Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic!

Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic!

 

In the fifth edition of Manias, Panics, and Crashes: A History of Financial Crises, historian Charles P Kindleberger and author Robert Aliber wrote:

Fraudulent behavior increases in economic booms. Fortunes are made in a boom, individuals become greedy for a share of the increase in wealth and swindlers come forward to exploit that greed. The number of sheep waiting to be shorn increases in booms and an increasing numberoffer themselves as sacrifices to the swindlers. ‘There’s a sucker born every minute.’ In Little Dorrit, Ferdinand Barnacle of the Circumlocution Office tells Arthur Clennam, who had hoped that the exposure of Mr. Merdle’s swindles would serve as a warning to dupes that ‘the next man who has as large a capacity and as genuine a taste for swindling will succeed as well.’ (p. 188)

It appears that tensions have surfaced between former partners both listed firms developer Filinvest Land [PSE: FLI] and contractor Megawide [PSE: MWIDE] on unpaid receivables. The latter reportedly has been considering a legal recourse to demand payment worth about Php 800 million from the developer.

Since the financial kerfuffle was aired by media, both companies were obliged to clarify such untoward developments to the public by the Philippine Stock Exchange.

And in order to avoid muddling the viewpoints of the respective protagonists, please find below their entire response. (bold added)

Megawide:

We confirm that Megawide Construction Corporation (Megawide) had been trying to collect around P800 million worth of receivables for more than a year from five (5) construction projects it completed for FLI. The five (5) projects, mostly high-rise buildings, had been completed, turned over to FLI and were now being occupied by FLI customers. We confirm that there were time extensions approved during the implementation of the projects. The new turnover schedule was based on the approved extension and well within the new turnover schedule. We confirm that the issue had been endorsed to Megawide’s legal counsel for appropriate action. Megawide had sent several demand and follow-up letters. However, Megawide denies the statement made by FLI that “Megawide is liable for damages because of its delays in construction and abandonment of five (5) Filinvest building projects”. As earlier mentioned, the new turnover schedule were based on timeextesnions approved during the implementation of the projects.

Filinvest:

We respectfully clarify that Megawide Construction Corporation (“Megawide”) abandoned and/orincurred substantial delays in completing five (5) projects of Filinvest Land, Inc. (“FLI”) and Cyberzone Properties, Inc. (“CPI”), which is a subsidiary of FLI, making Megawide liable for liquidated damages in the total amount of P793,500,000.00. Pursuant to the parties’ respective agreements for these projects, for failure to complete the work on the agreed completion date pursuant to the respective Notices of Award, Megawide shall be charged with liquidated damages and the project owner has the right to deduct such accrued liquidated damages from any sum dueMegawide. Megawide’s statement in the News Article that they are “within the approved new turnover schedule” is false. On the contrary, they exceeded the agreed completion dates even after factoring in the approved extensions of time. This fact is supported by documents and other evidence.

Present conditions signify as consequences from the series of previous actions.

The financial conditions of both companies should give us a clue to the origins of the likely debt/collection lawsuit. 

The growth rate of gross revenues, as well as earnings per share, of Filinvest Land, has been floundering since 2012. In 1H 2017, revenues improved by 9.3% year-on-year, but that was after a sharp 8.3% slump in the 2Q mainly due to a 16.6% crash in real estate sales. FLI’s 1H eps grew by 10%.

Because FLI’s revenues and earnings have been strained, the company has resorted to leverage to finance operations and Capex.

The good news is that FLI has been more restrained in the absorption of debt compared to its peers.

FLI’s refusal to make payments to Megawide can be partly traced to its foundering topline, as well as, its earnings performance

Though Megawide has reported a headline earnings bonanza in the 2015 and 2016, the company has been borrowing astoundingly more than it has earned since 2013. The company’s total debt levels have been skyrocketing. The company’s 4 year debt CAGR was at a staggering 67.54% whereas its net income CAGR has only been at 17.34%

Megawide’s possible performance lapse and likely liquidity pressures could be from its increasingly fragile financial conditions.

Strained financial conditions must have established the conditions for such relational fracture.

Because of the exposure to high degree of leverage, a slowdown in the industry will likely spark even more rancorous business relationships involving customers and the supply chain

The unfolding friction between FLI and Megawide should serve as a blueprint.

Mr. Kindleberger and Aliber also wrote: “Greed also induces some of the amateurs to commit fraud, embezzlement, defalcation, and similar misfeasance” (p.188)

The Php 300 million swindle by an ex-PSE employee in 2016 should be a testament to this.

Metrobank’s unearthing of a Php 1 billion internal fraud by an employee and two others last July 2017 should serve as another manifestation.   

The reported Bullion Buyer Ltd political financial scam, which emerged last week, could be another.

Swindling according to Messrs. Kindleberger and Aliber includes: A traditional form of swindling involvesoverstating the value of commodities held as inventories. (P. 166)…Swindles that involve falsified statements about the value of inventories can be tested when the promises are made…The lenders are taken in by the falsified values of the collateral offered by the borrowers, and initially the lender’s accountants don’t catch the deception. Swindles in financial markets may involve statements about the growth of corporate earnings or about the ‘warranted’ prices of shares of individual firms…Some of the swindles in the financial markets involve ‘excessive optimism’ about the earnings of firms or future stock prices that those making the statements know are not likely to be true.

And swindling is just part of the financial felony that appears at market tops. Financial felony according to Kindleberger and Aliber: There are many forms of financial felony. In addition to stealing, misrepresentation, and lying, other dubious practices include diversion of funds from the stated use to another, paying dividends out of capital or with borrowed funds, dealing in company stock on inside knowledge, selling securities without full disclosure of new knowledge, using company funds for noncompetitive purchases from or loans to insider interests, taking orders but not executing them, altering the company’s books.

DBP’s alleged “wash sale” to hide Php 717 million in losses in 2015 could be an example. Nonetheless, to sanitize this fiasco, DBP officials were cleared of the charges.

Financial problems allegedly brewing at an HMO firm could be another. But the Insurance Commissiondownplayed the company’s predicament.

Of course, the biggest embezzlement and felony so far have been the money laundering by some executives of the RCBC in 2016.

Yet people hardly realize that swindling has been happening almost every day at the PSE!

While Mr. Kindleberger describes forms of swindling as inflating pricing or valuations through misstatements and financial felony through dubious practices, market manipulation should be part of it!

Since marking the close became operational in 2H 2014, I recall of no precedence in terms of the scale of a three-day pump.

The sum of the 3-day pump of 151.77 translates to a massive 1.8% from last Friday’s close! That’s the scale of pumping to prevent the PSEi from falling!

Today’s 70.03 point pump virtually turned lead (losses) into gold (gains)! It’s the biggest in three days!

Moreover, the three days had many similar actors.

In three days, SM was pumped a whopping 3.7%, JGS by an astronomic 6.72% and URC by a colossal 4.31%!!!

This shows the collaboration and design to deliberately push the index higher.

What cannot be achieved in the regular session had to be blasted by the session’s end.   And it has not just been the frequency, but the intensity of manipulations just gets bigger and bigger!

Rising stocks have become an ENTITLEMENT!

There is NO stock market that I know of that operates in such manner. And yes, the PSE is a price-fixing mechanism instead of a stock market. The Philippines uniquely holds the tiara for price fixing.

By the way, all these are indicative of massive distortions in the marketplace. We have an IMPAIRED market.

Nevertheless, when fraud, swindles, embezzlement, and lies are seen as virtues….look at below!

Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling

In this issue

Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling

-The Astounding Collapse of BPO Investments

-Phisix Sets Artificial Record High on Money Supply Growth and Price Fixing

-Demonstrated Preference: Mr. Razon’s Selling of 3.18% Shares of Bloomberry and Wave of Insider Selling

Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling

The Astounding Collapse of BPO Investments

In 2015, I prognosticated that the one-way projection by the mainstream of the BPO industry’s growth trend will eventually falter. And that’s because BPO growth dynamic will eventually reach its natural economic limits: [Phisix 7,100: Downgrades Transforms into Capex Cuts! More Signs of Cracks in the Philippine Property Bubble! Sept 20 2015]

Like all human activities, BPOs are subject to changes in demand and supply. The supply side of BPOs are dependent on many fluidly variable factors such as political, legal, labor/manpower, wages, input prices, infrastructure, competition and many others. A significant change in one or two of them may alter whatsoever comparative and competitive advantage the Philippines holds today. For instance, soaring taxes, or skyrocketing wages or a war with a neighbor will likely reduce the appeal for BPO investments or operations.

India used to be the lone powerhouse of BPOs, that’s until the Philippines got into the fray. Yet India holds six of the top ten in BPO destinations with 2 from the Philippines, one from Poland and from China based on the 2015 rankings by Tholons

The same applies to the demand side or the clients or principals of local BPOs, where any major changes in the conditions of their host nations or on global conditions may affect BPO investment or operations. For example, a global recession or depression may likely upend or delay the BPO boom.

Nothing is set on the stone.

If I am not mistaken, such limits have arrived. The law of diminishing returns has begun to afflict the BPO industry.

From the Inquirer.net (bold mine)

New investment pledges in the IT-BPM industry registered through various promotion agencies fell 34 percent in the second quarter from a year ago, continuing the decline in one of the country’s top dollar earners that the trade chief had partly attributed to the uncertainty in US policy.

Collecting the pledges registered through seven investment promotion agencies (IPAs), data from the Philippine Statistics Authority (PSA) showed that investment commitments in the business process outsourcing (BPO) sector totaled P4.9 billion in the April-to-June period in 2017, falling from P6.27 billion registered in the same months last year.

The latest figures of the Information Technology and Business Process Management (IT-BPM) industry showed the continued decline in investment pledges. The PSA earlier reported a 34-percent decrease in new pledges during the first quarter to P4.18 billion from P6.34 billion in the same three-month period in 2016…

Not the first time, instead a follow through from 2016…

This is not the first time that pledges shrank in terms of their growth rate.

According to PSA data, the expansion rate of these pledges had been on a decline since the third quarter of 2016. In spite of a more than 35-percent increase in pledges during the second quarter of 2016, commitments still finished the full year with a 22.6-percent decline to P30.74 billion from the previous year that had P39.73 billion.

PSA data suggested that the “anchor accounts” were not enough to offset the drop in new investment commitments. The latest figures pointed to a 28-percent decrease in the first half of the year, reaching P9.08 billion from P12.61 billion in the first semester of 2016.

Wow! TWENTY-THREE percent decline in BPO investments 2016! THIRTY-FOUR percent decrease in both 1Q and 2Q in 2017! A fall of 23% and 34% would signify as crashes!

Sorry, the IT-BPM provides no data set to the public for me to come up with a chart. Hence, I am limited on the citation of the news.

First of all, Mr. Trump won the US Presidency in the 4Q of 2016.  BPO investments started to fall in the third quarter of the same year. Thus, uncertainty over US policy may be rationalization or reasoning from price changes.

Second, the BPO industry has been projected to grow at a fantastic rate by almost every outlook published by the mainstream domestic and international institutions. They seem to have forgotten that since we live in a world of scarcity, the same scarce factors would serve to restrain an industry’s growth rate. As the great classical economist Adam Smith wrote, trade by virtue of the division of labor is limited “by the Extent of the Market”

Third, a collapse in BPO investments has tremendous implications. It would not only affect the sector’s output, productivity, and profits but likewise impact job generation, income and wage growth, as well as, financial conditions.

Fourth, like the auto industry*, a slump in investment would spread to the entire BPO ecosystem. Or a magnified slowdown will adversely impact the BPO’s upstream (e.g. real estate) and downstream (e.g. retail) sectors.

*Has Peak Auto Sales Arrived? Part 2; Downshift in Sales Growth Spillover to Auto Production! September 17, 2017

The ‘race-to-build-supply’ of the real estate, shopping mall and hotel industry had partly been premised on the expectations of the linear growth rate of the BPO industry. Just what would happen when the glaring mismatch between output and expectations becomes a reality? What industry or industries will replace the erstwhile sunshine BPO industry?

As a reminder**, OFW remittances are not the same as BPO remittances. OFW remittances signify as money intended for final consumption. BPO remittances signify as gross business revenues for BPO firms. It would be a folly to believe that apples (OFWs) are similar to oranges (BPOs), because the distribution of spending will be different between them.

**Phisix 7,250: Breakout on Shrinking Volume, Media Mounts Elaborate PR Campaign on the Property Sector, Why? October 25, 2015

Many major economic activities such as construction (construction permits and cement), manufacturing, car sales, consumer sales (retail sales) and BPO investments have manifested considerable weakness over the same timeframe. Has such been merely a coincidence? Or has there been a common causal mechanism that has spread to affect them?

Phisix Sets Artificial Record High on Money Supply Growth and Price Fixing

Curiously, the Philippine Phisix has stormed to unparalleled heights in spite of these unfolding crucial shortfalls in the real economy.

Add to the intensifying bifurcation of the Phisix and the real economy has been the near-zero net income growth in the 1H of PSEi 30 firms which had been brought about by one-third of its components which endured negative net income growth and the stellar 19% surge in PSEi non-bank debt!

 

Price actions in Philippine stocks have become totally detached from reality.

While it may be true that the Risk ON sentiment in Asia has partly filtered into domestic stocks, foreign participation has been largely absent.

In Asia, 8 of 17 national bourses have recorded 15% returns and above; as of September 22. (see upper window)  Except for two bourses, Asian equity bellwethers have either set new records or have reached some milestone levels.

The strengthening of the local currency has mostly been responsible for most of the record-setting of national benchmarks in the region.

However, like Mongolia, the Phisix has been one of the outliers where record stocks have coincided with the fall of the currency or the peso.

As an aside, Mongolia’s boom recently had a dramatic turnabout; the nation nearly plunged into an economic crisis until it was bailed out by the IMF in May 2017. Although, the IMF delayed part of its bailout payments, a week ago, due to political turmoil or the ouster of the government. This bailout must have spiked its stocks.

And unlike foreign-backed buying of the PSEi 30 during the run-up to the landmark high in April 2015 and in the test of the same level in 2016, September 2017’s fresh record has been MAINLY about local activities. Local punters have indulged in mindless and relentless bidding binges on select index sensitive issues. And that’s aside from the brazen price rigging which apparently has been countenanced by authorities.

The BSP’s data on the monthly portfolio flows (middle window) shows the difference in foreign participation in 2015 and in 2016 relative to the present. Foreign money has largely been a nonevent in the recent record run.

And this explains the low volume pump and the awesome divergence between the broader market and the PSEi 30.

Of course, the record PSEi 30 run can be traced to the BSP’s emergency policies: the historic low interestrates and the monumental deployment of domestic Quantitative Easing or monetization of the NG’s debt, as well as, the unprecedented use of wholesale finance to bolster GIRs.

 

As money supply growth picked up tempo, so did the Phisix.

More importantly, the intensive price fixing practices focused on the biggest market cap issues have been designed to elevate the index.

The top 6-7 issues have borne the extreme PERs of the PSEi 30 which has been a manifestation of the disproportion of bidding activities over the past years.

As I recently noted***: To be clear, I am not saying that the 2015 record won’t be broken. Given the intense price fixing process, whether it does or doesn’t shouldn’t be a concern. What matters will be the peso as an outlet for present policies. The Phisix hasn’t only been outclassed by the falling peso, in the context of record breakthroughs. The plight of the peso will also serve as a critical obstacle to the Phisix.

***BSP Has Been Right: No Foreign Exchange Crisis…For Now; But Devaluation Policies Amplify Risks! August 27, 2017

Let me guess, because the Phisix broke into new territory, August-September M3 may have likely surged past the highs of May 2016 and July 2017 at 13.5%

Demonstrated Preference: Mr. Razon’s Selling of 3.18% Shares of Bloomberry and Wave of Insider Selling

And there are anecdotal and empirical evidence of listed companies forcing up share prices of their own firm or of related companies. Such activities can be seen through disclosed interventions (SM Prime), as well as buybacks (Macro Asia, and lately AGI).

Interestingly, waves of insider selling can be seen in the PSE’s disclosures involving “Change in Shareholdings of Directors and Principal Officers”.

I may add that the recent sale by ICTSI tycoon Mr. Enrique Razon of his 350 million shares representing 3.18% stake in Bloomberry Resorts Corporation at Php 10.85 per share worth approximately Php 3.8 billion from his holding firm Prime Metroline Holdings Inc. to international institutional investors through an overnight placement emits the same symptoms.

Mr. Razon’s disposal of BLOOM shares would mark the third major sale by a majority stakeholder of their firm in the last two years.

The Gokongwei sold Php 11 billion ($250 million) worth of JG Summit shares at around Php 82.1 per share in May 2016 (September 22 close at Php 77) while the Ty family sold $172 million worth of GTCAP shares at about Php 1,539 (September 22 close at 1,201) in August 2016****

****The Other Possible Reasons Behind the $250 M Share Sale of JG Summit May 29, 2016, Following Gokongwei, Ty Family Unloads $172 Million Worth of GTCAP shares! August 11, 2016

I have explained the sales by tycoons in the context of demonstrated or revealed preferences.

Mr. Razon justified his actions by stating that the sale would increase liquidity that will be beneficial for investors and the company. Will the addition of 3.18% of liquidity or market float really improve the company’s financial conditions? The answer is no.

The critical factor of company’s financial conditions ultimately takes root from the long-term stream of revenues. Mr. Razon knows this. Hence, opportunity costs dictated the actions of Mr. Razon. He sold becausehe sensed cash as having more value than holding 3.18% shares worth Php 3.8 billion in shares. He can opt to sell at Php 4.0 billion, Php 4.5 billion, Php 5.0 billion or more. But he chose not to. That is because he is not sure that there would be takers at that level. Action speaks louder than words.

Mr. Gokongwei and the Ty family sold at the price climax of the shares of their respective firms. I would bet that Mr. Razon thinks the same way too.

And I would bet that the slew of insider selling from a diverse set of listed issues has been emitting the same signals. Corporate insiders may be cashing in on what they think as overvalued securities where cash would be a better option.

Why shouldn’t they? BPO investments have crashed.

Economic activities such as construction (construction permits and cement), manufacturing, car sales and consumer sales (retail sales) and listed firms’ eps have yet to present convincing clues of a meaningful recovery. 

Because of the reappearance of upside pressures and of price instability in the real economy, the prospects of a material rebound in these sectors would seem unlikely.

And the enormous growth in government expenditures would compound on such growth obstacles mainly through the ‘crowding-out’ effect in the real economy and in financial conditions.

Moreover, signs of strains in the real economy have induced companies to ramp up credit growth. And this gorging of credit has hardly brought about its desired effects. What this would bring is more risk in their balance sheets.