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8:31 am  Monday  12 September 2011

In Philippine stocks, we probably need to be very defensive at the beginning of this week.

I got this quote from an article on CNBC online headlined: France Says Euro Survival Crucial; Wants Stronger Yuan

“Stock markets tumbled on Friday on news of the resignation of a German executive board member from the European Central Bank. And on Saturday, a sister party of German Chancellor Angela Merkel’s conservatives said heavily indebted states should be threatened with ejection from the euro zone.”

Another headline, this time on Spiegel Online (Der Spiegel is the largest circulation newspaper in Germany and the most respected) said: German Finance Minister Prepares fro Possible Greek Bankruptcy

The lead idea to the article is quoted as:

“German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.”

Why do I quote these articles?  Simply this: most domestic markets worldwide will be buffeted by factors outside their borders.  Surely Philippine stocks will come under extreme pressure and will probably experience some flight to quality.  Many fund managers will probably want to raise cash and pare off some positions.  This will likely be the framework of portfolio moves the rest of this week.

The key to situations such as these is to stick to strong performing stocks or those that have solid earnings.  I think the power sector which has been lackluster for most of this year should be a good beneficiary of this uncertainty.  People will likely hold on to their AP, EDC, FGEN and even MER.  Telcos TEL and GLO should also be good defensive plays since TEL has consistently seen its cash-flows move strongly while GLO is seeing a turnaround from its previously declining cash-flows.

Banks could experience some selling pressure as anxiety for global banks rises.  Local banks have a lot of dealings with their European correspondents, and a good number of these European banks are under very strong investor suspicion.  Of course, there is always the European Central Bank (ECB) to act as lender of last resort, the European Financial Stability Facility (EFSF) ans finally the IMF who governments can run to as a final alternative to sovereign woes.  Needless to say, the magnitude of this sovereign debt crisis is far larger than the Asian financial crisis of 1998.  Some are saying that it may even be larger than the U.S. sub-prime crisis of 2008 which saw the collapse of global investment bank, Lehman Brothers and some other American banks and insurance companies.

The question that comes to mind “will Europe be able to solve this mess?”  I think so, but it will take much longer than we expect.  Recall that over the past 40 years, we have been weaving around one international crisis after another starting with the collapse of the Bretton Woods Agreement in 1971 when the U.S. removed the gold convertibility of the US Dollar.  It opened up free currency exchange movements leading to multifarious balance of payments positions of countries.  Many fundamentalist economists would trace a lot of the global monetary problems to this because it removed gold backing of the global monetary system.  Theoretically, it is the capability of each country to create economic value added from the production of goods and services that supports the value of its currency.   When this ability is greatly reduced, a country’s currency would lose its relative value unless of course it had enough currency reserves or gold reserves to back it up.  That was the problem of the LDC debts problem of the 1980′s and also the immediate cause of the Asian crisis of 1998.

This is the same problem that Greece is facing, but the dilemma is that Greece has gotten so used to being coddled by socialist policies of its government that work ethic has been overcome by an entitlement attitude.  In short, people depend on the government for everything and private initiative has been diminished. No wonder Greece is bankrupt.

In the Philippines, thank God, we are not yet at such a stage even as people seem to think that the government can solve all their problems.  Government should only be there to ensure public administration of the safety of its citizens, the building of public infrastructure and the smooth operations of private enterprise – nothing more, nothing less.  The U.S. and parts of Europe are now in a mess because people expect government to do everything.  I hope we avoid getting there by putting faith in the workings of the free market.

Having said that, you probably realize why I am so much a proponent of the Philippine mining sector.  It will be these hard resources that will bring wealth and sustainability to our country.  Nickel, copper and chromite are the mainstays of industrial metal industries everywhere in the world.  Gold is the final store of monetary value of the world’s monetary system.  The Philippines has an abundance of these minerals.  This means that whatever happens to the global markets in the short-run, our country will finally be able to use our natural resources to support the great majority of our people.

I believe that we need to support legitimate mining companies of local mining operators.  I remember PX in the 1970s; it was not as esteemed as it is now.  AT and BC were the bluest then.  What this tells me is that serious newcomers such as LC, MA, NIKL, ORE, NI and MARC may eventually hit the big-time.  It is a matter of resources.

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