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9:25  Thursday  12 August 2010   Philippine Stock Exchange Index  3522.72 (yesterday’s close)

The took a terrible beating overnight sparked by a larger-than-anticipated trade gap of $49.9 billion in June.  Usually, when the U.S. trade deficit widens, it is because consumers are spending a lot.  The dilemma arises when consumers are not spending, yet the drag on production intensifies due to greater spending on goods produced abroad.  What has exacerbated the negative sentiment were corresponding weak economic figures reported in China and Japan.

These reports come at a time when the mindset of most people in Asia is that stock prices should be coming off for seasonality reason – notably the ghost month.  Surely, the impact will be negative for the next few days.  Some traders have been selling into the recent strength of selected stocks.  For example, strong issues like AEV and AP recently lost momentum as profit takers chose to sell and raise cash.  I think that is good because as these two stocks decline further, we can expect support building up.  AP has very good earnings momentum and the prospects for the rest of the year are excellent.  AEV may not be as brilliant as UBP’s earnings are not as formidable based on their 1st half disclosures.

Some good news for followers of PNB.  We observed a lot of buying of the stock at prices ranging from 43.25 to 44.30 by foreign brokers.  Although it closed at 43.50, during the run-off, a large foreign broker cleaned up th board.  This tells me that there is strong institutional buying at this level which is a sign that the stock has more upside.  An analyst pointed out a decline in the bank’s net worth by around Php 2 billion for the second quarter.  I reckon that this was part of the balance sheet clean up which banks usually do prior to a merger.  The good news is that buyers with real money are looking possibly at another 20 to 30 percent move on the issue.

I am anticipating that the slide in prices for the ghost month has started and will likely intensify.  This downturn should be a welcome development for those who are watching stocks like DGTL but not for those who hold GLO.  My view is that GLO will move towards 600 while DGTL, if it gets past this fearful month, will likely head towards 2.00 and perhaps a few centavos beyond.

As sentiment turns negative in the coming days, I think opportunities will start to emerge.  I would not be in a hurry to buy though for fear of catching a falling knife.  If fear heightens in around two weeks time, then that would be the signal that stocks have reached their cheapest level for this cycle.  I think the smart money anticipated this downturn anyway.  I read a n item that in the U.S., the hedge fund community believes the fundamentals for the S&P remain in tact.  US companies have a lot of cash on their books and management teams that have become impressively more efficient. “I don’t think we’re looking at a long-term train wreck,” says a hedge fund manager.

That looks to be the case for those companies in the PSE that we follow.  MPI for instance raised a lot of cash from both the equity and debt capital markets.  Remember that they are an infrastructure company and debt loads are normal for businesses such as these.  Do not forget, however, that the businesses have very strong cash flows – Meralco, Maynilad and the tollways.  Cash is always king.  The Gokongwei group is another cash producing cow.  We can go down the corporate list and discover that the PLDTs, the Jollibees, the Meralcos, the GMA7s, even the Splashes and the Tunas in this country are all running very good cash levels.  That is why widespread fear of a market meltdown may be quite unwarranted.

In the 1986 movie “Wall Street,” Gordon Gekko (played by Michael Dougla) had a famous line – “greed is good”! In today’s market, given my outlook, I would say “fear is good.”

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