Quote of the Day: The Global Warming Theory has Failed. Money, Politics and Ideology have Replaced Science

In celebration of Earth Day, the Weather Channel founder John Coleman vented: (source USA Today/ht zero hedge)

The environmentalists, bureaucrats and politicians who make up the U.N.’s climate panel recruit scientists to research the climate issue. And they place only those who will produce the desired results. Money, politics and ideology have replaced science.

U.N. climate chief Christiana Figueres has called for a “centralized transformation” that is “going to make the life of everyone on the planet very different” to combat the alleged global warming threat. How many Americans are looking forward to the U.N. transforming their lives?

Another U.N. official has admitted that the U.N. seeks to “redistribute de facto the world’s wealth by climate policy.” The former head of the U.N. climate panel also recently declared that global warming “is my religion.”

When all the scare talk is pushed aside, it is the science that should be the basis for the debate. And the hard cold truth is that the basic theory has failed. Many notable scientists reject man-made global warming fears. And several of them, including a Nobel Prize winner, are in the new Climate Hustle movie. The film is an informative and even humorous new feature length movie that is the ultimate answer to Al Gore’s An Inconvenient Truth. It will be shown one day only in theaters nationwide on May 2.

As a skeptic of man-made global warming, I love our environment as much as anyone. I share the deepest commitment to protecting our planet for our children and grandchildren. However, I desperately want to get politics out of the climate debate. The Paris climate agreement is all about empowering the U.N. and has nothing to do with the climate.

Quote of the Day: Why Saudi Arabia May Become The Mideast’s Newest Hotspot

Writes historian Eric Margolis at the Lew Rockwell.com

Saudi Arabia and the Gulf states have been de facto US-British-French protectorates since the end of World War II. They sell the western powers oil at rock bottom prices and buy fabulous amounts of arms from these powers in exchange for the west protecting the ruling families.

As Libya’s late Muammar Kadaffi once told me, “the Saudis and Gulf emirates are very rich families paying the west for protection and living behind high walls.”

Kadaffi’s overthrow and murder were aided by the western powers, notably France, and the oil sheiks. Kadaffi constantly denounced the Saudis and their Gulf neighbors as robbers, traitors to the Arab cause, and puppets of the west.

Many Arabs and Iranians agreed with Kadaffi. While Islam commands all Muslims to share their wealth with the needy and aid fellow Muslims in distress, the Saudis spent untold billions on casinos, palaces, and European hookers while millions of Muslims starved. The Saudis spent even more billions for western high-tech arms they cannot use.

During the dreadful war in Bosnia, 1992-1995, the Saudis, who arrogate to themselves the title of ‘Defenders of Islam” and its holy places, averted their eyes as hundreds of thousands of Bosnians were massacred, raped, driven from their homes by Serbs, and mosques were blown up.

The Saudi dynasty has clung to power through lavish social spending and cutting off the heads of dissidents, who are routinely framed with charges of drug dealing. The Saudis have one of the world’s worst human rights records.

Saudi’s royals are afraid of their own military, so keep it feeble and inept aside from the air force. They rely on the National Guard, a Bedouin tribal forces also known as the White Army. In the past, Pakistan was paid to keep 40,000 troops in Saudi to protect the royal family. These soldiers are long gone, but the Saudis are pressing impoverished Pakistan to return its military contingent.

The US-backed and supplied Saudi war against dirt-poor Yemen has shown its military to be incompetent and heedless of civilian casualties. The Saudis run the risk of becoming stuck in a protracted guerilla war in Yemen’s wild mountains. The US, Britain, and France maintain discreet military bases in the kingdom and Gulf coast. The US Fifth Fleet is based in Bahrain, where a pro-democracy uprising was recently crushed by rented Pakistani police and troops. Reports say 30,000 Pakistani troops may be stationed in Kuwait, the United Arab Emirates, and Qatar.

Earlier this month, the Saudis and Egypt’s military junta announced they would build a bridge across the narrow Strait of Tiran (leading to the Red Sea) to Egypt’s Sinai Peninsula. The clear purpose of a large bridge in this remote, desolate region is to facilitate the passage of Egyptian troops and armor into Saudi Arabia to protect the Saudis. Egypt now relies on Saudi cash to stay afloat.

But Saudi Arabia’s seemingly endless supply of money is now threatened by the precipitous drop in world oil prices. Riyadh just announced it will seek $10 billion in loans from abroad to offset a budget shortfall. This is unprecedented and leads many to wonder if the days of free-spending Saudis are over. Add rumors of a bitter power-struggle in the 6,000-member royal family and growing internal dissent and uber-reactionary Saudi Arabia may become the Mideast’s newest hotspot.

Two things, if this becomes true, which could part of what I have been discussing, then what should happen to Philippine OFWs?

Next, as for Saudi's public arbitrary/summary execution of the political opposition under the cover of drug dealing, will this resonate with the political climate in the Philippines under a new potential populist 'strong man rule' regime?

Updated to add: there goes the bug which automatically shrinks font to the smallest--again! Sorry for this

Phisix 7,250: 73% of Index Gains from Team Viagra! (Log April 21)

The operations of Team Viagra have not only become regular but bolder and more intense. 

For today session, virtually 74% of the day’s gains come from the session end spike 

Which bourse in the world shows of the same phenomenon? Only in the Philippines! Only at the PSE. 

In today's world, manipulations are now considered a virtue (even called reforms) hence the PSE was awarded as the best bourse of ASEAN in 2015.

Yet the brazen gaming of Philippine stock market reveals of increasing signs of desperation. 

Why? Because fundamentals have been exposed as having little relevance to current stock market pricing or levels.  The public in 2015 had been told that stocks was about G-R-O-W-T-H. So the April 10 2015 record--which eventually sputtered. 

Now that 2015 is a fact and G-R-O-W-T-H was nowhere to be found, the stock market pumping has become even more furious. 

So in the likely dread of the repetition of August 2015 and January 2016 crash, gains from current momentum has to be sustained AT ALL COST! And so the more drastic and desperate the end session pumps by manipulators! 

Just look at the sectors which had been forcibly pushed higher. 

Apparently the main thrust for the day’s operation has been banks. And they were followed by the regulars, the holding and property sectors. 

Since it is obvious that a break of 7,400 won't happen with just 8 issues alone, manipulators had to generate a bandwagon effect from the other PSE issues

And since banks have largely lagged the recent meltup and so this likely "marking the close" pump. You see gains can't be achieved via regular market pricing, so manipulation is required.

A stunning more than 100% of BDO’s gains today was from the closing pump. As one would note, BDO was marginally down (in red) prior to the market intervention phase where the marking the close occurred. 

BPI emerged from the grave to rise by 1.24% today. The last minute pump was 1.3%, which means, like BDO, more than 100% came from the coordinated push, since BPI was down prior to the intervention phase. 

78% of MBT’s gains for the day was from the same maneuvering. 57.8% of ALI’s gains were from the same operations. So on and so forth. 

The above are the major beneficiaries. Yet some others had pumps, but the scale has been lesser than as pointed above. 

Given the intensity of the coordinated chicanery, it is even a surprise that the PSE closed up by only .78%. Today’s operations appeared as if it was engineered for 1% or more gains. 

The lack of liquidity and the palpable tolerance by regulators and by the PSE has only been facilitating the commission of such irregularities. And since stocks are now status symbol, as well as policy tools which serve as a mechanism for the redistribution of wealth in favor of authorities and the establishment so why would they stop a good thing going? 

But of course, there is no such thing as a free lunch forever.

Flagrant pumping with little support from fundamentals means imbalances will just keep mounting. And symptoms of imbalances, as consequence from the lack of respect and perversion of the markets, can be seen via vastly mispriced  securities. And this means current conditions are unsustainable.  And sorry to say, that such pumps would mean August 2015 and January 2016 crashes will most likely not be in isolation. The obverse side of every mania and manipulations is a crash.

Note images charts and data from PSE, Bloomberg, Colfinancial and technistock

Central Bank Panic: Sweden's Central Bank Expands QE! Keeps Negative Interest Rate

Why has the stock markets of developed economies run amuck over the past week?

The US S&P

Europe's Stoxx 600

Japan's Nikkei 225 (not update for today's or April 21st trade where the said index spiked by 2.7%)

My guess? Aside from the supposed agreements by oil producers to cut oil production, which has become a key stimulus, another substantial part of the answer could be from the implicit Shanghai Accord. Global central banks appear to have undertaken an unannounced coordinated project of implementing monetary easing of their respective domestic financial system designed to propel risk asset markets higher or stoke the 'animal spirits'. Such tacit project, which may have emerged during the G-20 meeting in February, have been sold to the public as intended for inflation and growth enhancement.

Stock markets have become an instrument for policy making, thereby its sustained perversion. Thus, as global central banks remain on a panic mode, such translates to panic buying for stock market casino gamblers whom are the main beneficiaries from such policies.

Well, Sweden's central bank just announced an expansion of QE

From Marketwatch.com

The Swedish central bank raised its bond-buying target to 245 billion Swedish krona ($30.35 billion) on Thursday, saying the move, coupled with the bank's negative benchmark interest rate, is aimed at holding down the national currency and safeguarding a rise in inflation.

The revised policy plan will see the Swedish Riksbank, the world's oldest central bank, buy an additional SEK45 billion in government bonds in the second half of this year, on top of the SEK200 billion it is in the process of buying by the end of June.

Its main interest rate will remain at minus 0.5% where it has been since February.

Yesterday the Bank of Japan signaled that it may expand the purchasing of stock market ETFs

From Yahoo.com

Bank of Japan Governor Haruhiko Kuroda said on Wednesday the central bank's presence in the exchange-traded fund (ETF) market is "not too big," signalling that topping up purchases of ETFs could be a real, near-term option.

Later today, the ECB will have its decision day. Global markets seem all focused on central bank actions.

In short, to keep stock markets in suspended animation, away from the reckoning of harsh economic reality, central banks will continue to rain "stimulus" on stimulus addicts.

Phisix Operation Team Viagra Log April 20, Sharp Losses of China’s Shanghai Index Possibly Eased by National Team Interventions

Well, there has been no let up when it comes to cosmetically sprucing up the Philippine headline index.

While today’s intraday price actions had mostly been less volatile, “marking the close” pump contributed to the erasure of a staggering 42% of the day’s loss which tallied at -.19%.(see below)

As been noted yesterday, the apparent task by the index has been to keep PSEi from falling below 7,200.

However, instead of bolstering the index via the broader market, they opted to play safe today.

So the use of two major issues from two key sectors. 

SMPH’s share price magically jumped by a stunning 1.6% at the last minute market intervention phase to close the day up by 1.82%. This means that a whopping 88% of SMPH’s gains had been due from "marking the close". So SMPH pushed the property index and the PSEi higher.

On the other hand, AC was down by a big 1.7% just right before the close. However, index managers pushed the said stock by .9% to reduce the day’s decline to just .8%! Or close to half of AC's deficit was expunged courtesy of the index manipulators. So AC contributed to the push in both the headline and the (holding) sector index

Almost daily price fixing of the index and the PSE: only in the Philippines!

Oh by the way, Chinese stocks tanked by 2.31% today. But the day’s loss had been mitigated by what I would suspect as interventions from the "national team".

Unlike the Philippines, at least the Chinese government admits to these interventions.

The Shanghai index dived by as much as 4.4%, post lunch, before its sudden surge to wipe out 47.5% of said deficit at the near close. The Google chart above accounted for the last five day intraday sessions of the Shanghai index. And the huge pump can be seen in the rightmost side of the chart.

As one would note, pumping occurs at almost each session close (see red boxes). 

The difference is that the Philippines version signifies a Viagra like response as price fixing occurs at the last minute or during the transition from regular market trading to market intervention phase, hence the "marking the close", this compares to the last quarter of each session push as seen in the Chinese version. The Chinese national team ought to import Philippine price fixers.

The role of the Chinese national team as indicated in today’s Bloomberg report: Signs of stabilization in the world’s second-largest economy and speculation of buying by state-backed funds helped send the Shanghai Composite up 12 percent since its low on Jan. 28. China reported the economy grew 6.7 percent in the first quarter, in line with estimates, while industrial output and retail sales in March beat expectations. China stepped up intervention in its financial markets after stocks extended last year’s $5 trillion selloff and the yuan fell to a five-year low.

Moreover, China’s central bank the PBoC via its agency State Administration of Foreign Exchange (SAFE) have been indirectly amassing stocks.

From the Nikkei Asia

Consider Wutongshu Investment Platform, which is wholly owned by the State Administration of Foreign Exchange. Since last year, the fund has acquired at least 30 billion yuan ($4.62 billion) worth of shares.

Wutongshu was established in November 2014, with 100 million yuan in capital. It is reportedly led by He Jianxiong, a former director-general of the international department at the People's Bank of China. Recently, the fund's name has cropped up on the rosters of major shareholders of at least 12 listed companies.

As of Friday, its holdings in Shanghai Pudong Development Bank were valued at around 11 billion yuan, while those in Industrial and Commercial Bank of China (ICBC) were worth about 6 billion yuan. The institutional investor also runs a pair of investment companies. It appears the strategy is to have the parent increase its weighting of bank stocks, while the two units are likely focusing on other industries.

It wasn’t stated whether SAFE’s Wutongshu Investment Platform directly intervened or intervened through intermediaries from which the company provided financing. So the Xi Jinping Put has been extended to use the PBoC's SAFE.

As for today’s weakness in Chinese stocks, the same Bloomberg report seem lost to explain today’s actions

Traders struggled to explain the reason behind the sudden selloff, which isn’t an unusual occurrence in a market dominated by individual investors. Interest in mainland equities has been fading this month after March’s 12 percent surge amid concern that improving economic data will prevent the government from adding stimulus. Wei Wei, an analyst at Huaxi Securities Co. in Shanghai, says the slump is triggering concern that the panic seen at the start of the year, when the equity gauge sank 23 percent in the space of a month, could return.

Perhaps the lifting of the ban last April 8 on large shareholder selling of more than 1% of the stake may have been a factor. The easing of selling restrictions allows large shareholders to sell up to 1% of the total in a three month period, according to the Nikkei Asia

The other factor could be from reports that China’s $ 3 trillion corporate bond may have started to unravel

From another Bloomberg report yesterday

Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 61.9 billion yuan ($9.6 billion) of bond sales in April alone, and Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003.

While bond yields in China are still well below historical averages, a sustained increase in borrowing costs could threaten an economy that’s more reliant on cheap credit than ever before. The numbers suggest more pain ahead: Listed firms’ ability to service their debt has dropped to the lowest since at least 1992, while analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis…

China’s leaders face a difficult balancing act. On one hand, allowing troubled companies to default forces money managers to pay more attention to credit risk and accelerates government efforts to curb overcapacity. The danger, though, is that investor panic leads to tighter credit conditions, dealing a blow to President Xi Jinping’s plan to keep the economy growing by at least 6.5 percent over the next five years.

Economic figures for March reveal a growing dependence on debt. China’s aggregate financing -- a broad measure of credit that includes corporate bonds -- almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey as policy makers turned on the taps to support economic growth.

If the latter (emergent signs of corporate bond strains) will be or serve as the cause that may be aggravated by the former (1% selling rule), will the Chinese national team be able to stop the tidal wave of selling?

And to extend the thought, will the local or Philippine counterpart be able to forestall a potential chain effect from the above?

Interesting

Note: Philippine data/images from Bloomberg, technistock, colfinancial, and the PSE

Quote of the Day: What Goes Around Comes Around, Even Central Banks Suffer from Negative Rates

Spontaneous Finance Blog's Julien Noizet pointed out that the perceived "free lunch" from negative interest rates hasn't been free, not even for central banks which has implemented them:

Central banks are indeed big players on the market due to their OMO and related policies that involve purchasing and selling billions of assets in order to influence market prices, aggregate amount of high-powered money and interest rates. They also invest in other currencies and commodities and place cash with other central banks.

Unfortunately, a number of their placements are now generating negative returns and yields on their fixed income investments (often government bonds) are now very low, if not negative.

The irony of the whole situation is that central banks initiated their conventional and unconventional policies partly in order to help (i.e. force) the private sector to take more risks (‘search for yield’). What goes around comes around, and it is now central banks’ turn to follow the same route. In short, they are now turning into vulgar commercial banks that attempt to please their shareholders (i.e. budget-constrained governments who need this cash).

But in doing so, they also potentially endanger their capital base.

If something cannot go on forever, it will stop (quote attributed to the late economist Hebert Stein)

Phisix 7,200: Operation Team Viagra Log April 19

The year 2015 has demonstrated that the gamut of wild pumping activities, which impelled the Phisix towards the April 10 2015’s 8,127 milestone, had been nothing more than destabilizing intensive speculative bids. Such frenzied bidding has been anchored on the popular delusion of G-R-O-W-T-H, which, as I rightly predicted, turned out to be a mammoth flop. 

Of course, that was just a part of the story. 

The other scintillating facet of 2015 has been the massive rigging of the local equity prices.Such rigging process originated at the 2H of 2014.

Apparently, both factors remain present today. 

Perhaps in fear that the Phisix would break technical support, which may lead credence to the formation of the gigantic 4 year Head and Shoulder pattern, operation team Viagra ensured the headline index would remain within striking range of the May 2013 record threshold. The May 2013 high has palpably served as a mighty resistance level. 

So with the use of another “marking the close”, today’s loss was trimmed by an incredible 42% at the closing second. 

Three sectors participated in the concerted pump. The service sector contributed to the gist of the loss mitigation operations. The industrial and the property sector functioned as tactical flanking support for today’s loss alleviation program 

Perhaps Operation Team Viagra may have read from this blog that in order to break 7,400 they would need a "broader or broad based" participation. 

So indeed, a key part of today’s index management or price fixing program emerged from some of the underperformers. 

By virtue of price fixing, service sector leaders, PLDT and GLO morphed from deep red to suddenly green. 

In the case of PLDT, a huge loss of .98% magically closed up at .33%, from the massive +1.3% push. More so with GLO. Down by an enormous -1.3%, GLO was marvelously transformed at the close with a 1.38% advance, from another stunning 2.7% pump! 

As of last Friday, based on market cap weight, TEL ranked fourth while GLO ranked 18th. 

Energy producer EDC too was a beneficiary of a +1.6% pump that reduced the firm's loss to just .34% today.

Three of the four issues which benefited from today's pump were in the top 20 most active.

Price fixers seem to think that the discounting function of markets has been rendered irrelevant and obsolete by them. Or that they seem to believe that their actions have only beneficial consequences where the falsification of market prices would be a free lunch for them forever. 

Well good luck to them. 

Yes brazen equity price manipulation only in the Philippines!

Note: figures/images from colfinancial.com, Bloomberg, PSE and technistock.net

What Was the US Fed Chair Janet Yellen's Secret Meeting with US President Obama All About?

Former Congressman Ron Paul offers an explanation at his website: (bold added)

This week, President Obama and Vice President Biden held a hastily arranged secret meeting with Federal Reserve Chairman Janet Yellen. According to the one paragraph statement released by the White House following the meeting, Yellen, Obama, and Biden simply “exchanged notes” about the economy and the progress of financial reform. Because the meeting was held behind closed doors, the American people have no way of knowing what else the three might have discussed.

Yellen’s secret meeting at the White House followed an emergency secret Federal Reserve Board meeting. The Fed then held another secret meeting to discuss bank reform. These secret meetings come on the heels of the Federal Reserve Bank of Atlanta’s estimate that first quarter GDP growth was .01 percent, dangerously close to the official definition of recession.

Thus the real reason for all these secret meetings could be a panic that the Fed’s eight year explosion of money creation has not just failed to revive the economy, but is about to cause another major market meltdown.

Establishment politicians and economists find the Fed’s failures puzzling. According to the Keynesian paradigm that still dominates the thinking of most policymakers, the Fed’s money creation should have produced such robust growth that today the Fed would be raising interest rates to prevent the economy from “overheating.”

The Fed’s response to its failures is to find new ways to pump money into the economy. Hence the Fed is actually considering implementing “negative interest rates.” Negative interest rates are a hidden tax on savings. Negative interest rates may create the short-term illusion of growth, but, by discouraging savings, they will cause tremendous long-term economic damage.

Even as Yellen admits that the Fed "has not taken negative interest rates off the table," she and other Fed officials are still promising to raise rates this year. The Federal Reserve needs to promise future rate increases in order to stop nervous investors from fleeing US markets and challenging the dollar’s reserve currency status.

The Fed can only keep the wolves at bay with promises of future rate increases for so long before its polices cause a major dollar crisis. However, raising rates could also cause major economic problems. Higher interest rates will hurt the millions of Americans struggling with student loan, credit card, and other forms of debt. Already over 40 percent of Americans who owe student loan debt are defaulting on their payments. If Federal Reserve policies increase the burden of student loan debt, the number of defaults will dramatically increase leading to a bursting of the student loan bubble.

By increasing the federal government's cost of borrowing, an interest rate increase will also make it harder for the federal government to manage its debt. Increased costs of debt financing will place increased burden on the American people and could be the last straw that finally pushes the federal government into a Greek-style financial crisis.

The no-win situation the Fed finds itself in is a sign that we are reaching the inevitable collapse of the fiat currency system. Unless immediate steps are taken to manage the transition, this collapse could usher in an economic catastrophe dwarfing the Great Depression. Therefore, those of us who know the truth must redouble our efforts to spread the ideas of liberty. If we are successful we may be able to force Congress to properly manage the transition by cutting spending in all areas and auditing, then ending, the Federal Reserve. We may also be able to ensure the current crisis ends not just the Fed but the entire welfare-warfare state.

Could this be why US stocks continue to surge? Could this be part of the Shanghai Accord?

Phisix 7,300: Average EPS Growth for PSEi’s Top 15 Issues Crashed by 30% in 2015! Some EPS Growth May Be Due to Financial Engineering

A lot of what you do see in terms of the profit growth you do have now is engineering  stock [such as buybacks and global labor arbitrage], …These are the levers companies have to work with. They're taking advantage of the fact that there's a lot of opportunities to just continue to engineer their earnings. –Mike Thompson Chairman of S&P Investment Advisory Services at the CNBC

In this issue:

Phisix 7,300: Average EPS Growth for PSEi’s Top 15 Issues Crashed by 30% in 2015! Some EPS Growth May Be Due to Financial Engineering

-Priceless Commentaries From Some Annual Reports Demonstrate that the Law of Economics Work!

-The Jury is OUT: Average EPS Growth for PSEi’s Top 15 Issues Crashed by 30% in 2015!

-The Fabulous Eight’s Divergence: Record Highs as EPS Growth Underperforms!

-Behind GTCAP’s 32% Eps Growth: Financial Engineering and Creative Accounting?

-GTCAP’s Real Estate Woes, Add LTG and Rockwell to the Roster

-GTCAP’s Stumbling Auto Sales and the Real Growth Story

-Examples in the PSE of How BSP’s Inflationary Policies Transfer Wealth to the Elites

-It’s Not Just Jollibee, McDonalds and Max’s Group Shares JFC’s Financial Predicaments!

Phisix 7,300: Average EPS Growth for PSEi’s Top 15 Issues Crashed by 30% in 2015! Some EPS Growth May Be Due to Financial Engineering

Priceless Commentaries From Some Annual Reports Demonstrate that the Law of Economics Work!

(italics added)

Shangri-La Plaza’s revenue slightly declined by P41.2M mainly due to temporary close down of certain areas during the year on the Main shopping mall for renovation. Business was also affected by increased competition from newly opened shopping centers in the nearby areas—Shang Properties 2015 Annual Report¹

In addition, sales attainment during the period was also generally weaker than expected due to increasing competition—Anchor Land Holdings 2015 Annual Report²

Most of listed firms released their 2015 annual reports last week.

The above quotes extracted from the management discussion of the 2015 annual report of the said companies are PRICELESS!

Such statements essentially reveal that the fundamental laws of economics work! In particular, the imbalances from the credit fueled artificial economic boom, via the race to build supply (malinvestments), have finally surfaced on the financial results of many companies. And such formative financial strains have impelled some industry people to recognize of the emergent existence of oversupply. Albeit, their perspective comes in the lens of “competition”, which represents a symptom rather than the cause, as shown in the above excerpts.

Nevertheless, blissful ignorance rules! The dominant perception has been that inferior results of 2015 signify an anomaly. So the intensive competition to build supply capacity financed by credit inflation continues…

Yet, will the sustained sprint on capacity expansion improve on eps growth for 2016? Or will this further aggravate on the present the eps drag?

The answer will most likely determine the returns of the PSEi at the end of the year.

The Jury is OUT: Average EPS Growth for PSEi’s Top 15 Issues Crashed by 30% in 2015!

At the onset of 2015, the public was made to expect that the earnings of publicly listed of firms would balloon at the rate of mid-teens. And such lofty projections had been used to justify a succession of frenzied pumps for the headline index or the Phisix to reach a milestone 8,127.48 in April of the same year.

Well the results are in. Or hope has been transformed into reality with the release of the eps scorecard for 2015.

And the grade for consensus forecast: Fail!

For the top 15 Phisix issues, the average earnings growth (sum of eps growth rates divided by 15) in 2015 has stumbled to just 6.63% from 9.38% in 2014 (top chart). So instead of a projected 60% jump to an eps growth of 15%, the average earnings growth skidded by a hefty 30%!

If applied to the weighted average for the top 15 (the summation of the products of the market share weight of component issues multiplied by their respective eps growth rate), eps growth rate collapsed from 10.16% in 2014 to 5.51% in 2015 or a crash of 45.73%.

Back to the nominal average, a slight a majority or 8 issues posted eps growth LOWER in 2015 than in 2014, although the number of negative growth has dwindled by 40% from 5 in 2014 to 3 in 2015.

Eps numbers more than meets the eye as explained below

Remember that the top 15 issues accounted for about 80% of the share weightings of the PSEi basket as of Friday. 80/20 looks very much like Pareto’s rule at work. I haven’t accounted for the latter half

So 2015’s eps performance only exposed consensus forecasts as sheer hyperbole.

And such blatant misperceptions brought about by excessive optimism had been revealed by the two market crashes in August 2015 and January 2016, which paradoxically were blamed on external forces!

For the consensus, valuations don’t ever matter, and the overpriced securities will become even more overpriced to perpetuity. Yet recent market crashes say valuations do matter!

Yet what has changed in 2016?

If the baseline of 9.4% average eps growth (for the top 15) in 2014 had been used as springboard for a pump towards PSEi 8,100, then what would be the foundation for the recent parabolic rally? 2015’s much lower base of 6.63% eps growth???

Wouldn’t it be a supreme irony where tanking eps growth should function as tinder for more frenzied propulsion of the bids on the PSEi???

And to expand the logic further, should a return to last year’s growth rates (9.4%), justify even higher price levels than when the baseline was at 9.4% and expected growth was at 15-16%???

In the absence of eps growth, current market actions have only been puffing up valuation to nosebleed or celestial levels.

Also, since equity prices have gone in the opposite direction with eps growth, what happens if those expectations fail again? Won’t this serve as additional fodder to instability?

As I raised in January 2015³: Or has this been about flagrant misappreciation of risks that signifies as symptoms of financial destabilization in progress?

Perhaps in a state of denial some may posit, ‘this won’t happen’. Really? But 2015 is now a fact: eps growth fell with a thud! REDUCED G-R-O-W-T-H happened! Two crashes in August 2015 and January 2016 were facts too. Crashes were a reality too!

The vertical ascent or the V-bounce does NOT expunge the cause of the crash. Rather, soaring stocks on falling eps growth means that the V-rebound enhanced it!

To reemphasize, Phisix at 7,300 has been a product of a concentrated pump on select issues within the spectrum of the top 15 biggest market caps. And as proof, there are now EIGHT issues, or more than half of the 15 biggest market caps that have either carved fresh landmark heights or are within striking distance from historic highs.

Yes all these have been happening even when eps growth rates in 2015 have been dropped substantially lower than 2014! In short, bad news IS good news? Haven’t the incantation been that the Phisix was about G-R-O-W-T-H???

So what gives?

The Fabulous Eight’s Divergence: Record Highs as EPS Growth Underperforms!

Here are the eps and price charts of four index issues headed for opposing directions

EPS growth rate of the biggest listed firm SM investments have been down for the past three consecutive years, yet stock prices have partially broken above the 2013 highs a few weeks back!

Note that SM’s previous high in occurred in May just as the PSEi reached 7,392.

The eps growth of Aboitiz Equity Venture has been at the NEGATIVE zone for three straight years! However, 2015’s decline has ebbed from the double digit eps growth contraction in 2014 and 2013. Does a reduced negative number justify fresh record highs????

Ayala Corp’s eps growth rate tumbled to just 13.61% in 2015 from 45.3% in 2014, 20.55% in 2013 and 20.18% in 2012. Anywhere you look at AC’s 2015 performance, they were substantially less than the previous years!

So should lower eps growth rates justify higher price level, and consequently, overstretched valuations?

Notice too that Ayala Corp’s record high was in April 2015. As of Friday, AC share prices are off 4.75% from the 2015 milepost.

Add to the list of near apogee is Metro Pacific Investments, which stock has just been an earshot 3.23% away from the May 2013 high.

MPI’s eps grew by 13.11% in 2015, which is certainly better than 2014’s 9.71%, but still below the 2013 and 2012 rates at 15.83% and 23.08%. So a growth rate of 13% rationalizes higher price level than when growth rates were at 15% and 23%?

Without including the charts, here the other issues with share prices at record or near record levels

SMPH also reached its former record level last week. Although the firm’s 2015 eps growth skyrocketed by 48.8% in 2015, this was vastly inflated from a non-recurring or one-time gain in marketable securities. Otherwise, eps gains would have been materially lower given the sinking top line which was mostly from zero growth (actually .15% increase) in real estate sales (SM reported negative numbers) but also from a weakening of rental income despite the introduction of a substantial number of new inventories in both categories. And parent SM’s eps growth would have been negative, if such non recurring gains were excluded!

GTCAP touched its old record high in May of 2015 a few weeks back. The company reported an incredible 32.41% surge in eps growth. But what seems isn’t the same as what has been. The surge in eps growth was considerably a function of the incorporation of financial figures from a newly acquired real estate company: Property Company of Friends. The revenues of the new company inflated both the top and bottom line. Ironically, the newly acquired company posted a huge 35% drop in sales growth year on year in 2015 while Federal Land posted a modest 9.9% real estate sales. In short, creative accounting was a big contributor to the eps upsurge (see below).

Only JGS have, so far, divulged of a seemingly relatively better eps health yet. I say “yet” because I haven’t vetted much on the firm’s FS. But it would look as if a big segment of gains were due to the petrochem projects that went online in 2015. And such had been backed by modest contributions from other subsidiaries, even when topline numbers like CEB and URC has withered.

Curiously, the growth rate of domestic sales of subsidiary URC plunged to 10.67% in 2015 from 16.39% in 2014 and 15.47% in 2013 even when overall sales jumped to 18.05% in 2015. The top line was apparently boosted by a surge in foreign sales 39.36% mainly due to the inclusion of a recently acquired company.

Like GTCAP, creative accounting was instrumental in the inflation of eps. Additionally and ironically, the immensely inflated top line was significantly negated by a surge in financing cost which crashed eps growth to just 5.58% in 2015 from 16.96% in 2014, 24.32% in 2013 and 63.72% in 2012.

For the eight issue, JFC I delved on this last week.

Moreover, financial engineering and creative accounting have played noteworthy roles in the eps growth for many companies in 2015. Even more, behind the eps growth has been the greater surge in debt levels of many companies.

Truly amazing!

Fascinatingly, a non PSEi issue but a key member of the bank-financial index, Security Bank, has virtually gone ballistic or has risen by nearly 90 degrees or close to vertical from the January lows!

Why? Because of the 2015’s 7.49% eps growth, which has been substantially lower than the 45.3% growth rate in 2014??? Or has such been due to Bank of Tokyo-Mitsubishi’s reported 20% acquisition of the said bank?

None of these has become a reflection of G-R-O-W-T-H but of destabilizing torrid speculative pumps!

Phisix 7,300: The Predicament of the Fabulous Eight

Understand that the series of record highs or near record highs for the price levels of the half of the top 15 biggest market cap have been achieved even when the PSEi remains off by a substantial 10% from its headline equivalent in April 2015.

This is important. The path to April 2015 has been entirely distinct from today.

Most of the same big cap issues reached their previous records when the PSEi was at the RECORD or just a margin away from 8,127. To be specific; SM, SMPH*, JGS and GTCAP in April, AC in May and JFC in February 2015.

*SMPH was the first to break into new records (post April 2015), even when the PSEi began to falter from its landmark highs. Unfortunately, there had been four attempts for a breakthrough which all sputtered. Nonetheless, the fifth attempt was made last week.

In other words, record 8,127 resonated with an equivalent milepost high for these issues which backed the PSEi’s feat. Today, these issues have taken the onus of producing PSEi at ONLY 7,300!

Or said differently, current prices for these issues have reached or surpassed their record price levels when the PSEi was at 8,127! This implies of a substantial lack of participation from the rest of the field. Or that the latest bear market has severely damaged the capacity of the others to participate.

Yet current actions have consequences.

Unless a broader base of PSEi issues jump on the bandwagon to share the burden, excessive reliance on the fabulous eight for a renewed push to the 8,000 level would translate to the stark compounding of extant mispricing, as shown by their respective PERs (as of April 14): SM 26.98, JGS 31.73, SMPH 34.62, AC 26.22, AEV 19.43, GTCAP 26.66, JFC 44.92 and MPI 19.32!

Put differently, the asymmetry in the burden of price actions tilted towards only the fabulous eight would mean that 8,000 would be a vastly more difficult target to attain than in 2015. This comes even with the sustained help of the index managers.

This week the low volume sessions meant that the weekly gains of 1.02% had to be accomplished mainly through last minute pumps in April 11, 12 and 15.

Yet these issues are unlikely bear all the weight for a sustained upside push. Reason? Excessive valuations will pose as key or structural hurdle. And remember, the baseline for 2016 has been a decline of 2015 eps growth which should serve as headwind

And since the fabulous eight are unlikely to carry the weight, the risk is that the lack of broader participation may instead spur these overbought and overpriced issues to an exhaustion that would prompt for a volatile (and possibly violent) downside move.

In short, the V-pump has underwritten the demise of the bulls.

And like in 2015, failed expectations would have devastating repercussions.

Will the monster four year head and shoulder chart pattern of the Phisix be formed? Will it support the dilemma of the fabulous eight predicated on its skewed contributions to the Phisix?

A break of 7,400 may temporarily succeed, but at what cost?

Behind GTCAP’s 32% Eps Growth: Financial Engineering and Creative Accounting?

I have noted of GTCAP’s seeming use of creative accounting/financial engineering to bloat on their eps.

Although GTCAP is a holding company, based on 2015’s numbers, 75% share of its revenues were from automotive sales (Toyota Motor Philippines and Toyota Cubao), 11 % from power generation Global Business Power Corporation, 5.6% from real estate (Fed Land and PCFI) and 3.5% from “equity accounting” or “equity in net income of associates and jointly controlled entities” (Metropolitan Bank & Trust Company (“Metrobank” or “MBT’), AXA Philippines, Toyota Manila Bay Corporation (“TMBC”), and Toyota Financial Services Philippines Corporation)⁴ (p 80)

Overall, GTCAP main business remains skewed towards the automotive industry.

Nonetheless, last year, for its property business, GTCAP acquired an initial 22.68% stake in affordable (low cost) housing Property Company of Friends, Inc (PCFI) “for Php7.24 billion, with an option to increase its direct shareholding to 51% within the next three years”. With the acquisition and the “attainment of effective control” of PCPI, “PCFI’s financial statement was consolidated into GT Capital’s financials effective September 1, 2015”. (p.89)

Thus explains why GTCAP’s real estate topline ballooned by 54%!

GTCAP’s consolidated performance numbers departs from its equivalent by segment.

Take Federal Land. GTCAP’s main property company posted a mere 10% growth in revenue mainly from “real estate sales and interest income on real estate sales which rose by 8% from Php7.0 billion to Php7.5 billion driven by increased sales recognized from ongoing high-end and middle market development projects situated in Pasay, Mandaluyong, Bonifacio Global City, Manila and San Juan” and from “rent income which grew by 8% from Php769 million to P830 million owing to annual price escalation”. (p 89)

Moreover, while real estate sales grew by a mediocre 8% clip in 2015 (given the large supply expansions), such accounted for a dramatic slowdown relative to the blistering 28.2% pace in 2014. The decrement in real estate sales growth apparently filtered into Fed Land’s income which grew by 10% in 2015 that was sharply down from 2014’s blazing rate at 18.73%. (lower left window)

As for newly incorporated PCFI, income dropped 32.7% due to a 33.94% collapse in real estate sales in 2015 (lower right window)!

Nonetheless, the PCFI’s inclusion to the GTCAP’s consolidated financial statement ballooned her real estate top line by 54% which likewise bolstered the bottomline.

So poor FS seen via segment performance precipitately morphed into a stellar consolidated version most likely due to accounting cookery!

GTCAP’s Real Estate Woes, Add LTG and Rockwell to the Roster

Yes GTCAP’s decaying real estate performance adds to my roster of real estate companies encountering seminal difficulties.

Perhaps we can add two more.

LTG Group’s real estate sales had sharply been down by 15% in 2015. (upper window) This followed a 52.1% collapse in real estate sales in 2014. In 2014, LTG declared a “temporary halt in sales activities to pave the way for the Company’s value optimization plans for its existing projects” (p 62)⁵. LTG was quiet about real estate sales for 2015, instead they focused mainly on rental income. Nonetheless, LTG has earmarked funds for property development in Mactan Cebu, Ortigas Pasig and Novaliches Quezon City/Caloocan City. (p.50)

Meanwhile Rockwell Land’s real estate (condo) sales decreased 1.18% in 2015. This was led by the sharp 12% fall in residential condo sales which the annual report pointed to “the lower completion of The Grove, Edades, and Alvendia, which were substantially complete already in 2014”⁶. Residential sales accounted for 73% of total revenues. Sales of commercial spaces partly offset the drag on residential sales.

Despite topline strains, these companies will continue to build, build and build.

GTCAP’s Stumbling Auto Sales and the Real Growth Story

Back to GTCAP. Recall that I had an issue with the seeming contradictory numbers released by the cheerleader Chamber of Automotive Manufacturers of the Philippines (CAMPI) relative to GTCAP’s Toyota sales reports, where the latter’s announced third quarter sales numbers showed of a slump in growth to just 2.31% even when the former keeps bragging of 25+% growth rates?

Based on GTCAP’s annual report, automotive sales numbers shows of only 11% increase in peso sales growth in 2015. This accounts for a collapse in growth rate when compared to 2014’s raging 46.34%! While fourth quarter 2015 performance of Toyota’s auto sales recouped to grow at 15.29%, this was down by 58% from 2014’s 4Q growth rate at 37.14%.

As for the quantity, from GTCAP: “In 2015, TMP exhibited record retail sales of 125,027 units, an 18% increase from that of previous year. With this feat, TMP earned its 14th Triple Crown award which means Number 1 in passenger car sales, Number 1 in commercial vehicle sales and Number 1 in overall sales. Overall market share grew from 36.3% in 2013 to 39.4% in 2014 and 38.9% in 2015.” (p.88)

So Toyota sales (in units) grew by only 18% in 2015. And given that TMP holds about 40% market share (rounded off), then this means other car manufacturers had to deliver 30% to produce 25% growth rate.

And here is one important thing missed from the GTCAP eps announcement.

Behind GTCAP’s 32% surge in eps was an even colossal G-R-O-W-T-H story. Growth in GTCAP’s total debt (short term + long term + bonds payable) net of the current portion exploded by 67.79% (note 17)!!! Such growth rate has been more than thrice the 2014 counterpart at 19.19%!

Don’t you notice? There have been so much accounting profits for these companies to become so cash deficient. So given the dearth of liquid resources, companies like these resort to leveraging up at a rate faster than either sales growth and or profit growth.

Guess where these business models will eventually end up to?

Examples in the PSE of How BSP’s Inflationary Policies Transfer Wealth to the Elites

As a final note on GTCAP, let us revert back to subsidiary Fed Land’s income growth.

Apparently, property inflation contributed significantly to GTCAP’s top and bottom line, via the increase in rent income “owing to annual price escalation”. Or higher rents, due to property bubbles, benefited GTCAP’s FS while reducing the purchasing power (through lesser disposable income), as well as, the diminishing housing affordability for renters.

As a side note, here is another example of how the money illusion from central bank’s invisible redistribution policies of subsidizing property owners. This is an excerpt from the annual report of another company⁷: “Net other income increased by 1,707.29% or P=163,190,477 this year. Bulk of the increase came from gain on investment property as property assets were appraised during the year. Increase in fair value of investment property amounted to P=176,725,230 and P=14,243,119 in 2015 and 2014, respectively.” (italics added)

Money illusion simply translates to the ephemeral inflation of incomes, profits, assets and equity values brought about by sustained bank credit expansion promoted by the BSP through her policies.

Again, increased rental income or the surge in gains of property assets in the books of listed firms merely represents the transmission channels from the BSP’s trickle down (negative real interest rate) policies. Such monetary policies redistributes wealth in favor of property companies/landowners/speculators that comes at the expense of the consumers, renters and future property buyers, as well as, currency holders.

As the late free market economist Percy Greaves explained⁸: (bold mine)

The injection of new money into a society adds no new wealth. It merely redistributes purchasing power, and thus the titles to existing wealth. Those who receive some of the new money can buy more of the existing goods before prices rise, while others find prices rising before their incomes do. So some can thus take what a free market, with an unmanipulated quantity of money, would allocate to others. Every increase in the quantity of money therefore helps some at the expense of others.

Nevertheless, there is no such thing as a free lunch. And that the present free lunch experiment by the BSP IS coming to an end.

It’s Not Just Jollibee, McDonalds and Max’s Group Shares JFC’s Financial Predicaments!

When it comes to incipient pressures on sales by major food chains, it appears that JFC’s conditions have not been isolated.

Looking at the JFC’s major rival, McDonald’s through GOLDEN ARCHES DEVELOPMENT CORPORATION (GADC), which is a subsidiary of Alliance Global Group (AGI), we basically see the same predicament: increasing pressures on the topline.

Like Jollibee, McDonalds suffered a huge drop (a near halving at 48.55%) in sales growth rate from 2014’s 17.34 to 8.92% in 2015.

Like Jollibee, McDonald’s net profit growth rate suffered a steep decline, from a positive 1.27% in 2014 to -4.76% in 2015.

Curiously, McDonalds added 28 stores to its inventory which at the yearend accrued to 481 nationwide where 53% are company owned while 47% are franchised. (p.21)

Stunningly, those additional 6% of stores in 2015 produced unimpressive or marginal growth.

AGI reported⁹: “Average sales per restaurant increased by 4%, with 3% growth in sales per company-owned restaurant and 6% for sales per franchised restaurant. Business extensions provided a growth rate of 15%, with Drive-thru boosted total revenues by 11%. Value pricing strategy is adopted in order to drive more guest count and price adjustments are strategically implemented to mitigate the increase in cost of raw materials and to maintain the level of product quality. This is however outspaced by the increases in prices of imported raw materials and product mix shift and costs of utilities and crew labor. As a result, net profit contracted slightly 5% year-on-year. GADC’s results accounted for 15% and 4% of AGI’s consolidated revenues and net profit, respectively” (p.48)

In the above, AGI’s annual report tried to explain away the residual G-R-O-W-T-H, where they focused on the changes in the mix of sales, without dealing with the huge collapse in topline sales. AGI’s annual report just painted by the ‘positive’ numbers.

Apparently too, the falling peso may have increased McDonald’s operating costs through “increases in prices of imported raw materials”.

Again, increasing pressures on the topline being transfused into the bottomline.

And it has not been just JFC and McDonalds.

Here is the Max Group on its 2015’s performance (italics mine)¹⁰: Max’s Group reported consolidated revenues of P10.37 billion for the twelve months ended 2015 up 6% from P9.74 billion for the twelve months ended 2014. Restaurant sales came in 6% higher at P8.59 billion, driven by the opening of 84 new stores primarily across winning brands Max’s Restaurant, Pancake House, Yellow Cab Pizza and Krispy Kreme, which collectively account for around 83% of total revenues. The Company also discontinued 38 underperforming sites including 10 Le Coeur De France as part of its on-going rationalization to improve overall store network profitability. Moreover, Max’s Group added 21 franchised outlets including 7 overseas to boost its growing franchise portfolio for 2015. As a result, Commissary sales increased 2% to P1.28 billion from P1.26 billion while franchise income (franchise and royalty fees) rose 37% to P497.51 million from P364.15 million for 2014

Max's Group has a network of 588 outlets including 35 overseas as of December 31, 2015. Restaurant sales accounted for 83% of total revenues at P8.59 billion (p40)

Nevertheless the company “plans to roll out approximately 60-70 stores including 15-20 overseas with minimal churn” (p 42)

But because of its merger with 20 Max entities (p 30-31), like GTCAP, what used to be losses suddenly transformed into profits. Max appears to have used cooking not only for sales but also in its books too.

Yet even Max’s top line has grown almost at the rate of JFC and McDonalds (which has been on decline) even when they have aggressively been opening stores here and abroad. So Max will be spending a lot for expansion predicated on those topline growth numbers that appears to be very fragile and susceptible to either a collapse or a surge in business costs or both. And since the rate of supply side expansion seems greater than the topline and or bottomline growth, Max will likely to finance their future projects through increased leverage. And topline fragility can easily be transmitted to tarnish on the bottomline and put pressure on existing liabilities.

Retail food giants like JFC, McDonalds and Max are major clients of shopping malls. This means that any further exacerbation of financial strains on these organizations will eventually affect their expansion plans or even their existing stores. They may like Max start to close less productive outlets like Le Coeur De France.

But so far, the existing mindset has been that weakening financials have due to inadequate supply, so the supply side response of more expansion. Except for the prologue quotes by a few, hardly anyone seem to absorb the fact weak demand can be a function of oversupply.

It’s odd because everyone seem to keep talking about a Philippine consumer boom. Yet 2015’s performance numbers by key consumer outlets or food retail giants like JFC, McDonalds and Max have been showing otherwise.

Updated to add: In my previous discussion of JFC, I forgot to tackle one thing: JFC's soaring debt. Almost everyone is doing the same thing.

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1 Shang Properties Inc., Annual Report 2015 edge.pse.com.ph April 15 2016 (p.16)

2 Anchor Land Holdings Annual Report 2015 edge.pse.com.ph April 15 2016 (p 23)

3 See Phisix: Draghi’s Bazooka Sends Philippine, Indonesian, Indian and New Zealand Stocks to Record Highs! January 24, 2016

4 GT Capital 2015 Annual Report edge.pse.com.ph April 14, 2016

5 LTG Group 2015 Annual Report edge.pse.com.ph April 15, 2016

6 Rockwell Land, 2015 Annual Report edge.pse.com.ph April 15, 2016

7 Jolliville Holdings Corporation 2015 Annual Report edge.pse.com.ph p.19 April 15, 2016

8 Percy L Greaves Jr The Theory of Money August 31, 2012 Mises.org

9 Alliance Global Group 2015 Annual Report edge.pse.com.ph April 15, 2016

10 Max’s Group 2015 Annual Report edge.pse.com.ph April 12 2016