9am  Tuesday 18 August 2009  Philippine stock Exchange Index  2771.18 ( Monday close down 2.77%)

Yesterday, we saw the biggest decline in prices since this rally started.  There were ten stocks down for every stock that gained.  The was a real blood bath, and some players would probably be running scared.  The sell off was triggered by overseas sentiment.  The Shanghai Composite took it in the chin with the index down 5.79%.  That hurts.  The Hang Seng took a similar hard blow as the index gave up 3.76%, and Singapore’s STI had been beaten down 3.25%.  To say that this was a red letter day in the region would be a mere description rather than a hyperbole.

The way I see it, people are simply selling on news after they had bought the expectation.  If you recall, last Thursday, the U.S. Fed had declared that the recession ended in June – that’s the news that people had been expecting all along.  Japan also declared itself out of recession but at a very weak pace.  The question before us today is what are we looking to expect in the next round.

Recall that we thought this rally to be liquidity driven and the money growth indicators all over the world will bear that out.  The fear that is now starting to grip the market is the thought that the central banks will simultaneously take back all this liquidity.  Just as there was a rush to the entrance when this rally caught steam, we are now seeing an initial rush to the exit.  There is a difference, however.  The earlier constructive move was a qualitative call on the markets.  The move that we are seeing, in my opinion, is a fine tuning of people’s view.

The broad global money numbers are not seeing signs of contracting and the liquidity is still out there.  What people are doing is re-allocating assets.  If you notice, even the liquidity driven demand for commodities have started to stall as well with the decline of crude oil futures from the mid-70s level to where they are now.  In the Philippine market, I am not surprised that the index is down because there is a huge amount of profits to take in head line stocks like AC, ALI, GLO, MWC, GMAP, RLC and MBT to name a few.  I could go on but I will run out of space.

In my view, even if we drop by another 10%, it will simply be a healthy consolidation because this bull run took us up 40%; and we all know that markets and skyrockets do not follow the same slope.  There would be good levels where fund managers will return.  I recall that a good number of institutions were looking at the index to move up to above 3000 next year due to earnings recovery.  We have seen company earnings for 2Q09, and a good number have shown improved recurring business results.  The long view has not yet changed.  It is only the dynamics of a strong market that is at work. The dust will eventually settle and we will have a better view of what lies ahead.


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