ever go wrong with the Philippine economy.

Media recently broadcasted that some P 25 billion that have been lost to investment scams. Yet what has the BSP’s role been in them?  

In an environment where money has been politicized and manipulated to become free (for government and for cronies), has the BSP not been responsible for creating incentives for people to the fall trap to the “great temptation to chase yield” in which many become suckers and fall victim to unscrupulous agents?

Media also reported that there has been a “rising trend among young people victimizing the older citizens”. Increasing market stress also aggravates on the proliferation of financial fraud (Ponzi-pyramiding schemes) as I noted in 2008. The greater the market stress, the more vulnerable people are to fraud.

Yet who created such market boom bust market tensions?


To add, whom have media and the BSP been kidding when they show of the sudden drop in the growth rate of consumer NPLs in the face of a slowing economy?

The BSP, possibly in cahoots with the banks, may be engaged in statistical talisman or shouting statistics to shoo away financial demons that plagues the banking system’s balance sheets.

The rate of consumer lending continues to sizzle, though lower the previous highs, even when the statistical economy has been materially slowing.

The cooling formal economy such as in manufacturing and in exports translates to output, jobs, income and financial losses. So for those who have contracted loans when everything had been booming, they are likely to be feeling the financial heat in 2Q, and even right now.

So what those stats above from the BSP seem to tell us have been that economic conditions hardly has any bearing on credit conditions. Even when debt is high, a substantially lower GDP translates to the more prompt payers by debtors!

Up is down. High is low. More is less.


And while the second quarter has signified a done deal, and while there have been persistent and sustained attempts to widen spreads of the yield curve, the above flattening doesn’t spell good for credit, liquidity and even for NPLs! They can hide a quarter but eventually those tensions will surface.

Moreover, media tell us that 3Q GDP should be better than the 1H.

So they cherry pick on statistics that makes GDP to supposedly look good. Say manufacturing, despite a negative August data, they will instead cite ‘volume’ which grew by 3.7%. It’s really disconcerting, if not pathetic, to see people brandish numbers even when official GDP computation of manufacturing is about Gross Value Added or the measure of value of goods and services of a sector in the economy. And yet they call themselves experts. Apparently, experts at manipulating numbers.

Down is Up. Low is High. Less is More.

The above quarterly growth numbers of tax revenue collections seem to be declining in conjunction with GDP.

Though the relationship between changes in tax revenues and GDP has not been clear cut, as taxation represents stringently political activities relative to the GDP which supposedly measures economic output from a political economic environment, somehow tax collections may partly reflect on economic conditions.

In three occasions where growth rate of tax revenues fell for two successive quarters, GDP either fell as in 2010, or flat lined as in 2013.

So falling revenues may be a manifestation of a lack of political will to collect taxes, easing up of tax collection due to political season, and or has been reflecting on economic conditions-a slowdown.

I know. The opaque relationship may even be called a null hypothesis.

Finally, the BSP seems inundated with contradictions. First, they tell us that they know what is good for the public. So they lay rules that are supposed to protect us. But then they tell us many things about them not knowing! That’s when they have agendas to push or when they are put on the spot.

Agendas to push. In a speech early this year, the BSP chief lectured media about the knowledge problem or how to LOOK beyond statistical numbers. As I earlier posted[6]: Economic numbers rarely tell the complete story when taken at face value. Therefore, a responsible journalist who seeks to offer readers a fuller appreciation of the information will examine the figures within a broader context or against an array of other relevant indicators. Given the facts on hand, a good reporter will know which leads to chase, and which to set aside, perhaps for another day, for another story. The objective is to understand what is happening -- and why -- so that the facts can be pieced together into a sensible and useful news report for their publics.

By engaging in statistical talisman for 2Q consumer loans, such sagacious advice from the BSP chief is something which the BSP doesn’t want the public to do. Or they want the public to just take these numbers at face value, even if they defy economic logic!

Put on the spot. And when asked about how risks from China’s economy may affect the Philippines, the BSP chief even used one my favorite—the Chaos Theory—to justify the BSP’s knowledge problem or ignorance!

In a September speech[7]: (bold mine) This reminds me of how “chaos theory” is often described. As everyone here is aware, CHAOS THEORY is the study of nonlinear relationships where events that appear logically random are actually linked. It is said, a butterfly flapping its wings in the Amazon will affect the time of formation, exact location, and path of a hurricane several weeks later in North America. This “butterfly effect” is formalized in various fields like risk management, that’s why this audience knows it, right? It underpins the very framework of Financial Stability used by the BSP but, in its simplest form, it is more commonly referred to today as “contagion”….Ladies and gentlemen, it is clear that there is already some impact on EMEs, including the Philippines. And the possible consequences of a hard landing could be significant to many jurisdictions.  There are layers of nonlinear and changing linkages that make the prediction of full effects an impossible task.  But it is precisely an evolving situation such as that in China which should provide us a good platform to think about the possible issues that prudential policy may consider. In your more focused request, you asked me what the impact is on us of the slowdown of the Chinese economy. My reply -- So far, it’s been on the whole, benign.  We’ve so far managed well but we are not immune should Chinese growth slow more steeply and financial market volatilities intensify further.

So the BSP thinks that the “chaos theory” or nonlinear relationships apply ONLY to external forces and its linkages with the Philippines. They can’t seem to perceive of the chaos theory applied to the domestic setting particularly from “new regulations setting “minimum expectations” for supervised financial institutions that sell securities and similar financial instruments”

Very interesting.

Nevertheless, the great Austrian economist F.A Hayek has once been again validated.[8]

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralising decisions, and that a division of authority will actually extend the possibility of overall order

Phisix 7,100: Sluggish Trading Actions as US Dollar-Asia/Peso Likely Higher on US Jobs Report

A short note on the Phisix.

The PSEi was down .23% on a mixed showing. The headline index was generally up: 19 advancers versus 11 decliners. All sectoral indices were up except the service sector.

The service crashed by 6.54% last week, spearheaded by telco issues, PLDT -7.91% and Globe -5.35% and seconded by port giant ICTSI -13.70%.


But market breadth was considerably down: in aggregate decliners led advancers by 91. Three of the 5 days were in favor of the sellers.

Despite the rangebound trading that has partly been a product of price fixing, fascinatingly peso daily volume continues to emaciate.

This week’s daily volume (averaged weekly) at Php 5.479 billion accounted for the second smallest volume for 2015. The lowest volume for the year was at week ending at September 11, 2015 where peso volume (averaged weekly) was at P 5.404 billion. (see left)

Moreover, wobbly volume has resonated with other trading indicators, such as daily trades and number of traded issues.

Such frail volume makes the PSEi once again vulnerable to another selling stampede. The August 24 meltdown was preceded by a daily volume (average weekly) of Php 5.82 billion, the third lowest for the year!

Interestingly the USD peso has once again reached its resistance to close at 46.935.

The USD was mostly up in Asia with the exception of the Indonesian rupiah and Taiwan dollar. The Indonesian government reportedly announced a sixth economic package for this year. Malaysia ringgit and the rupiah have diverged last week.

Given that US October jobs market 271,000 widely beat expectations, this has been perceived as substantially bolstering the odds for a FED rate hike in December, the USD peso as with other ASEAN currencies are likely to trade significantly up at the opening of next week. If sustained through the day, then this should mean a breakout of the USD Php past the 47 level where the next target could be Php 47.5- 48 zone.

What arouses my curiosity in the US job report has been that many of the details seem to contradict other economic data related to the jobs. For instance strong jobs from retail and wholesale sectors come even as sales performance of the wholesale sector has been fumbling while retail sales (ex food seems to have plateaued since July). Wholesale inventory to sales ratio continues to climb and has now been approaching recession levels! Manufacturing showed ZERO job growth! Yet 54% of the 271K jobs growth came from arbitrary birth-death model. Generally, the US October job data was a story of mostly construction jobs from a property boom.

What can be seen has been a widely divergent or unbalanced economy which has been tilted balance towards areas benefiting from zero bound rates—asset boom.

Yet I doubt the integrity of those numbers. Because the FED was widely criticized for pushing back rates by incorporating global economic and financial developments” the job data looks designed or a set up to reverse what seems as faux pas that would pave way for the FED to redeem itself by a reluctant hike in December.

But a December hike will hardly solve the global dollar problem which mostly emerged out of the accumulation of balance sheet imbalances or mismatches.

A December hike will only put a squeeze on highly levered balance sheets of the rest world (specifically Asia and emerging markets) which should eventually boomerang back to the US.

And even when the US Fed eases (by QE) in response to a faltering economy (or bursting bubbles), the matching process of central bank action to fill balance sheet deficits will likely take time.  So I expect the USD to serve as a lightning rod against stresses that would surface in response to massive imbalances as an outgrowth of central bank policies from all over the world. And once the charade from risks assets have been sloughed off, gold will scintillate.




[1] Nikkei Asian Review ICTSI chief sees another crisis coming November 5, 2015

[2] PSE 3Q SMPH 17Q as of September 30, 2015

[4] Inquirer.net Core businesses push SMIC income to hit P19.4B November 5, 2015

[5] Businessworld BW Rules on financial products fortified November 4, 2015

[7] Amando M. Tetangco Jr Navigating Thru the Waters of Change...and Butterflies 2015 Annual Joint General Membership Meeting of ACI, FMAP, IHAP, MART, NASBI and TOAP September 29, 2015, BSP.gov.ph

[8] Friedrich von Hayek, THE FATAL CONCEIT The Errors of Socialism p.76-77 libertarianism.org

Friday, November 06, 2015

Video: Prof. Walter Williams on the Effects of Minimum Wage

In the following interview with Heritage’s Steve Moore, Professor Williams explains the unseen consequences of the minimum wage law, for instance, how why the mandate discriminates against low-skill or "non-preferred workers"

(hat tip Cafe Hayek) Source:LibertyPen.com 

Thursday, November 05, 2015

What China’s Frankenstein Bullmarket Looks Like

So the Chinese government’s attempts to stanch two bubbles from imploding has succeeded for now…

That’s by reviving one bubble (property) after another (stocks).

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Bloomberg on today’s return to the bull market….(bold mine)
China’s stocks rose, with the benchmark index entering a bull market, after an unprecedented state rescue effort halted a $5 trillion crash and ordinary investors returned to the market.

The Shanghai Composite Index climbed 1.8 percent to 3,522.82 at the close, taking its advance from its Aug. 26 low to more than 20 percent. Gains on Thursday were led by brokerages, while turnover was the highest since Aug. 18. The Hang Seng China Enterprises Index rose 0.7 percent in Hong Kong at 3:16 p.m., extending a 17 percent advance since this year’s Sept. 7 low.

The government took extreme measures to shore up equities as a boom turned to bust in June, including banning major stockholders from selling shares, curbing short selling and directing state funds to purchase equities. While government-owned funds still influence the market, evidence of heavy intervention has dwindled as late-day rallies become less frequent. Margin debt is also rising, volumes have stabilized and companies favored by individual investors are leading the rebound…

To keep growth on track, the People’s Bank of China has cut its benchmark interest rate six times in the past year, to a record low 4.35 percent. The world’s second-largest economy grew 7 percent in both of the first two quarters of this year, in line with the government’s goal for this year, before the expansion slowed to 6.9 percent in the third quarter…

The Shanghai Composite entered a bear market on June 29, ending a 935-day long bull market -- the nation’s longest. The gauge is still down 32 percent from its June 12 high…

“I suspect that the state or the state-backed funds are buying brokerage stocks and by doing that, they can quickly boost sentiment on the broader market,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co.

The Shanghai Composite jumped 4.3 percent on Wednesday after the central bank published five-month-old comments from governor Zhou Xiaochuan that said a link between exchanges in Shenzhen and Hong Kong would start in 2015. Traders also pegged the gains to optimism over China’s five-year plan to bolster the economy and use of the currency.
From another Bloomberg article

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Investors are slowly rebuilding positions using borrowed money. Margin financing surged to more than 2.2 trillion yuan at the height of the stock boom, before falling by more than half in the bust. It’s now back above 1 trillion yuan, adding fuel to the rally but also raising the odds of bigger price swings.
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Short sellers have largely been shut out of China’s market after curbs by both the government and brokers made it more difficult to bet on falling share prices. Authorities have also reined in China’s equity-index futures market, where traders used to be able to make large bearish wagers.

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If the bull market is confirmed on Thursday, it would make the Chinese market’s slump from its June high one of the shortest in recent history. At 75 calendar days, it would compare with an average retreat of 226 days in bear markets since 1999.
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Trading has picked up in Shanghai as shares rallied, an indication that ordinary investors are starting to take over from the government-run funds that propped up prices during the depths of the rout

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Rising confidence in China’s “new economy,” the catchphrase for policy makers’ goal of shifting growth toward technology, consumer and service industries, has propelled tech shares to the biggest gain since the market bottomed in August. Reducing the economy’s reliance on its old drivers of investment and low-tech manufacturing is a key part of China’s next five-year plan.

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Just because Chinese shares are rallying, doesn’t mean they’re cheap. The median stock on mainland exchanges is valued at 63 times earnings, the highest level among the world’s 10 biggest markets. The Shanghai Composite Index, which has a heavy weighting in low-priced banks, has a ratio of 19. That compares with its five-year average of 13.
Here is a guess. When the government eases on “banning major stockholders from selling shares, curbing short selling and directing state funds to purchase equities”, the stock bubble deflation should return. 

Besides, bubble deflation are manifestations of the natural market clearing process at work. What the government has done has been to postpone the day of reckoning. Importantly, the current massive government measures to forestall the market crash only COMPOUND on the very imbalances that has caused the bubble deflation: inflating bubbles.

Of course, strains from imbalances have not been limited to properties and stocks, other symptoms include rising incidences of defaults, the widening of spread between Offshore-Onshore yuan, accelerating capital outflows/capital flight and the ongoing downturn in the real economy. 

In other words, through the Frankenstein dynamics, the Chinese government may have achieved a temporary Potemkin financial markets. But she would need more than that.  She would need to contain the other fissures from where deflationary leaks have been seeping out.

Quote of the Day: Monetary Policy Makes People Excited to Destroy their Wealth

For over three decades, the interest rate has been falling. This causes all asset prices to rise. Rising asset prices incentivize people to consume their capital (as I’ve written in many articles). In short, it’s a process of converting someone’s wealth into someone else’s income. The owner of the wealth would never consume it, but the recipient of income is happy to consume most of it. 

Everyone has seen traders and money managers driving expensive cars and dining in high end restaurants. There’s nothing wrong with making a lot of money and spending it. The problem I am describing is not that they make a lot of money, but that the money they make does not come from producing anything of value. It’s other people’s life savings that they are driving and eating.

This is the difference between monetary policy and tax or regulatory policy. Monetary policy makes people excited to destroy their wealth. There is no other kind of government intrusion in the market that sets off such a feeding frenzy of self-destructive behavior.

How does it do this? It makes it profitable to do so. Why does someone hand over his wealth to someone else for consumption? He buys an asset in the hope that it will go up further in price. So long as asset prices are rising, people exchange their capital for a chance to win cash in the falling interest rate game.

Most people would say that the problem is when assets fall again. They miss the point. The destruction occurs when the price is rising, and winners are spending their profits which are others’ accumulated savings. The accounting catches up eventually when prices fall back down, and then losses are taken.
This excerpt is from an article entitled “What’s Different about Monetary Policy?” written by Keith Weiner, president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals, published at the CobdenCenter.org

Update: Sorry for the small font. No matter how I try to increase the size of the font to normal, it reverts to the smallest.