First Metro Asset Management Inc

WHICH WAY IS NORTH?

4:00pm  Tuesday   14 July 2009    Philippine Stock Exchange Index    2492.3 (-0.36%)

How would you describe the sentiment in the market when people buy it up strongly at the open, sell it down strongly in mid-session bringing it back to yesterday’s levels, and then buy it up again to close around 9 points above yesterday’s close.  Among headline stocks, TEL, BPI, FPH, and ALI were the strongest.  MBT and AC were in there very strong at the open but both invited profit taking at mid-session.

What this tells me is, the market still lacks conviction.  The guys who own stocks at much lower levels want to bank their gains.  Who can blame them?  But with a lot of these guys looking to pocket some profits, unless we see a fresh wave of cash pouring in, this market will be trapped in the current range.  Nothing wrong with that.

The main thing is that this market is behaving very normally.  There is no excessive fear hovering around the minds of investors and no one is really being too greedy.  There is enthusiasm side by side with skepticism.  There is prudent risk taking while others are cautiously treading.  It’s a perfect market situation where the theorists would say that all the information is already in the price.

Let us examine then which information have already been digested.  The first one that comes to mind is that the global economy will not slip into depression.  I think everyone is convinced of that already so we can be assured that any decline in the market will have a bottom.  The next bit is that while the western economies are still in recession, the present situation is not as severe as it was in the first quarter of 2009.  Another widely accepted view is that the U.S. will probably come out of recession at the end of the 3rd quarter.  Other known facts are that China continues to grow and so do the emerging markets.  Locally, the fiscal deficit will be manageable and will be comfortably financed through a combination of domestic and international bond issuance.  These are already built into today’s stock prices.

What are not?  Well, there is the 2nd quarter earnings reports which may either surprise or disappoint and there are a lot of these coming in the next few weeks.  There is also the rising cash levels building up in everyone’s deposit accounts.  In essence, dividend yields are still sufficiently high to compete with fixed income returns.  An imaginative stock analyst can find a bit more reasons such as a sustained growth of OFW remittances and the stimulative effects of the current budget deficit.

Bottom line, it looks to me that stocks are at least sitting at fair value levels.  The market could go either way, but I cant help but follow the money.  There is a  flush of cash running around the system and the economy continues to create it through the savings rate.  Many of us can’t see it, but, believe me, it is there.  That is the reason to keep vigilant.  I would still like the market to decline in the hope that some of the hot cash gets scared off because in the long run, I believe the direction is still north.

Bon Chance!

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First Metro Asset Management Inc