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10:45am  Monday  12 October 2009   Philippine Stock Exchange Index  2953.74 (Mid-session)

We had a phenomenal week in the market – a 4.3% gain in the PSE index versus a 2.9% gain in the DJIA.  Considering that the catalyst was a strong U.S. market, we outperformed that market with a surge on Wednesday.  We further maintained the gain as the week wore on in spite of some profit taking on Thursday and Friday.  Taking a closer look at who contributed to the 121 points gained,  we see that TEL added 44.095 points, MER – 14.253, and MBT – 7.308;  that’s 65.9 points or over half the gain of the week on just these 3 stocks.  Strong stocks like AP, FPH, RLC, MEG, and AEV together added another 21.3 points to the week’s gain.

What gave encouragement to the U.S. market was the initial positive earnings report led by Blue chip Alcoa coming in with 3Q earnings miles better than what the market expected.  Companies like PepsiCo, Nike and Marriott also beat expectations priming investors expectation that earnings are on the road to recovery.  Given that our market had been consolidating over the last two months from a high on August 2, it is not surprising that positive news from the global scene overcame the depressing news coming from calamities in many parts of the Philippines.

There are mixed expectations on how the economy will be affected by the destruction wrought upon us by the last two typhoons.  The government is saying that growth would be cut by 0.2% to 0.4% in the coming quarters.  Some economists think that the reconstruction and rehabilitation expenditures that the public and private sectors will be forced to carry out will create a spending push that should add to GDP.  Of course, the National Census and Statistics Board will have to net out the value of crops and agricultural output losses due to flood and storm damage.

Psychologically, it looks to me that market participants were mentally prepared for a sell-off last week.  When that did not happen, people just felt that money will continue to chase assets some more as investors are surely sitting on still more cash.  Putting things in perspective, was last week’s action a sentiment led rally?

Actually, sometime 3 weeks ago, I read a New York article recommending that investors look further into emerging markets in Asia.  The article further noted that “Philippine Long Distance Telephone Company was trading at 11 times earnings” should be a good buy.  I am not surprised that after the first week of October, many who read the article eventually digested the recommendation.  What I am saying is that I believe earnings among headline stocks will not disappoint.  I think that some of the banks may pull a rabbit out of a hat and report impressive results.  Combined with an ambient liquid investor base, there is very good reason to believe that this market will be moving higher.

On individual stocks, I think TEL is not expensive at 2600 and could move up to 2800 toward year end.  AC is range bound between 295 and 320; and I don’t think it will move out of that range.  MER could pose some surprises as it is very strong below 180.  I won’t touch it at 200, but I think that it is reasonably priced around 180.  I mentioned earlier that I thought MBT was about to break out; it did so the stock is wide open to rise to 45.  Stocks like SECB, UBP and PNB will also benefit from another surge of liquidity and an ongoing fund raising by large corporate borrowers.  I think that the BSP will move to ease intermediation cost some more.  Complimented by a slight improvement in the budget numbers of the National Government, I’m forecasting a major re-rating of bank earnings.  I am also thinking that a much neglected issue – PSB – could surprise some investors in the near future.  PSB’s earnings have been steadily rising with its efficiency ratios improving.

I would also keep an eye on consumer stocks: GMAP/GMA7, URC, PIP, SPH, TUNA, COAT.  In spite of the floods, people’s lives have to go on and patronage for consumer goods will improve particularly because we have an election coming soon.

Over-all, I think our market is still headed higher.  I would try not to be very light in my positions.  I’ll be looking for buying windows of individual stocks.

Have a good week.

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