7:10 pm  Thursday  3 June 2010  Philippine Stock Exchange Index  3355.23 (+2.0%)

We had an unexpected breakout today.  I noticed a sharp rise in the price of MER which was the biggest contributor to the rise of the index today adding 11.1 points.  SMPH added 8.39 points and TEL 6.86.  Ayala stocks  AC, ALI, BPI and GLO together piled up 14.14 points.  All other index shares either added to the rise or did not affect it except for GMA7 and MBT which together took away 1.6 points.

What this looks like to me is that institutional fund managers are buying the market and not just individual stocks.  AP, AEV, DMC, RLC and URC are following through their recent strength.  What looks to be catching up with the rest of its family is DGTL.  If you recall, the strength in the prices of URC and RLC spurred a lot of enthusiasm for JGS.  It appears that DGTL has opened up the imagination of those closely following the Gokongwei group.

I was thinking that the index would be hitting resistance at the 3330 level, buy today’s 66 point rally takes all the bets off that number.  We are poised to take this market to the next level.  It may also be that institutional investor confidence is returning given that the presidential proclamation by Congress is now close at hand.

The movement of MER may be indicating another M&A deal, possibly the SMC group eventually selling out their position.  That remains to be seen.  What is impressive is the movement of SM, SMDC and SMPH together with their cousin CHIB.  In spite of the roller coaster ride in the market over the past few days, these shares have been rock steady and have slowly but surely gone forward.  I was recommending positions in SMDC for a while even though it was a little pricey.  There are some investors who are bullish in Henry Sy companies, and it looks to me that they are coming out of the woodwork.

Personally, I would not be chasing the market despite this break-out.  I am betting that this is a false break because MER may have skewed the movement of the index.  While my long-term view is positive and my general outlook is constructive, I think there a number of investors and traders who may want to raise cash by taking some profits on these strong performers.  I think that prices will not yet run away except for those that are only catching up.  I think we will see some sideways movement since many are still looking to Wall street to gauge if the global picture has indeed turned positive.

As a strategy, I would not recommend getting out of positions at all.  Any selling should just be trained at raising cash for new purchases.  In other words, those who are looking to take profits in some stocks ought to rotate into newly rejuvenated counters.  If the global picture improves, our market could put down another 200 points over the next 3 months simply because valuations are not at all demanding and the domestic economy may still pull out a few surprises.

8:50 am  Friday 4 June 2010 (update)

The markets overseas appears to be shaking off the fears that the European Sovereign debt crisis brought about in the month of May.  This first week of June seems to be drawing people back to the market. Many U.S. analysts are thinking that the market could rise from what are seen to be oversold levels.

Our PSEi did not fall as much as the global markets did.  This week has actually been spectacular for local stock prices.  I think we will end this week even with higher prices as support prices for our favorite stocks have moved higher.  I think it is a good time to pick up some EDC below 5 and PNB around 30.  There is also a good chance that BPC and MPI may rise further.  MER will likely maintain its strength.  DMC, AP and AEV have very strong support at these levels.  SM, SMDC and SMPH should not be ignored either.  I would not be surprised if MBT challenged 60 very soon.

10:30 am  Thursday  3 June 2010

We will likely see some enthusiasm in the market following the 2.25% rise in New York’s DJIA.  This comes after a 2.34% two day decline of the same index.  The Market is really fickle reacting to almost any daily indicator.  It appears to me that the global investor, unlike for most of last year, is not taking any long-term view of the markets.  While the volatility (VIX) in the U.S. has come off a bit, it does not appear to be moving lower in the coming days and, perhaps, even weeks.

Most market participants have seen that when New York sneezes, the rest of the financial world catches the cold.  we saw that a few times these past few months.  The latest discomfort was the European sovereign debt crisis, but that is looking to be addressed.  The latest news is that Greece is privatizing part of its national railway and its postal system to raise cash in the government’s coffers.  A drastic and unpopular fiscal austerity measure is being adopted which will probably stave off threats of Greece being booted out of the currency union.  Spain and Portugal have been very positive in their response to the call of fiscal prudence among all European Monetary Union members that the impression being created is that a new era of fiscal union is developing in the continent.  Of course, things will not change overnight but what is important is that investors have something positive to expect.

In the U.S., the impression appears to be that emerging markets are presently overheated.  This is why the Shanghai index is having difficult time lifting itself from the doldrums that it has been having for almost a year now.  Nevertheless, smaller markets like the Philippines have not really seen a deluge of investments coming from the global players.  The PSE, while seeing average daily value turnover at higher levels compared to years 2009 and 2008,  has not reached trading volumes seen in year 2007.  We can be pessimistic and say that the market will not be as robust or we could be optimistic and adopt a view that we are still on our way to 2007 trading volumes.

In the near term, I think that the PSEi will remain inside 3330 which was the high we saw at the end of April.  While there would be bursts of optimism, I find it difficult to see any strong stimulus to push the market into break out levels.  Yesterday, it was the index stocks that lead the gainers.  I think the same will happen perhaps for another trading day or so, but if we do not break out of the 3330 level we may just pull back a bit.  In that case, it may be wise to lighten up on index stocks and put some weight on special situations.

One situation seems to be happening in DGTL.  The market share of GLO has been eroded by GLO.  Some investors do not favor the telco sector because it is not seeing any growth for the time being.  DGTL, however, is growing but at the expense of GLO.  Perhaps, there is momentum in their earnings stream as a result of these gains in market share.

The merger story at PNB continues to make this stock a good proposition.  It looks closer at hand today than it was a few months ago.  In the power sector, EDC might be worth a punt since it is trading below the middle of its trading range.  MPI is in the same position in the range.

Essentially, my message is that if people agree with me that we are going to stay in this range, then it would not be advisable to add to positions.  Rather, it would be good to top slice on positions and keep the cash for possible dips.

6:00pm  Tuesday  1 June 2010  Philippine Stock Exchange Index  -  3266.62  (-0.19%)

Over the weekend, I watched the final show of my good friends, The APO Hiking Society. They had decided among themselves that after 40 years of performing together, it was a good time to go while they were still high in their popularity.  This was not the first time they had planned to call it quits, and I was around the few times they had planned a farewell concert and made a performance of it.  This time around, I was sure it was the last show, and the guys had given the show all they had in order to leave their adoring audience a memorable curtain call for the performances forty years.  I had been their friend all these years, and I knew that they really meant it.

The stock market just like show business can be just as fickle.  Stocks have to play to an audience and attract their attention.  Stock prices can reflect their true value, but they can be over or under valued from time to time.

The Philippine market has been rallying for over a year now.  In fact, in comparison to the developed markets, the local market has been performing better year-to-date.  Nevertheless, investors have been quite wary on account of the sovereign debt crisis in Europe.  The fear stems from the possibility of contagion similar to what happened in 2008, a debacle from which many are still hurting.

The question bothering a number of investors is where is this market going.  We saw exceptional GDP numbers last week.  As investment professionals, it is something that we cannot ignore.  The 7.3% growth rate were met with doubt by a lot of skeptics.  If these figures are not verifiable against other measures, then I would probably join the ranks of the skeptics.  But seeing a54.9% growth in electrical machinery, as exports of semi-conductors and electronics products to the US and China boomed, then we can have comfort that the growth was solid.  Recall as well that we have had 4 months of above 40% growth in exports.  First quarter  Meralco sales were 14.2% higher compared to the same period last year, and OFW remittances were 7.0% higher compared 2009-Q1.  Both these figures affirm that the GDP release was indeed credible.

With such a strong GDP growth, the question is how fearful should we be of global contagion.  According to a recent update from Morgan Stanley on the European sovereign Debt Crisis they wrote: ” From a credit perspective Asian financials are beneficiaries as the operating models are intact, capital/liquidity is on average strong, but the regulatory trend is nonetheless credit friendly.” The chart accompanying the statement showed that the Philippines had loan to deposit ratio of roughly around 60%.  The significance of this is unlike the Asian contagion which resulted into capital inflows and bank funding dried up in the Philippines, there is enough funding in the hands of domestic banks to provide the necessary finance to companies operating in the country.

From years of observing the market, I had always seen that it is the availability of cash that drives stock prices particularly when fundamentals support their value.  While I do not foresee an immediate rally in the making, I similarly do not see this market crashing the way it did two years back.  What I am expecting is for the range of 3050 to 3330 to work itself out until good or bad news develops.  So far, I think much of our fears are already in the price.  It is even important in the near term to have a visible view of how your favorite stocks trade.

It is probably best to be counter-intuitive in approaching prices, meaning avoid strong prices and seriously consider weak ones.  A good trader should not be chasing prices these days, and if prices of strong stocks drop, have the boldness to pick them up.  Watching enough of price movements should give an investor or trader a good feel of what is going on.  After all, just as I was totally entertained last saturday, a good show is always worth the money.

The Philippine economy expanded 7.3 percent in the first quarter.   In a Bloomberg survey of 15 economists the median forecast was for a 4.4 percent growth.  What this tells me is that economists can be totally out of the ball park even as they closely monitor their favorite indicators.  What the GDP growth rate affirms is that there is good reason for the Philippine stock market to perform better that the developed markets.  Ours is not so small an economy, although we are just half the size of that of Greece’s.  However, it is not so small that we need to be so dependent on other economies.  It is true that 40 percent of our economy is  export oriented, but almost half of those exports are shipped to our neighbors whose economies are even more robust that ourselves.

What this give us is confidence that in spite of the woes in the global markets, we need not be as battered as they are.  Personally, I am not that worried about the European situation simply because the sub-prime crisis of 2008 was much larger than this.  Spain and Ireland have not yet been threatened wioth default.  Banks and investors have just become preemptively cautious.  It is not the panic that we saw when the commercial paper and the global inter-bank markets dried up in September 2008 right after Lehman Borthers collapsed.  While I see reason for Eurpoean and U.S. financial institutions to be worried, I view it as an impetus for unpopular and tough measures to be take.  I am sure that the Germans will be very tough on Greece, and the rest of Eurpoe will take the hard-line on whatever financial support is being mustered.

9:30  Wednesday  26 May 2010 Philippine Stock Exchange Index  3115.34 (up 12 points at the open)

Bloodbaths have become common place over the last two weeks.  Ever since the big downward blip in New York which saw the DJIA drop a thousand points in one day.  Of course, it ended that infamous day with “only” a 348 point drop. What it has done, nevertheless,  is that it has set the mood for the market to question the long rally that had been going on from March 2009.  Of course the rally had its stumbling blocks when Dubai went into default and the first sign of the PIGS showed up in January this year.  Nevertheless, the market overcame those hurdles to take the DJIA to a high of 11,258 in late April.  Furthermore, as regulators investigate the “blip” on the 6th of May, people are realizing that it was not a blip after all;  it was more of a real sell-off which had recovered on its own.  Given the surrounding debt crisis which hovers around the markets today, I tend to believe that May 6 in New York was a major profit taking move by the behemoth portfolios trading in the dark pools of market liquidity.  These are enormous trade tickets that get executed in virtual private exchanges which eventually get mapped in the formal exchanges.

Anyway, what does this mean to us small boats floating in the ocean of global financial markets?  We will continue to rock.  The tide is ebbing lower as asset allocation towards equities are being parked in cash while the European debt crisis remains unresolved in investors minds.  I for one think that more drastic actions should be taken against the violators of the monetary union conditions.  Of course, we will likely drift towards a compromise acceptable to both weak and strong economies of Europe.  After all, as Alden W. Clausen, president of the World Bank who presided over the huge Latin American sovereign debt defaults of the 1980′s, said -” countries do not fail.”  I would add, certainly not a country with thousands of years of history such as Greece.

In the meantime, I expect that our market will be buffeted by the storm that is going on in the developed world.

Tuesday morning, it rained in many places around the National Capital Region.  After a long dry spell, that is a welcome relief.  It may also be ominous of what lies ahead.  Could it be that new life would be blown in by these rains?  I wouldn’t stake my life savings on it.  What I would be trying to recognize in a more vigilant manner are the basics that serve as sure foundations of the companies whose stocks I follow.  The rains, for one, should be beneficial for power companies who can now shift to hydro as soon as water levels of the dams rise.  While the technical picture for AP appears to have its trend reversed, I would wait for further confirmation of these technical indicators.  For that matter, MPI and DMC which are partners in Maynilad, should be getting some relief from fears that Maynilad would be threatened by prolonged water shortages.

MER, for one, went the opposite way of the market on announcement during its shareholders meeting that Manuel V. Pangilinan was appointed CEO.  This marks a new era for the power company whose revenue growth has been quite robust in the first four months of 2010.  I would keep a sharp eye on MER.

The Gokongwei companies have been doing very well and the share prices of JGS, RLC and URC have been very strong.  I think that they will remain strong although I foresee a trading range developing while the pall of sovereign debt in Europe hang over our market.

The markets in New York had tanked sharply in early trade this time due to a sabre rattling threat by North Korea.  The strong recovery towards the close indicates to me that traders are starting to cover their shorts.  It may be too early to call a reversal in sentiment, but all the blood may have been already spilled.

For our market, the key will always be value.  There are some stocks that continue to present excellent value.  To avoid criticism that I am promoting some stocks, I would leave the selection to the individual reader.  My call is that we could work our way up to 3200 level in the PSEi over the next few weeks.  It may take some time before bullishness flows again in our blood.  Perhaps, when we see more rains over the NCR, the relief from the long hot summer might liven our sentiments.

10:05 am  Tuesday 25 May 2010  Philippine Stock Exchange Index  3154.22 (down 37 points)

With all this volatility in the global markets, it is inevitable that the local market would absorb a lot of this volatility in spite of positive macroeconomic fundamentals locally.  Of the country’s total exports, 43.3% go to East Asian Countries and 16.8% go to the U.S.  That leaves less than 40% that goes to India, the Middle East,  Europe and the rest of the world, which really tells me that Europe will not have so huge a bearing on our economy.  While a good number of OFWs are Europe based, many are deployed in the health and home care service industries.

What is directly affecting our stock market is the sentiment in the U.S. which has become fearful of the prospect that more sovereign debt crises might still arise from Europe.  The thing about credit markets is that when something like Greece turn up, creditors start reviewing all their positions.  The result is a huge contraction of bank credit to all borrowers.  I think that is what is going on.  It is the same situation prior to when Lehman collapsed in 2008.  Banks were already contracting their balance sheets.  They are doing it again today, and that is why governments are taking the slack.  It is almost a repeat of the Paulson initiative in the last days of the Bush administration, the time when they put together the TARP to keep liquidity flowing into the commercial paper market so that companies can still access finance.

The developed markets are looking bearish.  The question in my mind is whether this is a full-blown trend or simply a correction of the major trend starting from March 2009.  Even if it is just a correction, it could take the major markets much lower dragging smaller markets like ours down.  What is in store for us is likely a market that would be ranging between the recent highs and the supports that we saw sometime in February this year.  Here are some of my thoughts.

MPI is trading at the lower ind of its trading range.  It could ease to 2.70, but that does not violate the range.  We can view it within the wider range of 2.65 to 3.25.  MER could be working its narrower range of 160 to 175 compared to the wide range of 150 to 188.  AP could retrace to 15.25 given the weak sentiment plus the compulsion of investors to bank-in profits.  AGI may be seeing a trading support at 5 while its prospects to trade at 6 remains alive.

DMC could theoretically trade at 12.75 and gather strong support there.  I am pretty biased for this stock because the stories behind DMC are quite convincing – Semirara, Calaca, Maynilad, and all the infrastructure and land development projects.

EDC has been slipping although a support is showing at 4.60.  Geothermal is even going to be a bigger story with all the environmental disasters going on.  FGEN looks to be strong at 10.50 although 10 may also be reachable.

I’m not trying to promote MBT, but 52 is a screaming buy for me.  I can’t ignore the earnings strength that financials are bound to develop and MBT is the significant player in this market.  Since I like the financial sector, PNB to my mind has strong support at 28.  Of course, UBP should not experience too much a tumble; should it break 40, i think 37 should be very strong.

This dip should give followers of the URC, RLC and JGS trio a chance to get in at cheap levels.  These stocks have been quite resilient and have remained firm because of strong company fundamentals which continue to look good.

Over-all, I would be bold enough to say that this is simply a serious consolidation that we are going through.  It always happens when you least expect it.  For investors who are getting jittery, I would recommend lightening up by selling some positions that are not too deep in loss because it would be good to be holding some cash.  I can still see this market going up 20% by year’s end.  Nobody said riding the market would be a smooth ride, but it is when we learn how to face situations as these that we can get to be seasoned investors.

by Gus Cosio

10:00am  Friday 21 May 2010  Philippine Stock Exchange Index 3162.68 (in panic mode)

The 376 point drop in the Dow Jones Industrial Average will definitely cause further panic in Asian markets and the Philippines will not be spared.  The global indices are in levels similar to when the first news of the Greek fiasco was revealed in January this year.  I believe it will be a continuing concern for the rest of 2010 and for early 2011.  Such a mess is not easy to clean up.  While the best way to solve this problem is to kick Greece out of the monetary union, it may not happen yet for some political reasons.  I believe, however, that hardliners in Germany will argue the point strongly because German taxpayers who are among the hardest working in Europe will be bearing most of the burden.  I, for one, would agree.  Why should one country’s productivity pay for the profligacy of another.  I do not want to argue the point further, I just wanted to voice out my conservative opinion.

In our market, I also feel that I am conservative.  I would not want to take unreasonable risk for the sake of impressing or shocking others.  My view of investment conservatism is founded on appreciating the appropriate fundamental information.  In as far as the value of stocks is concerned, the bottom line is earnings per share and the quality of its sustainability and possible growth.  Combined with historical and prospective return on equity and a stock’s net asset value.  all of these factors should tell us conservatively what a company’s stock is really worth.  The price in the market will be a function not only of its fundamental value, but also of the sentiment that the market attaches to it.

Given this point of view, is there really reason t panic if you are holding stocks with sound fundamentals?  Each trader will have a different answer, so i will not even offer mine.

Anyway, I think a few stocks may be worth the picking in this downturn, perhaps today or maybe sometime next week.  MBT below 55 should be an excellent buy.  DMC at 14 or below should have a good pay-off before 2010 is over.  This downturn should also be a good opportunity to buy AP and AEV on the cheap.   RLC and URC were attractive at last week’s prices; they should be more attractive if they decline by at least 5%.  FGEN and FPH also at 5% below yesterday’s close present compelling value.  For a stock like PNB, nothing fundamental has changed.

Overnight, I read a feature on an ongoing hedge fund conference in San Francisco, CA.  The consensus was most hedge funds were overweight in liquid assets.  By liquid assets, they were referring to the more liquid S&P 500 stocks.  This is probably why there is a sell-off in the DJIA which represents the largest of the S&P stock roster.  Some of the hedge fund speakers were also saying that if everybody was overweight in liquid assets, illiquid assets may be very cheap.

From a global perspective, the Philippine market is one categorized as illiquid.  Keeping in mind that the money flow is going in the direction of Emerging Asia, is it a long shot to bet that funds would be coming our way? We just have to hold our breath.