Even at 7,720, Average PERs Soar Past 1997 Highs!

Below accounts for the PER of the 30 issue basket of the PSEi.

 

Based on 2015 eps, Friday’s (September 23) PERs have flown past January 1997 high at 28.21!!!

But of course, by virtue of playing around with reference points, the PSE’s PER have actually been pegged at the lower 20s (last July). Although even with cosmetic changes the PSEi remains at severely expensive levels.

And the PSE will likely pin those rates until 2Q EPS appears.

The consensus has been saying on record that present prices are pricing in ‘expected earnings’. But as 2015 episode has shown, the PSEi rocketed to 8,127.48 on expectations of a mid-double digit return for the average PSEi issues. This turned out to be not only wishful thinking but totally outlandish. Instead of G-R-O-W-T-H, 2015 eps recorded stagnation. And that’s the reason for PERs 28.21!

Although the PSEi dropped to 6,100 in January, they remained ridiculously overpriced then. How much more today?

And as I earlier noted, even 1Q 2016 reported an eps growth (-5.5%) contraction. It’s only 2Q 2016, which outperformed (+12.3%) but mainly from contributions of a few issues (whose eps growth suddenly boomed).

Yet the number of issues, which reported growth contractions (9 issues) swelled even larger than 1Q 2016 (7 issues)—yes in the face of a 12.3% eps growth! The asymmetric growth levels tell us of the nature of eps growth—they were mostly accounting profits.

In short, the reason for the sustained mispricing has been for the mainstream to overstate growth expectations that have the only paved way for massive pumping or price multiple expansions.

Since 2013, activities at the PSE have hardly been about G-R-O-W-T-H but about massive asset inflation (bubbles) justified on G-R-O-W-T-H.

Partly because of the inclusion of SECB, and because of this week’s 2.25% pump, at 7,720, the PSEi’s PER should be at new record highs!

And a significant reason why the PSEi has become very pricey has been because of the wonderful orchestrated, concerted and synchronized and very rampant price fixing process.

As further proof, no less than 4 of the 5 days last week has exhibited a combination of afternoon delight maneuvering backed by marking the close pumps.

Like ad hominem politics, the essence for such actions has been one of the expectations of something for nothing. And something for nothing extrapolates to the predilection of short-termism where manipulations (and murder in substitution for drugs) would have only pleasant outcomes.

Of course, short-term orientation did not just appear out of the vacuum. They had to be shaped. They have been shaped by trickled down negative rates policy of the BSP that has only whetted on the casino impulses in domestic asset markets (stocks, bonds, and properties). And it’s also why addiction to one-way trades has impelled local punters to concoct desperate measures.

Duterte Lashes at EU; As Expected, S&P Threatens Credit Downgrades!

The Philippine government appears to be been digging itself into a deeper hole with her persistent recalcitrant foreign policy anchored on profane laced ad hominem and blackmail politics

It’s not just the US government now. The other day, EU was shown the “middle finger” (Washington Post September 21) and accused of being “hypocritical” (BBC September 21)!

Perhaps, the EU may be reacting to the summary execution of the daughter of a British baron, who was accused of “drug pushing” to celebrities (The Guardian September 19)

Ironically, even after radiating signs of backpedaling on the demand for US troops to withdraw where the leadership “acknowledged that his country needed American troops in the South China Sea”, the Philippine president “assailed the US over criticism on the war on drugs”. (Bloomberg September 21, 2016)

War on drugs has turned into a vicious war of words with foreign political peers.

Now I’d like to remind you of the potential ramifications of the swiftly unfolding saga of foreign policy gaffes by the administration. (September 13)

If the Philippine government makes real of the threat to undermine the interests of the shadow but powerful and highly influential political forces behind Washington—the neo-conservative and military industrial complex—then potential responses or repercussions may have already been set in motion. To repeat:

 -This would eventually prompt US rating agencies credit downgrades—especially if US military interests are compromised.

-This would reduce investment and portfolio flows from the US and allied nations.

-Credit flows will likely ebb too, thereby putting pressure on access to international credit markets and thereby tightening financing conditions. This will be baneful to a leftist government with a penchant for political spending profligacy: social spending (welfare state), bureaucracy, infrastructure, and most importantly, the military institution.

 The reduced access to credit and fund flows will likely accelerate on the unraveling of the mounting economic and financial imbalances inherited by this government from the previous two regimes.

-The Philippine government will be alone to deal with territorial disputes. (This should be a good thing if only the Philippines government’s response would be to increase trade rather than through brinkmanship politics)

-Finally, it would be a lot cheaper or cost effective for the US government to engage in covert operations to influence the domestic political environment than to pullout from the country. The US government may surreptitiously work to offset whatever leverage the administration has been building to countermand the US government’s influences in the country. The US government has been no stranger to the financing, influencing and orchestrating destabilization to regimes it perceives as hostile to its interests. Operation Gladio should be a stark reminder.

As for credit downgrades, the latest from the Nikkei Asian Review (September 22) [bold mine]

President Rodrigo Duterte blasted credit-rating agencies and international organizations on Thursdayafter Standard & Poor's warned of a downgrade if the Philippines' recent economic gains are reversed.

In an invective-laden speech, Duterte lashed out at his critics, including a Philippine senator, the U.S., the European Union and the United Nations for criticizing his war against drugs which has killed more than 3,000 suspected drug users and peddlers since Duterte took office on June 30.

"Do not keep on complaining about my mouth, because my mouth is not the problem. It cannot bring down a country, but it can erase a generation of right-thinking Filipinos," Duterte said.

Duterte's tongue-lashing expanded to credit-ratings agencies a day after S&P said the rise in extrajudicial killings could undermine the country's credit scores, due to "rising uncertainties surrounding the stability, predictability, and accountability of its new government."

The Philippines earned its first investment-grade credit score in 2013 as a result of governance and fiscal reforms.

First of all, credit downgrades are coming.

Second, the US government has now used the S&P to wag the proverbial geopolitical “stick” to contain the Philippines government. As such, current events bolsters or reinforces my case that the past Philippine credit upgrades had hardly been about “governance and fiscal reforms”, but about the prominence of US military interests here (Phisix: BSP’s Tetangco Catches Taper Talk Fever July 29, 2013)

Third, Philippine government’s balance sheet should be expected to massively deteriorate given the intensified demands of an expansionary government due to the war on drugs. The war on drugs, of course, represents nothing more than camouflage for an “Ochlocratic dictatorship” or a populist Police State (Welcome to the Police State August 18)

Fourth, “unpredictable” eh, according to the mainstream? Heck, leftist governments operate like clockwork!

International access to credit will narrow as the budget deficits are destined to bulge! This leaves higher taxes, ballooning local debt and the BSP (monetization of government spending or helicopters) as the key sources of financing!

What happens to the race to build supply, once interest rates start moving higher?! What happens to the US dollar short exposures by the listed and non-listed firms and by the government?

Oh, by the way, the USD peso closed the week at 47.99 to match the 47.995 January 26 2016 high!

C-H-A-N-G-E is indeed coming!

USD Php 50 here we come! (That's just the first target)

Global Property Guide: Philippine Real Estate 2Q Price Growth Decelerated to 2.86% Year on Year, Negative 3.9% Quarter on Quarter!

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Remember these? The above represents the price trend of Philippine real estate—based on the Bank for International Settlements’ (Makati CBD) data as of 1Q (which I noted here at the end of August).

It appears that the declining trend had been sustained in 2Q.

From Global Property Guide (bold mine)

In The Philippines, the average price of 3-bedroom condominium units in Makati CBD rose by 2.86% during the year to Q2 2016, in contrast with y-o-y increases of 2% in Q1 2016, 2.96% in Q4 2015, 5.41% in Q3 2015, and 6.61% in Q2 2015 and 5.4% in Q1 2015. Housing prices dropped 3.9% q-o-q during Q2 2016.

Note that the GPG year on year data on the table differs from transcribed report where the above shows of -2.86% instead of +2.86%.

But I will stick with the +2.86%. That’s because the penned number has seemingly dovetailed with the substantial (but still positive) decline in the growth rates of gross sales as reported by property firms from both the PSEi and Property index (which I also presented here in August or a month ago).

Besides a third force—the bank lending to the real estate sector—plays a role too. Though bank lending to the sector has somewhat moderated, the 2Q pace of real estate loans was still at a blistering 21.14% yoy! Although a chunk of these loanshas most likely been used to expand the supply side (land acquisitions and real estate inventories) rather than used in support of demand (thru vendor financing).

Anyway, the NEGATIVE 3.9% q-o-q in real estate prices already bolsters the case of an aggravated slowdown in 2Q. And 2Q performance signifies an extension of a trend which peaked in 4Q 2013-1Q 2014.

Curiously, the 1H 2016 slowdown transpired even when the BSP implemented a silent stimulus in 4Q 2015 to 1Q 2016. A lagging effect perhaps?

In sum, the above factors (real estate sales, bank lending, and real estate prices) reveal that the growth rates in the industry have been substantially decelerating but remain positive as of the 2Q

Yet the crux: The furious race to build supply, which most likely comes in combination with slowing demand despite the free money landscape, has been haunting the industry. Such downturn has been first expressed through prices and through top line sales. And these will eventually spread to profits. And pressure on profits will shift the limelight on the industry’s credit risk profile.

Of course, markets signify a time-consuming process

And if the present trend continues (which I expect it will), then big trouble looms ahead, not only for the industry but for the economy, which has now been pillared by real estate and related industries. Based on the government’s 2Q data, Real estate (14%), trade [tenants of shopping malls] (17.4%), construction (7.25%) and finance (8.5%) contributes to nearly half or a striking 47% share of NGDP. This demonstrates of the substantial exposure or leverage of real estate and related industries to the economy. As a side note, I use the government data, even if I have deep reservations about it, just to emphasize on the scale of leverage of said sectors.

Yet more signs of the deepening and spreading cracks in the Philippine real estate bubble