First Metro Asset Management Inc

ECONOMICS AND POLITICS

7:00pm    26 February 2010    Philippine Stock Exchange Index   3043.75  (+0.412%)

Since we are coming to a weekend, we have time to look at the macro economic outlook in the Philippines.  If you recall from the price action of last year’s rally, when investor had a conviction that the global economy was recovering, they took the entire market higher.  It was on the third week of March 2009.  We can scan the landscape and examine existing macro fundamentals.

The overall outlook for the Philippine economy for the remaining months of the first semester is moderately positive as we expect the following:

Gross Domestic Product (GDP) growth for Q1 is likely to be below 3%, considering a 2-3% decline in agricultural output due to El Nino, and strong peso that will limit the stimulative effect of OFW remittances. Growth may only be slightly faster in Q2 due to heightened election spending.  December 2009 exports showed a second consecutive month of growth (y-o-y) of 23.6%.  Exports amounted to $3.30B, a billion higher than the $2.68 B of the same month in 2008. This resulted to a year-to-date level of  $38.3 B, 21.9% lower than $49.1 B a year ago.  Because the increasing East Asian markets are growing fast, the outlook for exports will keep growth in the positive territory.

Inflation will remain range-bound between 4.0% to 4.6% in the coming months despite the recovery in crude oil and metallic mineral prices, because of weak domestic aggregate demand.  Recent inflation figures showed that inflation rate eased in January 2010 at 4.3% (y-o-y) slightly lower than the 4.4% posted in December.  The food index was down from 5.2% (y-o-y) to 4.3% in January.  Crude oil was also stable between $70 to $80 during the period creating very little pressure on other commodities.

The National Government’s deficit will track more closely the targets for H1 considering improved tax revenues in the first two months of the year  due mainly to the relatively faster pace of GDP growth compared to last year’s average of 0.9%.  The December figures gives some light on the emerging deficit for 2010.  Tax revenues went up by 15.2%, the first positive growth since June 2009 and the first in double-digits in 14 months.  The Bureau of Customs (BOC) managed only a fairly flat 0.4% growth in collections because imports are not yet that strong.  The Bureau of Internal Revenue (BIR), on the other hand, posted exceptional increase of 19.9%.  What is encouraging are the initial reports from the two agencies which point to above-target performances in January 2010.

Overseas Filipino Workers (OFW) dollar remittances have been kept a double-digit growth pace in the last two months of the year.  The higher clip of remittances than last year and increased corporate savings, total liquidity of the financial system will remain robust.  When matched against weak demand for money, especially, with the National Government financing most of its deficit from foreign capital markets, interest rates are likely to drift downward in H1.  This assumes an unchanged monetary policy.  With the economic recovery remaining tepid, the BSP has enough leeway to even ease policy rates further.

The Balance of Payments.  While exports will post above 20% (yo-y) growth record, imports (which has a higher base) will move in tandem.  Given higher crude oil prices and larger rice imports compared to 2009, the trade balance will see a slightly wider deficit.  Fortunately, a sufficient amount for targeted foreign exchange reserves accumulation would still be available from the rise in OFW remittances.   The US dollar should continue its recovery with European markets being suppressed by Greece and the weaker Mediterranean countries and Ireland.  With interest rates lower in H1, the peso should be biased weaker and volatility of the peso might be more pronounced in the middle months of the year compared to the first two months of 2010.

This is the backdrop of my outlook on the Philippine market as of this month.  Notice that the important economic factors are growth, inflation, fiscal position of the national government and the balance of payments.  Interest rates and foreign exchange rates will move in response to the former indicators.

Right now, the economic outlook does not look ba at all.  It is actually the political picture that provides greater uncertainty.  The consensus among market professionals is that our market will be constrained by the forthcoming elections in May.

LOOKING BEYOND

11:30 am   Monday    22 February 2010     Philippine Stock Exchange Index     3000.54  (mid-seesion up 22 points or +0.74%)

Overall, It looks like the markets have taken the hike in the U.S. discount rate positively.  The message that is being received is precisely what the U.S. FED wanted to communicate, and that is that the economy is beginning to normalize.  Since the discount window is an emergency channel for banks in trouble, the general idea is that the banking system as a whole is out of the woods and is no longer in need of emergency assistance.  Read more

FED UP?

10:10 am  Friday   19 February 2010   Philippine Stock Exchange Index 2983.04 (mid session trading)

Wall Street and the rest of the developed markets were up overnight. Three minutes after the markets had closed, the Federal Reserve Bank took away the punch bowl by raising the discount rate to 0.75%.  The market was expecting the hike, but not until the FED would have met on March.  The fact that the FED chose to act earlier appears to be a signal that there is urgency in the move.  The significance of this move is the end of the decline in policy rates and possibly the beginnings of an upward trend in interest rates.

Initial reactions to the hike were:  1. The S&P 500 Financial Select Sector SPDR fund, an exchange- traded fund that tracks financial stocks fell 0.9% in after-hours trade, erasing its gain from the regular session.  Shares of Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. each retreated more than 1 percent.  2. The MSCI Asia Pacific Index lost 0.5 percent as of 9:43 a.m. in Tokyo, and  futures on the Standard & Poor’s 500 Index expiring in March lost 0.8 percent.

I would say these are knee jerk reactions because businesses start to get worried that cost of borrowing would rise.  In two year U.S. treasuries, the yield went up by 2.5 basis points to 0.952.  I would say absolute levels of borrowings are still pretty low and the U.S. dollar yield curve had been very steep over the last  year and a half that what would really matter is not nominal interest rates but the spread that companies pay for long-term borrowings.  That does not look to be drastically threatened by the FED’s move.  If at all, I think it signals investors that monetary authorities will not relent on their responsibility in mitigating any inflation down the road.

The local market opened 13 points lower, roughly 0.4% down.  As of this writing, the index declined another 5 points so we are now down around 0.6%.  The question that will start to bug people is that whether this will be the start of a reversal of the up-trend that we had seen to have started in march 2009.  While it is too soon to really tell, I tend to think that the trend is not yet over.  What we may see now is a deeper correction, but if the global economy is improving, earnings is bound to follow.  Why then should stock prices decline precipitously.  I think that it is even good that the U.S. has raised its rates because it should make the U.S. currency stronger which is positive for the Philippine economy.  Remember, our GDP consists 40% exports and OFW remittances fuels 70% of consumption spending.

I think the fundamentals for local equities remain intact. I think the local banks are not as vulnerable to this move as their counterparts in the U.S. as bank liquid assets have been persistently high.  If at all, they will probably see wider net interest margins in their FCDU book.  I would look for opportunities to buy local banking stocks MBT, BPI, UBP, SECB, CHIB and PNB.  For a stock like TEL which has a huge U.S. dollar cash flow, I think that things can only go better with a higher dollar.  The same possibly holds true for GLO.  A quick positive move was seen in the price of TUNA which moved higher because most of its sales go to exports.

Anyway, it is again a time for a long hard look at portfolios because this move should give us a chance to buy strong stocks at a bargain.  I am referring to the likes of AP, URC and RLC which have been unrelenting in their price appreciation.  I believe that there would be a lot of room for these stock to go.

WHAT ARE PIGS?

8;30pm   Wednesday   17 November  2010   Philippine Stock Exchange Index   3018.67 (+1.71%)

It is really no wonder that the market is up today.  Encouragement always come from Wall Street, although there are quite a bit of fundamentals that are helping us out.  For one, there is a lot of cash in local investors hands that cannot find a decent yield.  A lot of wealthy people are getting restless looking for places where they can squeeze some yields.  The government deficit which is considered the current drag on the domestic financial markets is not really that bad specially if you framework it in the backdrop of Portugal, Ireland, Greece, and Spain.  All these countries have budget deficits way above the European Monetary Union (EMU) agreement of 3% of GDP.  These four countries have deficits at double digits while the Philippines is only 3.4% of GDP.  We are more qualified to be in the EMU than these four countries which now carry the acronym PIGS.

If you ask my investment advise, I would recommend the domestic market over the PIGS at this point in time.  Most of you probably realize that credit spreads for Philippine sovereign bonds hardly moved after Greece’s credit crisis.  Something like that never happened in my life in the financial markets.  The world truly has changed.

I quite like the way our market behaved today with fundamentally strong stocks leading the way.  Except for BEL which had total crosses amounting to around 300 million pesos, the most active list was dominated by the like os TEL, GLO, FPH, AC, MBT, EDC, MBT, ALI, SM, AGI, URC and MPI.  All these stocks have good underlying earnings.  Some may be expensive valuations wise, but they have solid fundamentals behind them.  While we face potential profit taking because we have had six days of price increases, the short-term trend still looks good and I base my opinion on the price ranges of stocks like TEl and MBT.  I think TEL will rise to above 2600 probably to 2660 and MBT will likely go to at least 47.  AC could return to 300 while MPI could go up to 2.90 and MEG to 1.40.

Small cap stocks like TUNA and PIP looked poised to do return to their stronger price levels before the end of 2009 and some smaller cap stocks look to be in play.  I am not encouraging speculation on small caps with no fundamental earnings, but stocks like CYBR looks like it is being accumulated by their core investors.  I think that at this point, a lot of people are willing to play the game and will continue to fuel buying.  I would caution, however, about being to bullish because we still have the uncertainty of elections three months down the road.  To sum it up, I would suggest that if you want to make some money, you can trade the blue chips until they approach the highs of their recent trading ranges.  I think there will be a second chance to get them back within the next two months should you choose to take profits.

The vulnerability of our market will be from external market sentiment and our national elections.  I think these factors are what we should make our stock plays on.  Incidentally, we have been seeing steady foreign buying over the last two weeks.

SOUNDS GREEK TO ME!

12:30 pm   Monday   15 February 2010  Philippine stock Exchange Index    2963.24  (+0.46%)

In the dynamics of any market, there are periods when prices do not move in a directional trend.  Normally, stock prices move up because there are very strong reasons to increase investors holdings of stocks.  When the broad economy is healthy, the business environment becomes robust and companies expect to make good profits and return this to investors by way of dividends or higher values of assets.  Of course, when there is a threat to the smooth running of the economy or it becomes clear that the economy is contracting, the opposite happens.  Business uncertainty always drives investors into conservatism.

In trending markets, i.e. rising or falling prices, we come to periods when asset prices have gone beyond investors expectations or returns have become to good to pass up.  This is when consolidation sets in and it is normally when trading ranges occur.  In the case of the Philippine stock market, we saw a 63 % return for the index in 2009;  it is but natural for investors to try to consolidate these gains by taking back cash into their positions which means selling into further strength.  Remember that among experienced investors or traders, no one is so cock-eyed to believe that markets are like a balloon which floats up in the air and never comes down.

Presently, there are factors which are causing investors to protect their portfolios.  A few weeks back, the U.S. heard their president say that he would force banks to get rid of their risky positions taking the U.S. market into a tailspin.  This was followed by the anxiety on Greece’s debt situation, once again raising levels of anxiety in the market.    Last Friday in China, the people’s Bank of China raised reserve requirements for the second time in a month responding to loan growth which continues to accelerate and causing property prices to surge once more.  While the short-term effect is to see markets respond negatively, its longer term effect is to avert asset bubbles and restrain inflation particularly since the China economy grew 10.7 percent in the fourth quarter from a year earlier, the fastest pace in two years.

In contrast, the Euro Area declined a seasonally adjusted 2.1 percent in the fourth quarter, and  for the full year, the economy contracted 4 percent.  Industrial production in the region fell 1.7 percent in December, the most in 10 months.  Meanwhile, in the U.S., retail sales rose in January, but a separate consumer-sentiment index fell in February, indicating mixed signals coming from the economy. Stripping out autos, gasoline and building – core retail sales rebounded by 0.8% after declining by 0.3% in December.  Core retail sales are up 5.3% over the last three months at an annualized rate, an indication of robust growth in household consumption.   This reflects a healthier picture compared to the headline data.

The difficult thing about markets is that they are always fickle.  Markets will react in the most whimsical way, but, in my opinion, the bottom line is always dependent on the cash positions of both individual and institutional investor.  Over the last two months, I reckon that many portfolios had become fully weighted in their equity positions.  Having little in their cash balance, they become edgy causing them to sell on early indications that markets could fall.  This is what leads me to think that markets would trade in a range over the next few weeks, and the range will continue for as long as investors are not yet comfortable with their cash balances.  When they have enough cash to again put at risk again, then the rally continues.

In the meantime, it would be interesting to see what happens to Greece and the rest of Europe, after all, most of Asia will be closed these two days because of Chinese New Year.  It would also be useful to check your portfolios for stocks that have become expensive compared to their cheapest levels in 2009.

WHAT’S GOIN’ ON?

2:10pm   Thursday   11 February 2010  Philippine Stock Exchange Index   2908.88 ( +1.81%)

As I was on my way to work this morning, an old Motown tune was playing in my mind.  For those of you who still remember the late Marvin Gaye, he recorded a hit in the early seventies entitled “What’s goin’ on?” – a song lamenting the social problems arising from the Vietnam War.  That was almost a lifetime ago, but what grabbed me was the term itself – What’s goin’ on?

When I was working my trading desk in Hong Kong 25 years ago (yes, I am Jurassic), my boss sitting in Tokyo would call in the middle of the day to ask “What’s goin’ on?”  As a securities dealer, I had to have the answers.  I had to be able to say what my roster of investors were doing and what kind of feedback they were giving me – whether they liked the market or not, whether there was an issue they were looking to buy or sell, whether they were waiting for good timing to come in or whether they are just looking to sell and duck in the trenches.

In essence, what is important in the market is not so much what the demagogues are saying.  I remember what the legendary portfolio manager, Peter Lynch had said: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” What really matters is what people are doing with their money.  Let us have a look.

After selling positions in the market from 15 January in reaction to Obama’s plan to restrict U.S. banks and further selling on 1 February when the Greece credit crisis blew wide open, selling only stopped on 10 February when Germany indicated that they will help in a rescue initiative.  Philippine investors were right on the heels of this development paring down positions.  With two days of gains in stock prices and over 100 points recovery of the index, I can only observe that investors have started buying back positions that they had dumped earlier.

On a per stock basis, it is obvious that people sold TEL from 2775 level to 2500 where buying emerged.  Punters took profits when TEL rose to 2555 yesterday, but at 2520, buyers have come back.  If you ask me, those buying today are strong fundamental buyers who are willing to put out cash for value – a headline stock that is trading at 12.4 X trailing earnings, offering dividend yield of  8.21%, and showing a return on equity of 32%.  Am I seeing it correctly?

When AC got sold down to its 6 month low of 260, Ayala themselves started to buy their own shares in the market.  It as never been a cheap stock, but if they are willing to put cash into it, that is telling something about AC’s value.

SM had not been much of an exciting stock, but in the latest downturn, this stock was holding its own.  Today, as yesterday, it gained quite creditably with even rising volume indicating more cash being put to work at SM.  With MPI, we saw a lot of investor nervousness, but in the last 3 trading days, anxiety looks to have developed into a lot of confidence.  MPI was among the highest value turnover in the last 4 trading days with the price recovering strongly.  The strong banks – MBT and BPI – are seeing the same reversal of sentiment although a great deal of the cash can be measured as going into MBT.  PNB is also seeing increasing value turnover with a modest recovery in price.

So what’s goin’ on?  Well, what it looks like is after a healthy profit taking bout resulting from anxieties over international events, investors are getting their heads together and tucking away stocks of value.  I think form here on in, investors will try to buy the dips, after all the local business environment together with the rest of Asia is in much better shape than the west.

HOME ON THE RANGE

6:15 pm  Tuesday   2 February  2010    Philippine Stock Exchange Index    2864.18  (-0.66)

Investors are probably perplexed today after seeing Wall Street stage a rally overnight yet seeing the PSEi going down.  It is even more discouraging that the local market opened higher only to invite further selling.  There’s been a number of issues that have gone through nearby support levels – AC, TEL, MEG, MER, FLI and PIP, to name a few.  Read more

First Metro Asset Management Inc