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11:30 am   Monday    22 February 2010     Philippine Stock Exchange Index     3000.54  (mid-seesion up 22 points or +0.74%)

Overall, It looks like the markets have taken the hike in the U.S. discount rate positively.  The message that is being received is precisely what the U.S. FED wanted to communicate, and that is that the economy is beginning to normalize.  Since the discount window is an emergency channel for banks in trouble, the general idea is that the banking system as a whole is out of the woods and is no longer in need of emergency assistance.  Such a message should reassure most investors that things will not be as bad as they were in the beginning of 2009 and the worst is definitely behind us.

Will that be good for the market in Manila?

I think that it should be.  Essentially, we have a banking sector that had been in very healthy shape.  The way the economy behave last year and the better prospects that face us this year, local banks should be in even better shape.  That is likely to lead to a freer flow of credit to companies who need to open up new businesses.  That would also mean that consumer loans will continue to be available.

As far as long-term interest rates are concerned, the only major threat is the budget deficit of the national government; but that does not look like it is going out of hand.  There would be very many ways to finance that money hole ranging from asset sales by government, more foreign borrowing and larger issuance of peso long-term bonds.  Fortunately, the country’s savings investment gap (ex ante) continues to grow wider as most savers in this economy chose to keep their assets in cash.

In this backdrop, I cannot but conclude that in spite of these ups and downs that we are seeing, the direction that I see beyond the first semester of 2010 is up.  When 2010 began, I thought that this market should easily gain 15% by the end of the year.  From where we are today, my view of the potential of this market is around an 18% gain among the large cap stocks.  The question is not whether a stock investor will make money, but whether it will be 15% or better.

Last week, a reader asked me this question: “If I had Php 25, ooo to put into the market, what 2 stocks should I buy?’  My answer was that I would buy PNB and either DMC, MPI or AP.”  Regular readers would have realized by now that  am a long-term holder of PNB, and this is because this is one stock that I think should double in the next 12 months as soon as its merger with Allied Bank goes through.  The reason I like DMC is that it is an excellent infrastructure play; it has power, water and civil engineering the very components of a complete infrastructure play.  I think MPI amounts to the same thing except that it is slightly more expensive than DMC; but that is reasonable because they own a ion’s share of MER which will continue to be an expensive stock.  I like AP because they look to be a low-cost producer of electric power which the country badly needs.  They will have excellent margins because they sell a good portion of their output to the spot market where prices are generally higher.

All that said, I have very good reason to like the market’s trend.  I have to caution, however, that I do not see a straight ascending move.  Rather, I see a resistance of buying and possibly profit taking when the index hits 3100, so I would recommend not to chase prices when markets are strong.  As usual, money management should never be left aside in trading this market.  It is always better to have cash in your portfolio because every now and then the market allows you to buy things cheaper.

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