11:10 am   Wednesday  May 27, 2009    PSEi  –  2346.92

Why would consumer confidence in the U.S. encourage investors to buy Philippine stocks?  In my previous life, we did not put too much weight on this survey since it did not measure an actual economic indicator such as industrial production or durable goods orders.  Of course, the survey hopes to gauge the underlying sentiment in the economy but until it is translated to money spent on goods and services, it is meaningless.

Last night in Wall Street, the survey seems to have affected investor sentiment.  DJIA traded up 2.37% and the broader based S&P picked up 2.73%.  NASDAQ was even stronger rising by 3.45%.  The market surge comes in the heels of economists saying that there is a risk of a double dip recession, i.e. that economic recovery would be weak.  What we are seeing today is real money buying the market while psychic money is trumpeting for caution.

Essentially, what has been underlying market strength in recent weeks is money flow.  A lot of money that has been sitting at close to zero yields has become impatient.  The U.S., European and a few Asian governments have been relentless in supplying the economy with cash that there’s nothing else to buy but stocks.  After all, one can eat only so much hamburgers.  This is a liquidity driven market rally and liquidity is not going to dry up soon.  Governments will continue to pump money into the system until the real numbers, i.e. industrial production and durable goods orders and more importantly employment figures, show some sustained growth.

That’s one reason why OFW remittances to the Philippines continue to come.

In the Philippine market, we saw a decent 20 year FXTN auction yesterday where investors bought Php 8.5 billion at a yield of 8.814%.  In December 2008, the same bond was sold at 9.5%.  Doesn’t that tell you that investors are willing to part with cash at lower yields simply because you can no longer buy yield today without going out the risk reward curve.

It’s no wonder that money is streaming into stocks.  Honestly, that’s where the yields are.  These stocks offer dividend yields of at lease 5%:  TEL, GLO, SPH, ABS, GMAP, PIP, and SCC.    Other stocks offer lower yields but above 3%: MBT, COAT, SMPH, FGEN, and URC.  The thing about stocks is that total return can go higher because of price appreciation.  If you ask me now what the risk reward ratio is, I would not be able to give you a proper number; but what I can give you is an image of a see-saw.  Imagine an unlimited cash pile on one side and a limited number of stocks on the other side.  Which side do you think will stay up?

At this point, positive consumer or investor sentiment does not look that unreasonable.

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