First Metro Asset Management Inc

SELL IN MAY AND GO AWAY? BUT IT’S JUNE ALREADY!

6:00pm   Monday  June 8, 2009   PSEi 2517.73    PHP/$ 47.64

I hope Philippine stock prices are finally looking for a correction.  The neighborhood seems to be going that way.  Hong Kong is down 2.26%, Singapore down 2.95%, Jakarta down 1.07%, Thailand down0.48% and Malaysia down 0.25%. Do you sense a sigh of relief in my tone?  Frankly, I would be more relieved is we saw a decline greater that the 10.95 points (-0.43%)  we had in the PSE index today.

I observe some stocks hitting the ceiling the way they did last week.  AC can’t seem to surge way past 300 and BPI continues to attempt breaking past 46 but to no avail.  TEL, on the other hand, looks like it’s trying to overcome its laggard performance when everybody else was rallying the past few weeks.  Actually, while the market was not extremely weak today, we can see signs that prices are already having a tough time breaking through their recent highs.  Lopez stocks (EDC, FPH, FGEN, BPC) which had been very strong recently are starting to lose steam.  This is a tell tale sign that we may be moving to a real period of consolidation.  Nothing wrong with that.

What is apparent to me now is that the prices that we had seen in the the first quarter of this year was unsustainable or too low.  In other words, those ridiculously low prices were in fact irrationally cheap levels with dividend yields relatively high and price to book ratios were extremely low.  The risk of entering the market at that time had become had practically vanished.

Today, we have to start questioning that risk again.  We have to start thinking whether today’s prices reflect reasonable risk-reward conditions.  We can extrapolate the numbers to help us gauge this, and it is necessary that we do.  We should begin poring into company disclosures and research reports to establish whether 2009 earnings will in fact be decent with respect to current prices.  We should also establish whether our economy will accommodate robust business conditions and for what companies.

My call is that we will likely see favorable earnings in the quarters ahead simply because all these listed companies knew the score about the global economic slowdown and have had ample time to adjust their operations.  Likewise, 1Q09 earnings disclosures of most companies were fairly acceptable.

The question now is how long will this consolidation be.  There is a market adage that goes, “sell in May and go away.” That saying was actually a convenient rule to follow because in most markets, summer vacation began in June.  What portfolio manager did not want to enjoy a long vacation without worrying about his or her portfolio.  Anyway, it is the second week of June already and it does not seem to be too late to sell.  But as with any vacation, we’ll have to come back after we’ve had our relaxation and continue to work the salt mines.  The thing about taking a rest is it makes us stronger for our tasks when we get back.  Now, wouldn’t we want that of the market?

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First Metro Asset Management Inc