Wow. Money Supply Breakout Powered Record Phisix! S&P warns of Deteriorating Credit Quality!

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%

[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 September 24, 2017]

Well, that conjecture turned out to be pretty much accurate.

The BSP’s data demonstrates that August M3’s 15.4% broke past highs of May 2016, which has exactly been less than a month before the Phisix breakout in mid-September. When M3 soared to its peak in May 2016, the Phisix hit a high of 8,100 two months after or in July.

 

What is the relationship between the Phisix and the peso? Well, the answer to that is “what medium is used to transact stocks?” Wouldn’t that be the peso? This means stocks are likewise subject to the conditions of the supply and demand of the peso.

For instance, under current conditions, when an excessive amount of money has been infused into the financial system, demand for money decreases as demand for other economic goods or financial assets increases.

To quote again BSP’s Dr. Dante Canlas**:

[**Dr. Dante Canlas, BSP Sterling Professor of Monetary and Banking Economics, Business Fluctuations and Monetary Policy Rules in the Philippines: Lessons from the 1984­1985 Contraction April 30, 2012 p 14-17 BSP.org.]

"A prior issue is this: is inflation a monetary phenomenon Friedman had said “inflation is always and everywhere a monetary phenomenon.” With a quantity theory of money in mind, if the central bank increases the money supply from a position of balance, then the real money stock exceeds the demand for it. To restore balance, the general price level must rise, which means inflation rate, defined as the percentage change in the general price level must rise.

And the BSP’s negative real rates policies have signified its source.

Thus, monetary inflation feeds into asset prices, expressed as record Phisix (as well as property prices), and likewise into the general price level, as measured by the CPI.

In response to the BSP’s twin action, real economy inflation, not just the CPI, should be expected to substantially rise. And increased price pressures would translate to compounded difficulties for the marginal earners. To put bluntly, disposable income will shrink! [As an aside, my neighborhood sari-sari store informed that prices of San Miguel beer products is expected to increase in the coming days]

And even when taxes of the marginal earners will be removed, their purchasing power will remain suppressed due to the government’s inflation tax.

The BSP’s emergency measures, viz. lowest interest rates in history (ZIRP) and record NG debt monetization (QE), has fathered the resurgent M3.

Both the private sector and the government have used money creation to propel GDP.

As I wrote back in August,

Today, both the BSP and the banking system have been working overtime to expand the money supply. Monetary inflation has been aimed at generating revenues for the NG through direct taxes and through the inflation tax.

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

On a month to month basis, the BSP’s net claim on the National Government (NG) was reduced by Php 12.6 billion in August. However, the year-on-year rate of change jumped 16.74%.

On the other hand, the growth of the banking system’s total production and consumer loan portfolio has rocketed past 2014 highs!

In the recent past, the fiery bank loan growth, which peaked in 2011, spurred a 10 month 30+++% in 2H 2013 to 1H 2014. That was all about the banking system’s credit inflation.

Today, with the twin-engine of credit inflation in full throttle, a repeat performance of the previous 30++%%% money supply growth looks likely a viable immediate target!

Such explosion in bank loans or the sustained massive expansion of systemic leverage operates even as net income has been stagnant in the 1H 2017***, the perpetual race to build supply and intensifying economy-ide price pressures.

[***Phisix Surged to 8,000 even as Net Income Posted a CONTRACTION in the 2Q and Stagnated in the 1H!August 20, 2017]

The S&P Global Ratings appears to have captured in their radar system the massive increases in systemic leveraging. Hence they issue a subtle warning, perhaps tacitly addressed to the very accommodative BSP

From S&P’s Xavier Jean and Bertrand Jabouley (ASEAN Inc’s debt dilemma, Finance Asia September 28)

The median leverage of the largest domestic companies appears to be stabilizing in most countries, with the exception of the Philippines and Thailand.

Philippine and Singaporean companies had about 2x more leverage on aggregate than those in Indonesia. They also had nearly 50% more leverage than those in Malaysia and Thailand. These numbers remain consistent year-on-year. Singapore stands as the “champion” of indebtedness, due to still-modest operating conditions for real estate and oil- and gas-related sectors, combined with persisting spending and sticky dividends (about 35% of EBITDA for the largest 100 listed companies in the country, compared to 25% on average across Southeast Asia). In the Philippines, the dominant diversified groups continue to spend aggressively on expansion and acquisitions, so leverage has continued its upward trend.

We believe ease of access to funding remains a key factor in leverage. Singapore, Philippines, Malaysia, and Thailand all have active and liquid local banking and capital markets. We also see that leverage tends to be above average among the most active issuers in these markets…

Based on their sectoral exposure, we believe that countries likeliest to see credit quality deteriorating in the next 12 months are the Philippines and Thailand, with Malaysia, Indonesia, and Singapore being potentially more stable.

The S&P essentially validates my observation that PSEi 30 firms have been gorging in debt with reckless abandon. [Biggest Wow, as 1H Net Income Stagnated, Ex-Bank PSEi 30 Debt Swelled by a Staggering 19% (Php 433 Billion)! September 3, 2017] Debt has become the foundation of G-R-O-W-T-H!

And the massive pump-fest at the Phisix comes in the light of the “credit quality deteriorating in the next 12 months”! Interesting, no?

Of course, BSP policies account for as a major factor.

 

There is another related dynamic: Market manipulation. During the first three days of the week, the PSEi’s correction had been severely mitigated by coordinated and synchronized end-session pumps. [Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic! September 28, 2017]

In the next days, it had been dumping! But Thursday’s dump came after another attempt at an afternoon delight pump! (upper right window)

In all five days of the week, end-of-session pumps and dumps became the determinant of the Phisix. The halcyon days of pricing dictated by the markets are over. Price discovery and the economic coordination process from pricing signals have given way to the brazen gaming of the system.

With SM consistently being inflated along with its other subsidiaries (SM Prime and BDO) to keep the Phisix at records, the Sy group now commands an astounding 26.81% share of the index’s market weight! The Phisix is now about SM! Remember, in the 1H SMPH declared that it bought Php 4.9 billion of shares of related party firms. [SM Prime’s Growth Model: In 1H 2017, Every Peso of Growth Was Funded By SIX Pesos of DEBT! SMPH Bought Php 4.9 Billion of Related Party Shares! August 13, 2017] Pump one’s own stocks by borrowing heavily! Truly signs of times!

Aside from the government, some vested interest groups have come to believe that markets can be tampered or controlled with impunity or with no attendant harmful consequences.

We shall soon see.

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!