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8:38 am  Monday  4 July 2011

Our stock market had been following the moves of the Dow almost all the time in June except for that infamous day when a broker sold down TEL to 2202 at the last minute causing a huge but aberrant close in the PSEi.  Anyway, the Dow has recovered all of its June losses and the PSEi gained 108 points from June 1 ti July 1.  In New York, traders were hit twice: they were long in the beginning of June and stocks tanked in the first week, then going into the final week, many were short and had to buy back positions.  Judging from the Net foreign buying in the past three trading days, many of the foreign funds following our market were in the same boat.

Actually, the market risks are still around.  I do not think that Greece and the European debt problem will go away soon.  My friend Dr. Bernie “Boom” Villegas of UA&P believes that Greece will eventually default.  The austerity measures are tough and old habits die hard.  The riots in Greece will continue and serve as a sword of Domocles over the European markets.  Hopefully, Germany will remain very strong; and China will likewise lend a helping hand, not so much to Greece, but to countries like Spain, Portugal, Italy and Ireland who are not as hopeless as Greece.

The problem in the U.S. has not gone away either.  If they do not legislate for a higher debt ceiling by the end of July, the U.S., too, risks a default.  All three rating agencies announced already that should a default happen, the U.S. gets an outright “D” rating.  That would be a disaster for the bond market and could bring the equities markets worldwide into a spin.  Hopefully, sense and sensibilities come into the minds U.S. legislators.  This is really brinkmanship between the White House and Capitol Hill on the budget deficit issue.  Objectively speaking, the U.S. may not be any better off than Greece when it come to debt to GDP ratio.  The only thing the U.S. has going for itself is its currently irreplaceable capital markets which the global financial system is very dependent on for international settlement of payments.  Just the same, the U.S. has to get its fiscal house in order because in time the rest of the world will be able to create an alternative financial infrastructure to replace the need for the U.S.  When that happens, I shudder to think of what will happen to the U.S. currency.

What I am trying to point out is that in spite of a very strong market in the past few days, I would not loose sight of impending risk arising from the developed markets.  One reason why traders do not want to remain short or underweight in their positions is that earnings season has begun and because of productivity growth in the U.S., profitable operations of S&P 500 companies can be expected.  Actually, high unemployment in America has allowed U.S. companies to operate more efficiently.  In the Philippines, we expect better second quarter results compared to the first quarter of this year.  personally, I think TEL could turn in a very positive earnings surprise.  So can GLO because ever since the DGTL/TEL merger was announced, the cut throat competition among the three appears to have eased.  The banks should be reporting good results as many loans growth data have revealed more than encouraging results.  I would keep an eye on the big three – MBT, BPI annd BDO.  BDO is particularly cheap as it has lagged MBT over the past few months.

In mining sector developments, I suspect that the acquisition of a chunk of AT by SM Investments Corp. has not yet been reflected in SM’s share price.  I think SM is worth a punt.  Having said that, I think it would still be a good play to go for some AT as the play on the stock does not appear to be in its final stages yet.  I would say the same thing for LC/LCB while the Gold Fields deal has yet to be finalized.  All told,  I remain very constructive in mining such that I think some of the smaller and neglected issues may be worth a second look.  Just do not ignore doing homework on the real mineral claims and exploratory prospects of the particular mining stock.  Otherwise, Have a good trading week.

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