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10:15 am  Wednesday   11 August 2010   Philippine Stock Exchange Index  –  3,532.62

A few things have been putting a damper in the market over th past few weeks.  In spite of strong earnings reports among PSE listed companies, very few stocks have really moved far higher than they should have.  The main stumbling block has been the fears arising from deteriorating economic conditions in the U.S. reflected by very little improvement in job creation.  This has prompted the U.S. FED chairman to signal further easing in policy.  Overnight, we saw most markets fall into the red in Asia, Europe and North America.  In Asia, the culprit appears to be the onset of the “hungry ghost month.”  Chinese astrological beliefs explain that this time of the year, the spirits of those that had gone to the other world return earth because they are hungry.  With all these spirits running around, many mischiefs can result and a multitude of things could go wrong.  That is why people become very cautious particularly with money matters.  In places like Hong Kong and Singapore.  It is not unusual to see people burning play money and incense while offering fruits to images of their relatives in order to appease the emotions of ghosts that are running around.

What this does to the market is it reduces liquidity and whatever liquidity premium that is attached to favored stocks disappear.  Those that have low liquidity value deteriorates further because of lack of attention.  The decline in trading volume is further exacerbated by the peak of the summer holiday season among western hemisphere fund managers.  All these concerns accumulate into one seemingly bearish tone in most markets.

Should we be bearish in this market?  Well, I’ve always believed that the trend is your friend.  The short-term trend appears to be turning bearish, so I believe that I will ride that trend.  That is not to say that I will wind down all my positions.  That would be too risky.  What I’ve been doing is top-slicing on my positions, i.e. selling to take some profits and raising my cash position without being flat or zero position in the stocks I like.  Again, it is simply managing my cash and preserving some profits.

The stocks that I am happy to keep are DMC, PNB, MPI, EDC and TEL.  Although EDC has not been performing, I learned that producers of renewable energy have priority in selling into WESM which is the most profitable space in the power generation market.  I believe the same is true for FGEN.  These stocks including FPH have been quite weak lately, but I think that is happening because portfolios are switching our of these stocks and moving to LPZ.  LPZ is the ultimate holding company of all these and the sum of the parts in LPZ has been way below the price of ultimate parent.  This is a classic arbitrage move, a valuation adjustment that ought to happen in the market whenever valuation gaps go very wide.

My strategy is to keep my winning positions because the long-term trend is still headed north.  That is not pure sentiment on my part.  If one takes a close look at individual stocks, earnings are pretty strong and look to have sustained prospects due to a strong underlying economy.  From a global point of view, I believe that global money continues to flow to emerging markets Asia.  It will eventually flow at a faster rate into the PSE.  I would use this ghost month to my advantage and try to accumulate large cap stock when they go weaker.  After all, with the FED easing monetary policy further, all that liquidity will seek out the cheaper markets and ours is certainly inexpensive given present and forward earnings of Philippine listed companies.

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