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8:30 am   Wednesday    3 February  2010     Philippine Stock Exchange Index    3061.89  (-0.552%)

In trying to gauge what continues to drive the market, I would like to share two pieces of news I picked up  from Bloomberg today.  The first is the BTr auction of 3-year bonds which fetched 5.160 percent yield.  It was a very strong auction which was more than 3 times oversubscribed and the entire issue was awarded at only one price.  The second was a statement coming from BSP Deputy Governor Diwa Guinigundo saying that Philippines’ domestic financial market is “very liquid” and can cover the government’s funding needs.  This statement was made in the backdrop of the National Government’s plans to issue  multi-currency bonds to OFWs.

What does this tell us?  From what I remember of the  quantity theory of money lessons when I was an economics student, aside from demand for transaction balances, people will either keep your money in interest bearing instruments or if interest rates are pretty low, you will try to find better returns in other assets.  I think this tension between the DoF and the BSP is betraying to us what the underlying demand for assets would be.  Given that returns on 3-year government bonds are below 5% after tax, the case in favor of buying stocks is looking stronger.

Then we see the  market getting more interesting.  While the index is down 17 points, the mood looks to be up-beat.  The stocks that pulled the PSEi down were ALI, MER, BPI, EDC, SM, AEV, PX, RLC, MBT and MWC.  These had been the stronger stocks in the recovery from the lows of January.  Those that kept the index hanging in there were TEL, FHP, AGI, AC, ICT, BDO, DMC, FGEN, FLI, GLO and PSE; these were stocks that were lagging the market.  It looks to that the money does not want to leave the market.   For example, ALI had gone up 6 percent over the past week while TEL was up only 3%, so some investors are selling ALI and buying of TEL.  FPH was strong today because of the closure of the MER option with MVP’s group.  MER, on the other hand, lost some steam because it had become clear that control of MER is no longer an issue.

In the coming days, each stock will be following its own story for the time being.  Sentiment looks constructive except that I think many will be unwilling to add new cash toward new positions.  They will not be pulling cash out as well because there is very little yield elsewehere.  Rotation buying will probably be the flavor of this week, and we are seeing it already among second and third liners.  These stocks usually benefit when rotation sets in.

A piece of good news is TEL which came out with their full 2009 results without any surprises.  Core earnings were Php 41 billion while net income was Php 39.8 billion.  They expect 2010 earnings to be around Php 41 billion as well.  They will be paying out Php 141 dividends this month.  TEL will likely remain firm until ex-dividend date due to the dividend play on the stock.

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