What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.—Ludwig von Mises
In this issue
Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima?
-Real Time Market Crashes: GCC and Oil Producing Nations!
-Core to Periphery Transmission: Market Tremors Slams America and Europe!
-Tremblors Rattles Asian Markets!
-Market Meltdown In The Face of BOJ, ECB, PBOC Stimulus
-Sanitized Alarm Bells from Bank of Canada and from the Hungarian Central Bank
-Philippine Yield Curve Flattens On Soaring Short Term Rates: Signs of Scramble for Liquidity?
-Phisix and Typhoon Ruby: The Mythical Link
-Will the Domestic Casino Industry function as the Causa Proxima to a Credit Event?
Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima?
They are back! Market crashes and heightened volatility has returned with a stunning vengeance. They are back BIG time because for many critical bourses, last week’s volatility compounds on the tensions of October. This translates to a grizzly bear market.
Real Time Market Crashes: GCC and Oil Producing Nations!
The left window represents the December 11 performance of the benchmarks of Gulf Cooperation Council (GCC) [chart from ASMAinfo.com]. The right window exhibits their performance for the week.
Take for instance United Arab Emirates or UAE’s Dubai Financial (DFM) which plummeted 7.42% Thursday. Over the week the same benchmark was down a by shocking 13.81%! Curiously, despite the 33% collapse from the record high of May or 30% crash from the second peak last September, as of Friday, the DFM still has posted a positive 6.68% year to date returns! In numbers, the DFM was up 39.68% in May or 36.68% in September before the crash. The swiftness and severity of the meltdown signifies a vivid demonstration of how perceptions and confidence can radically get altered or how greed morphs into fear, or how manias mutate into panics.
You can blame it on crashing oil prices, you can impute this to the strong US dollar or the ISIS or to escalating Middle East tensions, but surely there will be financial-economic and domestic, regional and global political ramifications from these.
Since current oil prices have presently been way below the welfare cost per barrel of many of these states, fiscal deficits for many oil producing states are likely to balloon. Additionally, forex reserves will be used to finance these gaps. The reduction of foreign reserves would translate to the draining of liquidity thereby providing a feedback mechanism to these economies dependent on loose liquidity. Market tightening thus, will put into spotlight the massive liabilities acquired to finance unproductive endeavors. Such malinvestments will soon be revealed via the several channels: the emergence of excess capacity in the system, more asset liquidations and repricing, and a surge in Non-performing loans.
So depressed oil prices PLUS liquidity constraints will serve as a 1-2 punch that will send these economies to the gutter.
Yet if oil prices remain at below the cost to maintain the GCC’s and oil producing welfare states which may end up with the cutting of social services, how far before Arab Springs or popular revolts emerge?
And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.
Oh oil prices plunged anew last Friday. The US West Texas Intermediate (WTI) closed down 2.81% while the European Brent bellwether tanked 2.87% which for the week translates to 12.4% and 10.4% losses respectively. Since GCC bourses are closed on Fridays and re-opens on Sundays, the bloodletting of their stock markets can be expected to be carried over the coming week.
Core to Periphery Transmission: Market Tremors Slams America and Europe!
This week’s magnified volatility has even percolated to the "core" or to developed economies.
First, yields of 10 year US Treasuries closed at 2.103% this Friday which has fast been approaching the October low of 2.09%. In October, when stock markets had been under pressure, investors took USTs as a safehaven play. Recently, divergences occurred, as US stocks soared to record levels, bond investors bought into USTs. So this can be construed as bond investors seemingly unconvinced of the sustainability of the record stock market rally.
Bulls even arrogantly claimed that “this time is different!” as shown by the Barrons magazine cover last December 8. Manias eventually exhaust themselves and underwrite their own demise.
This week, the losses of US benchmarks Dow Industrials (-3.78%), S&P 500 (-3.52%), and Nasdaq (-2.66%) has expunged the aggregate 5 week gains of the Dow and S&P (from November 7 to December 4). Still, given the recent record run, US benchmarks are way off the October lows.
But neighbors of the US have not been as lucky. (see right window). Brazil’s Bovespa crashed 7.7% this week, along with Canadian TSX (5.13%) while Mexico and Chile’s benchmarks exhibited selling pressures too.
Given this week’s meltdown, the Bovespa have now been way below the October level, the Bovespa has been joined by Mexico’s Bolsa IPC while Canada’s TSX and Chile’s IPSA has reverted to the depths of October.
See, an October déjà vu.
But the tiara for the biggest collapse this week belongs to Greece.
The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy. So market’s response has been rational.
Interesting to see how a revival of the Greek crisis will impact a vulnerable Europe, in the face of a Japanese recession, a highly fragile Chinese economy and a slowdown in Emerging markets, aside from heightened geopolitical tensions.
So these forces have combined to brutalize Europe’s financial markets which suffered from an October syndrome. Oh, UK’s FTSE 100 is just about 100 points or 1.5% away from October lows. Interestingly Portugal’s PSI and Norway’s Oslo All Shares have closed below October levels. Italy’s MIBTEL closed just marginally away from the October abyss. While there has been a big slump this week (right window) for most of European equities, the recent rally stoked by the ECB’s QE gave them some distance from the October threshold.
Tremblors Rattles Asian Markets!
India’s record breaking SENSEX suffered a 3.89% selling tantrum which broke the one year uptrend.
Thailand’s SET, whose chart mirrors that of the Philippine Phisix, also broke below the October support levels that paves way for the ominous ‘double top’ formation which also haunts the Phisix.
The SET’s October breakdown has been shared by Malaysia’s KLSE where a massive foreboding ‘head and shoulders’ formation seems in progress.
Basically, the Korean KOSPI, Australian All Ordinaries and the Hong Kong’s Hang Seng have presently been testing the October support.
It’s only the New Zealand’s NZ50 and the Indonesian JKSE which drifts at record highs, but the latter has also manifested minor head and shoulder formation. Yet this comes as the USD Indonesian rupiah has topped the 2008 highs! Remember when the USD rupiah reached this level, this had been accompanied by a collapsing JKSE.
Meanwhile the Singapore STI has fully recovered from the October lows. But her currency the Singapore dollar remains elevated at 2011 levels.
The above demonstrates of the deteriorating market breadth of Asian financial assets in the face of a firming US dollar, which has been validating my thesis.
As I previously noted[2]: It’s interesting to see the developing interplay between external developments and internal structural frailties. Nonetheless internal or domestic fragilities renders Asia vulnerable to capital flight which may either trigger or aggravate on the unwinding of domestic bubbles.
In short, a firming US dollar is a manifestation of shrinking of regional liquidity now being ventilated by deflationary forces (bubble bust) gaining momentum.
As for Japan, the Nikkei stumbled 3.06% as Yen rallied 2.23%. Japan as of this writing is holding a snap election where PM Abe attempts to portray of the public’s approval of his policies.
Given PM Abe’s stranglehold of the Japan’s political machinery, the time squeeze gives no room for the opposition to mount a viable campaign against his regime. So the PM Abe’s snap election really represents a devious ploy intended to exhibit false measure of confidence on Abenomics. It shows how elections are about egregious manipulation of the public[3].
Yet if the yen continues to rally global stocks will remain under pressure (partly from the unwinding of yen based debt financed carry trades), and if the yen falls further, the strong US dollar will add to the worsening conditions of emerging markets.
The 2013 experience is being replayed today where BoJ’s Kuroda’s QE has triggered or has been accompanied by a global financial earthquake[4].
Emerging markets thus has been caught in US dollar based debt trap: damned if you do, damned if you don’t.
According to Bank for International Settlements’ Hyun Song Shin, Offshore dollar credit to non-banks now exceeds 9 trillion dollars[5]
Telegraph’s Ambrose Evans-Pritchard has the numbers[6]: The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.
So actions by the BoJ and ECB which has been ventilated via the currency markets has only magnified the vulnerabilities of emerging markets to US dollar based debt. So the ongoing emerging market turmoil serves as an expression of the debt deflation process in motion.
Market Meltdown In The Face of BOJ, ECB, PBOC Stimulus
Oh, unlike in October where the global financial markets had been “saved” by the BoJ-GPIF, the ECB, the Bullard Put, and the China’s PBoC, it’s a wonder what will be used to mitigate current circumstances.
European banks soaked up only €130 billion of second tranche of TLTRO from the ECB last week for a total of €210 billion from the two tranches out of the €400bn program. The sluggish response implies that ECB Draghi’s “do whatever it takes” hasn’t been generating “traction”.
Meanwhile, Italian banks reportedly increased the amount of sovereign debt held (by €18.4 billion or $22 billion) on their portfolio to a record €414.3 billion last October. Perhaps Italian banks have been preparing for the ECB’s QE. This implies a transfer of risk from banks to taxpayers channeled through the ECB. But what if the Greek political crisis unravels into a regional debt crisis? The likely answer is that both Italy’s banks and the government will be broke.
On the other hand, assets by the Bank of Japan reportedly soared to 300 trillion yen or about 60% of the GDP which has almost doubled from the about 165 trillion yen, or about 30% of GDP at end of March 2013. Such monstrous Abe-Kuroda experiment will end badly.
And aside from cutting interest rates, China’s People’s Bank of China has been desperately attempting to re-ignite a credit bubble from an already debt burdened economy.
The PBoC has reportedly targeted 10 trillion yuan ($1.62 trillion) in total loans for 2014. This by loosening of government lending quotas in October, aside from taking on lax enforcement of loan-to-deposit ratios
November’s credit numbers have been staggering. According to Dow Jones Business News[7]: Chinese banks issued 852.7 billion yuan ($137.5 billion) of new yuan loans in November, up from 548.3 billion yuan in October, the PBOC said Friday…In November, total social financing, a broad measure of credit in the economy, came to 1.15 trillion yuan, up from 662.7 billion yuan in October. And M2, the broadest measure of money supply, was up 12.3% at the end of November from a year earlier, lower than the 12.6% increase at the end of October, according to the central bank. The figure was below the median 12.5% increase forecast by economists.
Bank loans skyrocketed 55% month on month, wow! Where has all these loans been channeled to?
Chinese industrial production has been decelerating fast where November growth rate has slowed to 7.2% from 7.7% in October and from 1990 average of 13%. Two figures while marginally beating consensus expectations, Fixed investments (15.8%) and retail sales (11.7%) have been on a steady downtrend.
Strikingly, year on year import growth rates CONTRACTED 6.7% as export growth rates fell sharply to 4.7% last November from 11.6% a month ago. China’s export and import growth speaks loudly of global economic health conditions*.
In short, if I were to assume that the statistics has anywhere been accurate, there have been little signs that such explosion of loan growth has been used in the real economy. So have most of these loans been funneled to the stock market?
Could such explosion of margin trades have been funded by loans from banks to brokerage houses? Could those jump banking loans supposedly used for industry have been diverted to stocks?
As one would notice, the Chinese government’s solution to her debt problem has been to extend more debt. This short term based “kick the can down the road” policy represents: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.
In other words, the Chinese government has been buying time from a total credit market collapse. Yet by extending more credit, the Chinese government nurtures more imbalances that eventually will be met by real economic forces. With global markets under pressure, and with the Chinese currency, the yuan (CNY), showing recent symptoms of weakness amidst huge dollar based loans, how long before the unraveling?
The point of the above is that the world has been undergoing injections of massive stimulus from central banks of China, Japan and Europe designed to expand liquidity and credit. But in spite of these interventions, markets continue to emit signs of strains! Collapses are happening real time! This is a spectacular sign of policy failure.
If market tremors continue to spread and intensify, will the US be forced to join the easing bandwagon again? Or will this be initiated by another Bullard Put?
The Bank for International Settlements via chief economist Claudio Borio has recently warned on this[8]
And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed.
*as a side note, one nation’s imports signify as some other nation’s exports. As noted above, Chinese import growth contracted in November (y-o-y), Germany’s import growth rate also CONTRACTED 3.1% month on month in October. For the Philippine bulls who sees virtually no risks, but all glory from credit fueled levitated assets, how will collapsing Chinese and German demand for imports, affect domestic exports? Do they know? In 2013, exports to China ranked third of Philippine exports with 12.4% share and Germany ranked sixth with a 4.1% share. Signs are already here, Philippine export growth rate collapsed to 2.9% in October from the stellar over 10% growth rate during the past four months, specifically 15.7% in September, 10.5% in August, 12.4% in July and 21.3% in June. Add these to the collapsing markets of the GCC, which places OFW remittances at risk. So where will demand come from? Domestic demand has already been constrained by credit overdose as revealed by investments on a downtrend, and by growth in credit and statistical economy that has been moving in opposite directions, and by consumers harassed by BSP’s invisible redistribution favoring the political and economic elites. So where will Philippine statistical growth come from? Statistical massaging? Or manna from heaven?
Sanitized Alarm Bells from Bank of Canada and from the Hungarian Central Bank
At the beginning of the year, I have warned of the possibility of Black Swans afflicting the global markets and the economy. But the properties of a Black Swan event have been its rarity, extreme impact and ‘retrospective predictability’. In short, a black swan event requires blindness by the mainstream.
I can’t say that this can be applicable to current conditions since as almost every week one or two political authorities have aired concerns of risks from bubbles either on a domestic or from global-regional perspective. Of course the degree of warnings has been variable, with the BIS, IMF, and OECD tackling on the severity of the risks directly as against domestic central banks who typically spouts what I call as sanitized alarm bells.
Alarm bells have been sounded by two political agencies this week.
From the Bank of Canada[9]: Risks to Canada’s financial system have not increased in the past six months, but high consumer debt loads and imbalances in the housing market remain a concern, the Bank of Canada said today in its biannual Financial System Review (FSR).
Admit to the problem but downplay the risk. Good luck to them.
The second report seems more interesting; the Hungarian central bank has warned against a speculative “external attack” on her currency the forint, due to the weakness in the euro zone's economy. The USD-Hungarian forint (USD-HUF) has climbed to March 2009 highs or the forint has been battered to 2009 crisis level lows.
What makes the report especially interesting hasn’t been about the “external attacks” which obviously has signified a bogeyman, but about the premises from which the warning emanates.
From Reuters[10] (bold added): "The central bank's forecast shows that the third recession of the European Union can be a further difficulty in 2015," Governor Gyorgy Matolcsy said…Tuesday's remarks by Matolcsy chimed with comments by Economy Minister Mihaly Varga. He said last month the forint may weaken in 2015, when banks will have to convert billions of euros of foreign-currency mortgages to forints at a fixed rate of 309 per euro.
Two important insights: One, despite current actions by the ECB, the Hungarian central bank projects the Eurozone to fall into a “third” recession in 2015!!! How about that: a cynical neighboring central bank implicitly questioning the efficacy of ECB Draghi’s policies??!!
Two, the Hungarian central bank admits to have been plagued by foreign exchange loans or “euros of foreign-currency mortgages”! So “external attacks” serve as convenient scapegoat or camouflage for what has been an internal problem: excessive foreign currency denominated debts as warned by the BIS above.
Sanitized alarm bells means that global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality[11]
Philippine Yield Curve Flattens On Soaring Short Term Rates: Signs of Scramble for Liquidity?
It has been a fascinating spectacle to see the mindless emotion-propelled manic bidding up of the domestic equity securities at the Philippine Stock Exchange.
Although I have been writing about economic issues, the stock market has hardly been about the real economy but about credit and liquidity expansion that temporarily boosts highly fickle confidence that incites people to indulge in speculative orgies.
The mainstream has used economic issues or statistical G-R-O-W-T-H to justify or rationalize the public’s speculative urges, so my discourses have been intended to provide a contrarian causal realist perspective.
Yet here is a recent development which the consensus has been blind to and may adversely impact stocks: Philippine yield curve has massively flattened over the past few weeks.
The left window serves as a summary of the right window which represents the entire yield curve of Philippine domestic bonds (based on weekly Friday quotes). Both windows reveal of how short term yields (3 and 6 months, and 1 year) has been intensively climbing relative to the marginally easing yields at the farther end of curve.
From the mainstream viewpoint, a flattening of the yield curve can be interpreted as falling expectations for future inflation, anticipation of slower economic growth and expectations that the central bank will raise rates as reflected by a rise in short term rates[12].
I don’t think that the above explanation is complete.
It has been true that increases in short term yields did reflect on expectations to tighten by the central bank, as short term yields rose in 1Q 2014 when consumer price inflation became a headline concern (see charts below).
But short term yields hardly retrenched and remained rangebound even as money supply growth has stumbled from the remarkable 9 month of 30++% rates.
Now that statistical inflation has dropped to 3.7% last October[13] this has prompted the Philippine central bank, the Bangko Sentral ng Pilipinas, to keep policy rates unchanged this week[14]. The BSP action has been in line with previous policy communications.
The point is short terms rates have surged despite signals and actions by the BSP to keep rates at present levels. The question is WHY the two week spike in short term rates? This seems hardly been about expectations on policies.
As a side note, for all the warnings by the BSP chief, like their peers I guess that they would tolerate more inflating of bubbles rather than to have the system cleansed or reformed: short term priorities over long term consequence. Nevertheless economic forces will dominate. Perhaps the yield curve has been indicating on these.
Yet this seems hardly been about seasonality. In 4Q 2012 until 1Q 2013 yields exhibited declines across the 1 year and below spectrum.
From this perspective I offer a different explanation. The two week spike in short term yields represents a scramble for liquidity!
The short term rates 3 month, 6 month and 1 year have all reached June 2013 highs. To recall, June 2013 was when the taper tantrum PLUS BoJ’s QE 1.0 triggered turbulence in global financial markets, so the spike in short term rates then has been consistent with concerns over liquidity.
There have been little signs of turmoil (yet). The peso has been nearly unchanged for the year even as the neighboring currencies have been severely buffeted on likely heavy interventions by the BSP. The Phisix remains above 7,000. Despite failing to meet consensus expectations, statistical growth remains above 5%. In addition, media and experts continue to serenade economic hallelujahs even as neighboring financial markets have been roiling from weak currencies.
So this, in my view, may have been about debt IN debt OUT that may have reached proportions whereby demand for short term loans have become greater than long term loans, thus the spiraling demand equates to the public willing to pay for higher short term rates. And demand for such short term loans may have been reflected on the yields of short term treasuries.
And demand may have originated from cash constrained borrowers who may be competing to secure funds to oversee the completion of their capital intensive based projects on mostly bubble sectors, and or from highly levered asset speculators (real estate and stock markets) who may be jostling to acquire short term funds in order to settle existing liabilities as returns have not been sufficient to cover levered positions. Could this be the reason behind the obsession over managing of the stock market index?
It remains to be seen if the current developments represent an aberration or if my suspicions are right where short term yields have been about emergent signs of liquidity strains.
But if my suspicions are correct, where short term rates continue to climb, this will affect many businesses via higher financing costs. There will be a cut back in expansions as losses will mount.
And if the rise in short-term yields engenders an inverted yield curve–where short term rates are higher than longer term rates—then the consensus will even be more startled because inverted yield curves have mostly been reliable indicators of recessions!
At any rate, look at how the mainstream interprets flattening yield curve: slower economic growth. So even if the yield curve doesn’t invert, but remains flat or continues to flatten, the consensus will be flabbergasted with statistical GDP falling below their sky high expectations.
And finally if financial and the real estate markets are driven by liquidity and if the flattening of the yield curve have indeed been about liquidity constrains then this might be the calm before the economic storm.
Phisix and Typhoon Ruby: The Mythical Link
And speaking of storms, one of the most absurd arguments peddled by media and by their coterie of highly paid experts has been to impute recent weakness in domestic stocks to Typhoon Ruby.
As I noted before, this is nothing but a myth.
| Typhoon | One week | Two Weeks | One month |
| Yolanda (Nov 3-11 2013) | -3.5% | -3.6% | -6.16% |
| Pablo (Nov 25-Dec 9 2012) | +1.6% | +4.3% | +5.05% |
Looking at the the performance of Phisix in different timeframes reveal of the immateriality of such claims. Typhoon Yolanda has been accompanied by negative returns after 1 week, 2 weeks, and 1 month after the destruction. Typhoon Pablo, on the other hand, produced the opposite—positive returns over the same period.
Perhaps one may suggest because Typhoon Yolanda holds the reign as the most destructive and costliest, thus the decline? Nope. Destruction is destruction, so having the adjective “most” doesn’t logically justify distinguishing one for the other.
As I wrote in the aftermath of Typhoon Yolanda[15]:
The flow of stock price movements during post-Typhoon episodes largely reflected on the pre-established interim and general trend of the Phisix…
This means that natural disasters have mostly been a non-event, especially today when stock price movement have become highly sensitive to central bank policies.
Typhoon Yolanda’s negative returns came as the Phisix had been battered by the taper tantrum and by BoJ’s QE 1.0 in May 2013 (upmost window). On the other hand, Typhoon Pablo sailed on the tailwinds of a booming Phisix (lowest window). So the flow of stock price movements during post-Typhoon episodes had indeed largely reflected on the pre-established interim and general trend of the Phisix, as I predicted then.
As further proof that Typhoon Yolanda has been nothing more than a post hoc fallacy, I placed the Thailand SET on the middle and labeled “Yolanda hits the Philippines”. The chart of BOTH the Phisix and the SET resembles one another. Do I now say that Typhoon Yolanda smacked Thailand stocks too? Look at the charts of Singapore’s STI and Indonesia’s JKSE covering the same period, all three reveals of the same actions—late October top which came with selling pressures that produced a December bottom. So Singapore’s STI and JKSE had likewise been victims of Typhoon Yolanda?
How about this week’s quasi crash by the SET and by Vietnam’s Ho Chi Minh index, they too had smashed by Typhoon Ruby?
And such post hoc fallacy has been qualified as expert opinion?
It may be convenient and popular to tell the public about how recent events (available bias) have caused actions in the stock markets in the same way G-R-O-W-T-H has been peddled to rationalize frenzied bidding up of ridiculously expensive stocks, but is it the truth?
Will the Domestic Casino Industry function as the Causa Proxima to a Credit Event?
Casino stocks have been pummeled violently to severely oversold levels which prompted for an equally violent rebound last Friday.
The oversold plight of the casino stocks had been used by the bulls to incite a frenzied Friday rally that culminated with another stunning episode of marking the close.
Bloomberry’s 4.09% Friday jump regained only half of Thursday’s losses and remains significantly down by 7.9% this week. Melco Crown soared 7.44% on Friday to more than recover yesterday’s 4.92% crash. But two days won’t do justice to Melco’s predicament. The MCP has been sold down by a shocking 17.98% over the past 5 days! Since no trend goes in a straight line, the violent selling translated to an equally volatile rebound. Yet Melco remains down 4.46% over the week.
Melco partner PLC jumped 5.58%. Because of the absence of foreign participation, PLC posted a 1.96% advance over the week.
Lastly, Resorts World developer Travellers International only inched up .4% from Thursday’s 3.74% drubbing. Travellers closed the week down by 1.96%.
The crash of domestic casino stocks should have been anticipated even if we omitted the Macau-Singapore-US link.
Since the listing of Resorts World developer Travellers International [PSE:RWM], the first casino resort to open in Metro Manila, its stock has been on a downhill. As of Friday, RWM has lost 33.5% from its IPO price which means the stock has been in a bear market and has been mostly absent from the recent rally.
A quick glimpse of RWM 1Q financials show that net profits have been up even when gross and net revenues as well as gross profits have declined. On the other hand, debt levels has improved from Php 20.6 billion in 2010 to Php 17.7 billion in 2013. In 1Q 2014 debt has already been pegged at Php 13.4 billion.
So much grand plans to be financed by debt pillared on the perception of sustained easy money environment and from demand based on G-R-O-W-T-H anchored on the same easy money landscape. There seems no margin of safety from errors.
Yet 1Q 2014 RWM top line figures seem to have already hit a growth barrier.
If we add three of the major domestic casinos, debt will total accrue to around Php 50 billion in a race to build tremendous capacity to compete with the region.
Demand from the major prospective customer, the Chinese gambler, has been down mainly because their economy has been teetering towards a crisis, the domestic and the regional economy has also been slowing which leaves a very limited domestic market from which the big three with huge capacities will be competing with. Lastly and most importantly the excess capacity has been financed mostly by credit—how will these be repaid?
What will be the conditions of these Philippine casinos when their delusions of grandeur will be met by reality of competition, slowing growth, excess capacity and more importantly by the emergence of tight money?
Yet if domestic markets have been unimpressed by RWM then why the enthusiasm for the newcomers? Because the new casinos tickle the imagination more than the first mover? Or has this been because of better PR image packaging?
The stock market reaction to the three casino stocks looks like the boiling frog syndrome. There was hardly a crash in RWM because the RWM frog had been boiled alive slowly (bearmarket)! The crash in Bloom and Melco has been like frogs that leapt out of the boiling water.
RWM already gave a clue. Yet no one dared to listen.
Historian Charles Kindleberger talked about causa proxima or event risk that triggers a snap in the confidence of a highly levered system. If there should be any lesson from the past two weeks, it is that the casino industry looks like the prime candidate for event risk.
That two week selloff in casino stocks coincides with the two week spike in short term yields, has there been a connection?
In the movie Rocky 3, the antagonist challenger to the world title held by protagonist Rocky Balboa, Mr. T had been asked by media to predict the outcome of the fight. His curt answer: “Pain”
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That’s how I see financial markets in 2015.
For what it is worth, there will always be opportunities or there’s always a bullmarket somewhere.
Enjoy the Holidays.
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