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Index to Pearl of the Orient Seas by Clarence Henderson
The Philippines Stock Exchange:
Wild, Wild West Meets Ninja Roller Coaster:

November/December 1999

Clarence Henderson
Henderson Consulting International, Manila, Philippines

This Month's Focus: Philippines Stock Exchange, trading and playing the Stock Market, stocks, front running, wash sales, dominant shareholders, transparency, investment, and international brokerage houses.

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The Philippine Stock Exchange, although small by regional standards, provides the knowledgeable speculator with many opportunities to make a buck or two. It can also quickly strip the not-so-savvy investor of his money, not to mention the shirt on his back. Indeed, the Philippines Stock Exchange is a Wild Wild West stock market with certain similarities to one of those huge, gut-wrenching roller coasters featured in American theme parks.

We were reminded of this recently when we learned about the experiences of a young acquaintance who recently found himself swept up in a swirl of adrenalized stock market activity. In recounting his tale, let's call him Bernie for the sake of protecting the innocent. In the same spirit, we'd better also use a Philippines Stock Exchangeudonym for the stock in question.

Bernie, who recently earned his business degree from of one of the better colleges in the Philippines, received a nice little graduation gift from his father: about half a million pesos worth of bonds, safe institutional investments, paying 8% interest While Bernie appreciated the gift, he also wondered if he shouldn't explore other, more profitable investment options.

Bernie had a number of friends in the entertainment industry who had been making dough hand over fist in the Philippines Stock Exchange. When he told them about his bonds, they laughed in his face -- and why not? They'd been making a killing riding the wave of Paradise Resorts Unlimited, a stock that had traded under five pesos a mere month before. It had just passed 30 on the way up and showed no signs of slowing down. His friends assured Bernie that the stock would continue to rise into the stratosphere and that he should hop on the bandwagon before it was too late.

Bernie went for it, hook, line, and sinker, as they say. He sold the bonds at par value, losing some interest in the process, but figuring it was peanuts compared to what he stood to make with Paradise. He wanted to leverage his funds, but as a first time investor no brokerage firm would extend him the necessary line of credit. Not wanting to hurt his dad's feelings (and knowing that the old man would probably kill him if he found out), he talked to his uncle, the owner of a factory who had always liked his nephew. After swearing him to secrecy and convincing him to guarantee his credit, Bernie invested all his money (and then some) in Paradise.

The first week was fine. Bernie tracked the stock daily and was quite pleased with the results. By the end of the second week, Paradise was trading at 55 and Bernie was walking around all day with a great big smile on his face.

Week three, however, was a different story. Paradise went into free fall and Bernie panicked. When he called some of his erstwhile friends, he was dismayed to learn that they had all sold at the end of last week.

"Didn't you know?" one of them asked. "It was time to cash in. You'd better sell too -- if it's not too late."

Bernie soon discovered that the ominous tone of his friend's voice was well-founded. When he called his broker to sell his stocks, the results were even more unsettling.

"I'll try," he said, "Paradise is hitting the maximum trading limit every day before sell orders can execute. Doubt we can move them. And you'd better be ready to come up with 800K by Friday to cover your margin."

Oops. Bernie had been had. There were no buyers and Bernie didn't have the cash the broker was asking for. We'll spare you the ugly details, but let's just say that our na´ve friend ended up losing all his money, begging his family for funds to cover his debts, and with a great deal of egg on his face. He'll be paying off loans on the deal for at least the next three years. Maybe he won't be quite so anxious to dive in headfirst the next time around.

To understand what happened to Bernie, you have to understand the unique psychology of the Philippines Stock Exchange. In looking at any stock market, the first question to ask is: How far out on a limb are people willing to go? In the case of the Philippines Stock Exchange, the answer is that folks are willing to climb way out to the end of a spindly little branch and hang on for dear life. Sometimes, as in the case of Bernie, the branch breaks and they break their figurative necks.

This market is driven by emotions and rumors. While some investors know their technical analysis and the brokerages employ professionals who know how to chart the fundamentals, that's not really the point. There is a tremendous amount of buying and selling on news. Investors buy on rumors that something is about to happen, then sell out as soon as a news item confirms the rumor. If the rumor is accurate, they turn a quick profit.

Margin requirements may be accurately described as "fast and loose." Many active traders are highly leveraged, making them mucho vulnerable when their stocks tank. The Philippines Stock Exchange is in essence a mountain of credit built on a molehill of actual money, with more than a few parallels to Wall Street of the late 1920s. The market has a limited investor base, relatively thin market capitalization, and close relationships between brokers and listed companies. Ideal breeding ground for insider trading and subtle and not-so-subtle price manipulation.

We need only mention a couple of common practices. "Front running" occurs when a broker buys or sells ahead of client orders (prohibited but widely practiced). In effect, block sales of stocks are transacted without any actual change of ownership, creating the illusion of heavy interest in a stock when in fact there is little or none. "Wash sales" involving the transfer of stock ownership by brokers without real clients are also common.

Much of this activity goes undetected, thanks to shells on top of shells, bank secrecy laws, and other "confidentiality" protections that make it difficult or impossible to tell what's really going on. Indeed, a few large traders acting in collusion can and do significantly influence stock prices. Some of our knowledgeable friends tell us that a few top shareholders hold over 40% of market value -- Cojuangco, the Lopez family, the Ayala group, George Ty, and Lucio Tan, to name a few.

There are occasional Senate inquiries, such as the current hearings about the BW Resources scandal. These highly publicized and politicized affairs are usually convened after a spectacular run-up and crash of a particular stock. One of the hot issues now under discussion revolves around recommended changes in the allowable trading band recommended by the SEC. Currently, trading is automatically halted when the price of a particular stock goes up by 50% or drops by 40% in a day. That's why Bernie couldn't unload his Paradise stocks -- large block trades were already in the queue at the opening bell, effectively soaking up the band and preventing any small trades from being transacted. Trading was stopped each day before his sell order could be executed, leaving him holding the bag.

It's not that the Philippines Stock Exchange doesn't have good rules. Solid, conservative rules regulating block trading and requiring full disclosure for listed companies are on the books. On paper, the rules look about like those you would find on the Hang Seng, the German Bourse, or the NYSE. In practice, however, the Philippines Stock Exchange is an old-line "gentlemen's club" with its own unwritten rules, and the way things operate in practice is quite different from the theory.

The situation is made even more explosive by the flows of hot money that pour in and out of the market at cyber-speed. Affluent Taiwanese, Hong Kong, and Singaporean investors know that they can turn a quick profit in Manila and take full advantage of the situation as you might expect. They also tend to get accurate inside information. Even major international brokerage houses play faster and looser here than they would ever even consider when trading, say, on the Hang Seng. They know they can get away with it, so they do.

The Asian Development Bank, in a recent paper, complained about the Philippines Stock Exchange's lack of transparency. Indeed, the international perceptions of the Philippines Stock Exchange are consistent with the generally negative images held of the Philippines economy in the international business and financial community. There seems little question that, if the Philippines is to create financial and economic stability over the long term, the Philippines Stock Exchange should be reformed. However, as careful observers of the Manila business world, we aren't holding our breath.

In short, the Philippines Stock Exchange is a casino of a stock market that offers all the allure and pitfalls of any other game of chance. And just like a casino, the market is driven by a 5-letter word (G-R-E-E-D). The astute and (especially) well-connected investor can make a lot of money, and the Bernies of the world will continue to be victimized. If you've got a little money, street smarts, nerves of steel, and a cast iron stomach, perhaps the Philippines Stock Exchange is for you. In fact, there's this one stock that you really should buy . . .

Clarence Henderson

Comments, questions?... Post a note to the APMF discussion board (See left hand sidebar) or email Clarence direct

...from Clarence Henderson's Pearl of the Orient Seas

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Clarence Henderson Henderson Consulting International Manila Philippines

Clarence has had over 20 years of consulting experience in New York, Los Angeles, and the Philippines. He brings to the forum many years of experience in the Philippines and his monthly column integrates the experience of working in the Philippines with business tips earned the hard way! You can learn more about Clarence by clicking on his photo. Clarence Henderson: Manila, Philippines Sources - About Clarence - Other Columnists

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