First Metro Asset Management Inc

THE OTHER G by Gus Cosio

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.

MONEY TALKS – June 11, 2010

Invitation (Money Talks) 06-11-2010

For inquiries and reservations, kindly contact Madz, Joy, Belle, Sally or Francis!


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.


9:00pm Thursday  20 May 2010  Philippine Stock Exchange Index 3222.19 (-1.32%)

I would like to put some perspective on the local market moves.  we have been buffeted by events which have all been external in nature.   Just recall the relief rally that the market saw last week after we had a very convincing elections which for the first time had been automated.  We were encouraged by the swiftness of the results.  What impressed me more was the early conceding of Manny Villar who was a very strong contender in the last polls.  The act was further supported by the rest of the losing candidates likewise conceding.  Only Erap, who probably has very little comprehension of the science of statistics and information technology, has not conceded.

If the European sovereign debt scare were not around, we would probably be seeing a stronger market.  Unfortunately, the greater majority of investors have very little understanding of the situation in Greece and would rather take profits rather than risk losing.  I have no argument with that.  Last week, we saw a single day low in the DJIA which sent the index to a 996 points intra-day drop.  At first, it was thought that it was a computer glitch; but when the dust had settled, authorities realized that there was really some massive selling in what is known to be the dark pools of liquidity.  These are private trading platforms in developed markets where very large trades go through and eventually mapped in the formal exchanges after the trade.  I think the selling was sparked by fears coming from the debt crisis in Greece.

In a post-election forum on Tuesday, economist Dr. Bernardo Villegas said the debt problem in Portugal, Ireland, Italy, Greece and Spain could spill over and cause another recession in the United States and Europe and, should it occur, will cause a slump in Philippine exports.  “Things are looking rosy in 2010, that’s why exports rose by more than 40% in the first semester. But I’m warning the new government next year may not look as rosy,” Dr. Bernardo said.

There may be some difficulties ahead in global trade, but there are also positive signs that these stumbling blocks to growth are being mitigated.  Yesterday, Applied Materials (AMAT) of the U.S. reported results that exceeded analysts expectations.  I think this is very significant especially to a semi-conductor manufacturing country like the Philippines. AMAT is the largest supplier of manufacturing systems and related services to the global semiconductor industry.  It is a grandfather company to the electronics market, therefore, its strong recovery presages a strong recovery in the global electronics market.  That will be good for Philippine exports and will fuel some consumer spending in the country.

So there is a growing opinion that Europe may affect the real economy because of our level of exports.  While I think our exporters should be cautious, other indicators do not fully support this particular expectation.  As a market practitioner, I think that it is merely the relative value of assets between Europe and Asia that investors will be pricing in to their portfolios.  It may move the general level of  local asset prices, particularly stocks, but not to the same degree that it will affect Europe because over the past few months, the strategic moves of global portfolios is to raise their level of exposure to Asia.  We had seen that strategy recommendation from every investment banker that had come to Manila since the end of 2009.

At the end of the day, it will be the sound fundamental conditions of individual companies that should lend support for the markets.  With corporate earnings mostly showing positive growth, our market will likely revert to its normal course over the next few days.  We were disrupted by election anxieties and the possibility of another global contagion coming from Europe.  The election discomfort is already playing itself out.  All these calls of massive automated cheating is being discredited simply because the evidence bears out the contrary.

If we focus on earnings of local companies, we really have lots of reasons to rejoice.  For example, DMC disclosed net income rise of 82% in 1Q10 to Php 1.4 billion due to dramatic increases in its construction business and power and energy businesses.  Net income at SCC which DMC owns a majority of was up 99% to Php 594 million which now owns Calaca Power.  Both DMC and SCC are trading at single digit PEs.

One reader sent me information on GMA7/GMAP GMA7 1 Q10 results.  Net income is up 71% YOY to Php 855M showing an ROE of 29%.  That should perk up the stock price although I would be slightly careful as network competition may erode market share.  Anyway, GMA7/GMAP may see a bounce when the market perks up.

I guess the question remains whether or not the rally that we have been seeing has finally run its course.  I cannot say definitely if it is intact or over.  All I know is that money or excess liquidity is the fuel for asset prices and financial assets are the most elastic of all asset classes.  One thing for sure is that in the face of another recession, the major central banks will not pull out money from the system.  Certainly, they will not squeeze the rest of the world all because of Greece.  What Europe will do is they will strap Greece with stringent austerity measures if they want to save the Euro as a common currency.  Otherwise, they will have to kick Greece out of the monetary union which is probably the better thing to do.  Furthermore, inflation has been very tame.  Headline CPI in the U.S. was reported at -0.1% down month-on-month for April. Core U.S. inflation as measured by CPI rose only 0.9% year-on-year.  what this means is that there is no threat that the Federal Reserve Bank will pull back monetary growth.

All told, I think what we are seeing is a classic case of fear overtaking the greed behind the most recent rally.  remember that our market had gone up one the whole by 9% at its peak last week.  At today’s close, we are barely 6% from the beginning of 2010, a 33% consolidation.  Will our economy tank in the next 6 months such that stock prices should also spiral downwards?  That is what is causing the fear.  I do not want to second guess the economy; what I would like to do is choose companies that would do well even if the economy slows down again because I am still of the opinion that equities as an asset class is where returns can be significant.


10:15 am Tuesday 18 May 2010   Philippine Stock Exchange Index 3266.20 down 27 pts

With the global markets becoming more volatile, it is very probable that the same instability in the markets could come to local stocks. Just to put things straight, the troubles in the global financial markets are not arising from companies going bad but from sovereign states losing control over their finances. Read more


5:00pm  Friday  14 May 2010  Philippine Stock Exchange Index   330.42 (+0.08)

We had a shortened trading week due to election on Monday, May 10.  We also had a good week because of the same elections.  All the conspiracy theories about failure of elections and troubles that would accompany the failure turned out to be nothing more than a theory.  The wisdom of the market place would have been a better gauge of the election outcome rather than all these fears and anxieties of those who were even far removed from the market.  I always believed that those who are willing to risk money for their views have a better handle of the things to come. Read more



8:00 am  Thursday  13 May 2010   Philippine Stock Exchange Index   3269.48 (+0.2%)

If anyone is in doubt about our stock market, you’d better think again.  When GMA won the election in 2004, the stock market rallied 27%  in the 12 months following.  When Erap won in 1998, despite being in the middle of the Asian crisis, the market still rallied 20% in the succeeding 12 months.  I remember the mid-term election in 1995, we had an unstoppable market.  We saw the same thing in 2007, in spite of the fact that the U.S. market had already started to wobble with the cracks starting to show in the mortgage markets.

There is always optimism that accompanies an election exercise not only because of fresh hopes of remedies to existing problems, but there is always a premium that investors, whether local or foreign, attach to political stability.  With Aquino getting a very clear mandate, there is very little doubt that people will rally behind the program of government that he intends to pursue.  He may even have an easier time carrying them out particularly in the first year because both business and the various interest groups in the country will give him a chance – a honeymoon period, so to speak.

Yesterday, the market was not as strong as the trading day immediately after elections.  Even during the strength of the market last Tuesday, we saw some profit taking by those who made a bet on the success of elections, a risky proposition that paid off.  Why did the market not follow through with the rally yesterday?  Well, it is business as usual.  with the elections over, the market is looking for new drivers.

Overnight, we saw a strong move in the U.S. markets led by technology stocks.  The thing about tech stocks is that they are a definite harbinger of the underlying demand in the real economy, not only in the U.S., but globally as well.  I do not want to harp so much on Europe anymore because Greece is a dead horse that i no longer want to beat. Even China where people have been predicting a housing bubble for the last 12 months has become quite tedious to matter for the time being.  The thing is to notice that markets which are far removed from the various domestic or regional troubles try to carry their intrinsic strength.  Look at Indonesia where investors have been focusing on the stability of both political and economic scene in spite of stormy conditions of markets elsewhere.

What I am saying is that investors ought to focus on what is good about our market, not because we would like to be naive of underlying realities, but because that is what investors will be looking for.  Remember, it will all be a bout money flow; and in a smallish market such as ours, if an additional U.S.$ 500 million comes into our market over the next 6 months, that is enough bring the market up by at least 15%.  In my case, I choose to be fully invested right now and my choice of sector in the next six months would be the financials and those stocks with infrastructure plays.  while we have had good moves already with banks, I think with the exception of BPI and BDO, the banks remain cheap.  These are MBT (my current favorite), SECB, UBP, PNB (still a favored stock), and the newly chosen index stock CHIB.  I am even looking to consider RCB which has been showing signs of resiliency already.  Banks have been a good proxy for the economy in the Philippine equity market and I see the economy gaining further strength as the year wears on.

The 43% growth in Philippine exports in the backdrop of a strong U.S. technology market is a confirmatory indicator since more than half of our exports are technology and electronic products.  Furthermore, with the U.S. economy gaining more traction, I believe we will see further growth in remittances which should provide more money which the local economy can put to investment use.

There will be a lot of good plays in market in the months to come.  I would really urge everyone to increase asset allocation to the equities market.  I had a meeting with some lawyers last Tuesday and before we started the meeting, I had to share my thoughts with them that if one does not have equities exposure over this following 12 months, you will be losing a great opportunity to make money.  That is why I am convincing all my friends, relatives and even my kids to buy mutual funds with equity market exposure, if they do not have the wherewithal  buy stocks directly.  I feel that I am doing them a disservice if I do not try to convince them at all.

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First Metro Asset Management Inc