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Stocks in New York had touched their 2008 highs before pulling back. Nevertheless, both DJIA and S&P 500 were up on the week with the latter performing better. This tells me that global investors are diversifying out of blue chips which led the beginning of 2012 rally. Locally, while the PSEi reached its all time high on Thursday, many traders and fund managers saw it as an opportunity to consolidate positions and take some money out of the table. Many were anticipating that the PSEi would hit 5,000 soon, and when it almost did, people proceeded with what they were planning on doing – take profits.

The movement of Philippine stocks on Thursday and Friday may be scaring off a lot of traders for the time being. At worst, we can expect a string of selling as short term traders bank in their gains. I don’t blame them; but personally, I am not worried. There are no major hurdles lurking on the horizon like there was in 2007 when the first signs of the sub-prime fiasco were ignored by the market. The Greek situation has been plaguing us for over two years now as well as the related financial problems of the rest of Southern Europe, but those have been slowly coming to resolution. There is a potential bomb shell in the Middle East, but political instability has been around for decades and even when war had broken out in the region, the markets always recovered from it.

What we should really watch out for are the important elements that are driving Philippine stocks; and these are the investment flows. It is only now that both local and foreign funds are getting more widely involved in Philippine stocks. Take local trust funds. For a long time the aggregate exposure of trust funds in stocks have been a maximum of 10 percent of AUM. It is only recently that their asset allocation has moved up to 20 percent in most cases. A minority are even raising exposure to the equities market up to 25 maybe 30 percent. The magnitude of these funds flows is enormous already. Then you have government pension funds bringing home funds that had been previously invested abroad. This is on top of the organic growth that these funds have from continued employee contributions. Finally, there is the increasing participation of domestic retail investors due to easy access to stocks through online trading. All these stack up to a sizable flow of funds committed to trade Philippine stocks.

Of course, there are the foreign funds that are increasing allocation to emerging Asia particularly the ASEAN due to the pulling power of Indonesia. What is favorable to Philippine stocks is that it is a lot cheaper than Indonesian stocks in general as of this writing. This relative value comparison makes a strong case for local index stocks, not just for the PSEi but for the MSCI Philippine index as well.

This is one reason to be bullish on the large cap stocks even as prices pull back. I certainly think that AC, AGI, SM, MBT, JGS and TEL are among the stocks that are worthwhile catching in this downturn. Personally, I am hoping for another 100 points down which means another broad based decline in the market. I must admit that this is merely wishful thinking. At today’s level, I am already willing to accumulate index stocks. I would avoid AEV and AP for being overvalued, and EDC, FPH and FGEN for having such lousy underlying performance and very disappointing corporate disclosure deportment. I would much rather line up a few second and third liners as they tend to be objects of speculative interest when large cap stocks turn soft.

We are seeing very strong interest in OV and PXP because oil seems to be gaining a lot of attention. These two companies have ownership interests in existing oil producers. In fact, OV had been paying steady cash dividends. Oil stocks may be speculative in nature, but that is what oil investing all about. Oil companies take a huge risk as they spend a fortune on exploration. In many cases, the oil find is not of commercial quantity; but when they find a gusher, the returns are enough to pay off the capital expended on wells gone sour.

Going back to index stocks, I am hoping that AGI, JGS and MBT will do some catching up today. AGI as with BEL and LR seem to have been dragged down by the bribery scandal revealed by an ousted director of Wynn Casinos in Las Vegas. I see no reason for that to affect the existing operations of AGI’s Resorts World. Of course, with Belle Grande – BEL’s joint venture with LR – being in the pre-opening stage, things may still go wrong making LR a very speculative proposition at this time. Just like in the roulette or craps tables, you can make a small killing but only after your nerves get a little stretched. Hey, but for some people, it is worth the thrill.

JGS is historically a slow mover, but I think there has been a game changer. There is more liquidity in JGS now because of the sizable placement made a few weeks back. There is also the removal of the DGTL drag on earnings. Actually, the drag is now translated to earnings because the position is now in TEL which some analysts see to gain some growth in the next three years due to broadband and data services. Of course MBT is a gem that has been a stellar performer. People have just taken profits in the stock, so it is really a good time to get it back.

Anyway, today is a good time to take stock of one’s portfolio strategy. We have seen support and resistance levels for stocks that we follow, and these data should guide us in entering and trimming positions. I continue to be constructive in the broad market. I think some fundamentally sound second line stocks have yet to make their big move. There is no reason to be anxious if we remain focused on market fundamentals.

Have a good week.

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