First Metro Asset Management Inc

A GOOD SHOW IS WORTH WATCHING by Gus Cosio

6:00pm  Tuesday  1 June 2010  Philippine Stock Exchange Index  –  3266.62  (-0.19%)

Over the weekend, I watched the final show of my good friends, The APO Hiking Society. They had decided among themselves that after 40 years of performing together, it was a good time to go while they were still high in their popularity.  This was not the first time they had planned to call it quits, and I was around the few times they had planned a farewell concert and made a performance of it.  This time around, I was sure it was the last show, and the guys had given the show all they had in order to leave their adoring audience a memorable curtain call for the performances forty years.  I had been their friend all these years, and I knew that they really meant it.

The stock market just like show business can be just as fickle.  Stocks have to play to an audience and attract their attention.  Stock prices can reflect their true value, but they can be over or under valued from time to time.

The Philippine market has been rallying for over a year now.  In fact, in comparison to the developed markets, the local market has been performing better year-to-date.  Nevertheless, investors have been quite wary on account of the sovereign debt crisis in Europe.  The fear stems from the possibility of contagion similar to what happened in 2008, a debacle from which many are still hurting.

The question bothering a number of investors is where is this market going.  We saw exceptional GDP numbers last week.  As investment professionals, it is something that we cannot ignore.  The 7.3% growth rate were met with doubt by a lot of skeptics.  If these figures are not verifiable against other measures, then I would probably join the ranks of the skeptics.  But seeing a54.9% growth in electrical machinery, as exports of semi-conductors and electronics products to the US and China boomed, then we can have comfort that the growth was solid.  Recall as well that we have had 4 months of above 40% growth in exports.  First quarter  Meralco sales were 14.2% higher compared to the same period last year, and OFW remittances were 7.0% higher compared 2009-Q1.  Both these figures affirm that the GDP release was indeed credible.

With such a strong GDP growth, the question is how fearful should we be of global contagion.  According to a recent update from Morgan Stanley on the European sovereign Debt Crisis they wrote: ” From a credit perspective Asian financials are beneficiaries as the operating models are intact, capital/liquidity is on average strong, but the regulatory trend is nonetheless credit friendly.” The chart accompanying the statement showed that the Philippines had loan to deposit ratio of roughly around 60%.  The significance of this is unlike the Asian contagion which resulted into capital inflows and bank funding dried up in the Philippines, there is enough funding in the hands of domestic banks to provide the necessary finance to companies operating in the country.

From years of observing the market, I had always seen that it is the availability of cash that drives stock prices particularly when fundamentals support their value.  While I do not foresee an immediate rally in the making, I similarly do not see this market crashing the way it did two years back.  What I am expecting is for the range of 3050 to 3330 to work itself out until good or bad news develops.  So far, I think much of our fears are already in the price.  It is even important in the near term to have a visible view of how your favorite stocks trade.

It is probably best to be counter-intuitive in approaching prices, meaning avoid strong prices and seriously consider weak ones.  A good trader should not be chasing prices these days, and if prices of strong stocks drop, have the boldness to pick them up.  Watching enough of price movements should give an investor or trader a good feel of what is going on.  After all, just as I was totally entertained last saturday, a good show is always worth the money.

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First Metro Asset Management Inc