Sitting on the dock of the bay

7:10 pm  Monday  31 January 2011

To say that we had a bloodbath today would be too much of an understatement.  We were not only slaughtered today, but also chopped up and hung up to dry.  It is undoubtedly a “blood in the street” situation particularly because investors both local and foreign totally ignored the 7.3% full year growth in 2010 GDP.  When markets react stronger to bad news rather than to good, you know that the market is generally bearish.

I say ‘generally’ rather than ‘completely’  because I noticed that there were some bargain hunting near the close of trading.  For example, DMC was trading at a low of 32.65 yet closed at 33.75 on solid buying of around 800,000 shares.  AP, although closing slightly above the day’s low at 27.75 (low was 27.65), had buyers of more that 3.5 million shares near the close.  JGS was sold off to 18 on 48,200 shares but was bought up to 19 at the close on 233,000 shares.  You could also see high conviction buying of RLC with 6.342 million shares being bought up at the close.  There may be others like BPI and MBT; I just did not have time to check the details.  Nevertheless, these are just a few signs of bottom fishing.

There is one thing to remember when buying stocks at the sight of blood – make sure that the stock you buy has very strong reason to be alive because we really do not know when the bloodletting will end.  Today is a good example of why you should always have some cash on hand.  The 3881 level is very important because this was the same level when we saw in a precipitous drop that ended last Monday, January 24.  I would think that 3881 is a good support particularly because it corresponds to oversold levels of the PSEi.  Additionally, much of the strong individual stocks in the PSEi are  also exhibiting oversold conditions.

I cannot conclude that the Philippines is over reacting to the crisis in Egypt because the whole world in fact thinks that a dangerous situation is existing due to the country’s strategic location.  One can just imagine how trade could suffer if something happened to the Suez Canal which connects the Mediterranean to the Arabian Sea.  Another aspect to remember is that Egypt is quite closely tied economically to Qatar, Dubai and the United Arab Emirates, not to mention Saudi Arabia.  There are over a million Filipino OFWs in the region.  We cannot underestimate the implications to our countrymen if things turn for the worse.

The good news is that extreme conditions are working their way into stock prices globally, Philippines included.  Markets in the region, except Shanghai and Taiwan, are down.  In japan and Korea, in spite of positive industrial production numbers, stock prices tumbled as well which leads most people to conclude that most of the losses are on account of risk reduction among portfolios.  The prudent thing to do is to watch how the situation in Egypt develops without disregarding values.  As in all political tensions, resolution is the ultimate objective and that takes time.  Time also manages to squeeze out all the risk expectations and investors eventually adjust to the new normal.  That is just the way things go.

Boats in the harbor

11:00 pm  Sunday  30 January 2011

I was in Cebu all of Thursday and flew back to Manila Friday morning.  Unfortunately, I left my laptop charger in my office so I  was not able to have full use of my computer and could not write down my thoughts for the blog.  Fortunately though, I was able to catch up with a few readers from Cebu Gordon Gekko, Norman, Orven and Jacqui for a late night coffee at the Ayala terraces.

Our firm held a business and economic outlook briefing for our clients in Cebu.  An affair like this is normally by invitation only from a list provided by the company.  It was relatively well attended and people were appreciative of the information shared.  It really goes to show that in this day and age, one of the most important commodity is information.  But more than simply getting information, it is very important that we know how to process the bits we receive.

Over the weekend, we saw an unexpected decline in the DJIA and people attribute it to the political crisis in Egypt.  Egypt plays a special role in the Middle East.  Recall that it was Egypt under the late Anwar Sadat who signed a peace treaty with Israel in 1979 which would have gained much for the peace process in the entire region.  Tragically, Sadat was assassinated during a televised military parade for all the world to see in 1981.  It had been Mubarak who held power since then.  Egypt continues to be an ally of the U.S. and a radical political change could alter relationships with the U.S. and Israel.

What the event highlights is the uneasiness of investors in the DJIA in spite of the fact that global asset allocation has been favoring U.S. blue chips since the turn of the year and even earlier.  Volatility measures such as the VIX has suddenly bounced after gradually creeping lower over the last three months.  Personally, I think it will take more time before the momentum of the move to global blue chips slows down.  what we are seeing is just a pause before the charge resumes.

Nevertheless, I think that some of the stocks I watch that are looking to have developed good support at current levels.  JGS, FLI, DMC, AP, and EDC look to be meeting buyers where they were last Friday.  Fundamentally, they all look good but their prices were whacked last week.  Perhaps, having an accumulation strategy on these stocks could pay off a few months down the road.

I think RLC could still trade below 14 possibly 13.70 but it is decently priced where it is now.  I heard that most of its earnings are recurring rentals from malls and commercial buildings.  VLL is also very cheap around 2.75.  If your nerves can hack the volatility, a VLL position could pay off handsomely in a few months.

People might think that I am beating a dead horse with ORE.  Honestly speaking, I believe that speculating on a stock that has been closely followed by both fund managers and speculators should have limited downside.  One only has to be honest with oneself and realize that there will always be that possibility of losing money on the stock.  My take on it is that my chances on ORE are far greater than that in a black jack table where I can lose everything.  NIKL should also continue its surge as nickel prices are again above U.S.$ 25,000 per metric ton.

The broad market should continue to be downward biased, so investors have to be careful.  It is time such as these where we can really learn the art of stock market investing.  Over the past 20 months, it was a situation where the tide rises and all the boats in the harbor rise with the tide.  This time, we sail the uncharted seas.  This time around, we need to sharpen our skills in navigating the market.  That is how we will get our pay-off.

My pet cats

12:26 am  Wednesday  26 January 2011

We had a good bounce today, but more than a few may be seeing this as a dead cat bounce.  From a technical point of view, I would say that the threat of a further downturn is still around.  The most optimistic scenario is that we have a trading range developing between 3, 900 and 4200.  It could be wishful thinking, but a range bound market is very possible.  People in general may not have the bullishness they had through most of 2010 and would be inclined to sell anywhere above 4,000.

My take of the current market sentiment is that the tendency to reduce holdings in emerging markets by global portfolios will continue well into the first quarter.  Investors will look towards the range to sell at the highs since the bullish indicators are presently overshadowed by bearish ones.  Essentially, sentiment as it has been developing will not be able to turn around overnight.  What will change sentiment will have to be very strong earnings disclosures supported by equally encouraging economic figures.  Even if that happens, I believe raising cash should still be the order of the day.

As I write, the European markets closed softer due to weak economic news in Britain while the U.S. markets appear to be headed much lower for the day.  If the general outlook is turning cautious, the inclination to be defensive could get more pronounced in Manila.

8:25 am Wednesday 26 January 2011

It looks to me that the DJIA recovered close to the close of trading.  When I saw it before I went to bed past midnight, it had been down 61 points.  The market color that funds are re-balancing towards large cap beta stocks seems to be the main plot of the current story.

Also, with yesterday’s bombing dominating news all night and even this morning on the radio, I think the case for some foreign selling becomes more compelling.   Fortunately, some of the well performing stocks like DMC, AP and AEV are much cheaper, and our sights are set for longer horizons, I think it would not be unreasonable to start accumulating.  The same would go for MPI, FLI and even ALI.  TEL should make a good dividend play as it consistently pays over a hundred pesos dividend in March.  MBT should be a good buy at 60 or lower.

On the way to the office, I gave a thought to ORE and I think the stock is very cheap at 3.25 is not bad at all.  Still speculative but downside should be limited at this point.  Anyway, I don’t know if this cat is really dead, but we should be aware that it could be.

ABF

12:21 am  Tuesday  25 January 2011

Last week, I was in an event of an insurance company where I was one of the speakers.  My talk was on some boring topic like the investment outlook.  The speaker who came before me was such an excellent speaker that I picked up so much from him.  The funny thing was what struck me the most from his talk was something that he admitted to have picked up from another motivational speaker – Anthony Pangilinan.

He shared three letters which stated three different but related advice.  The letters were ABF and they stood for: 1) Accept the Brutal Facts;  2) Anticipate Better Future;  3)  Act with Bold Faith.  When I looked at my portfolio after the close of today’s trading session – which incidentally is around 5% under water – I remembered these pieces of advice.  They are really very appropriate in my current situation.

What are the brutal facts?  It is that free markets are unforgiving.  The race goes to the swift.  The fittest are those who survive.  In short, the brutal fact is you will lose your shirt if you gamble.  The word to the wise then is “do not gamble; invest!” An investor is one who can work with time and can accept that in an investment, one can lose money.  Ask any entrepreneur.  I have good friend who is now filthy rich from his chain of food shops.  He had been bankrupt twice in his adult life before he saw his business finally thrive.  Now he is a peso billionaire.  That is a bitter truth about investing – you can lose all or part of your money.  The good thing about the stock market is that if you do not trade on margin, you cannot lose everything.  The other truth is – if you can work with time using sound money management and judgment, you can make all of your money back and more.

Which brings me to the next piece of advice which is to anticipate a better future.  We are no cock-eyed pollianas here.  We are investors who investigate the facts and do proper research.  That give us the foundation to look to the future because that is what stock investing all about – the future.  Do we think that Warren Buffet made all those investments because he was worried about the present?  He was forward looking all the time.  He looked at business and economic potential and not merely at stock prices.  He did not even care if stock prices went down.  He was interested in how the company would eventually grow, and that did not happen overnight.  If you cannot look into the future and see things unfold, you’ll be quite unsuccessful in most of what you do.

Finally, to act with bold faith; this is something that is not pure instinct.  When you have faith, it is having confident assurance that you know you are doing the right thing.  You cannot be gambling and doing the right thing.  Even faith in God requires that you at least know what the word of God says.  Otherwise, it is mere superstition.  What I am saying is to have bold faith you must look at the right data and analyze them in a methodical and proper way.  Bold faith is when you are standing on a sure foundation.  You have done your homework, studied the fundamentals, and interpret what the market is telling you.

I remember a golfer of old – Lee Trevino, a winner of many a PGA tournament.  He said in an interview after winning one of the majors that he won because he got very lucky with his putting.  Then he went on to say that the more he practiced, the luckier he got.  I think people can really be lucky in the stock market.  You can make a killing once, but lose it on the next bet.  However, if you hone your investing skills by developing the proper thinking and temperament, you could be like the worlds most successful investors in your own league.

If the pasta wiggles, will you eat it?

10:10am  Monday  24 January 2010

Economic indicators are a very tricky set of information.  Economic figures tend to distract people from short-term realities.  Take what is happening in our local stock market of late.  The underlying macroeconomic forecasts have been very cerebral ranging from 4.5% to 7% growth in GDP in 2011.  Exports growth is seen to be slowing down due to base effects, i.e. the higher level reached in 2010 will make absolute export numbers lower in percentage terms.  The same is likely to be seen from percentage increases in OFW remittances.

I am not going to dwell on these indicators or the likelihood of these factors out-performing or becoming a disappointment.  What appears to matter in the recent days is not the domestic outlook.  The reason that market has been tanking is obviously because global portfolio managers have been re-balancing portfolios in favor of the large cap high-profile stocks in the developed markets.  This explains the solid performance of the Dow Jones Industrial Average (DJIA) over the S&P 500.  We have also been seeing the Euro STOXX – the European counterpart of the DJIA representing the blue chips of the continent – moving sharply higher in the beginning of the year.

Basically, it has become obvious that international investors are not looking at existing on the ground fundamentals in each country.  The over-all strategic move appears to be to move into the global brand names and not seek the outperformance that was given by emerging markets Asia in 2010.  In down to earth arithmetic in the Philippine market, there was approximately Php 24 billion net foreign buying in all of 2010.  Around Php 8 billion was seen in 4Q 2010.  In the first three weeks of 2011, we’ve already had Php 4 billion net foreign selling.  I think in the coming week or so, we will see a further Php 4 billion selling related to portfolio rebalancing.  It is obvious that most of the selling will come from the best performing stocks like AEV, AP, DMC and AGI not because these stocks have gone out of favor.  Simply said, these stocks are where the money is, and money flow has been ruling our market of late.

When will this selling abate?  I just want to remind people of what happened around this time of the month January last year.  The Greek crisis caused the market to plunge a touch past 10%.  As of this writing, we are only down around 6% since the beginning of the year.  I reckon we will come down the full 10% before foreign selling slows down.  In plain arithmetic, I think it will be 3,800 on the index with AP dropping to 26, AEV to 35, AGI to 10 and DMC to 30.  These are my best guesstimates, but when markets are panicking like this, it is really anybody’s guess.

Is it time to exit the market already?  I think the best thing to do is raise cash even if you have some losses.  I took some losses on CEB because it may be a laggard for some time to come.  The point is, you must have extra cash at this point.

Thinking in a sleepy town

Tacloban

10:41pm  Thursday  20 January 2011

I was reading the Asian economic outlook of one of the major international investment banks on the plane.  What I wanted to find out from between the lines is whether or not a crisis is brewing somewhere in the world.  For an event to reverse the trend that emerging Asian markets have seen last year, it has to be in the same magnitude as the Asian Flu of 1997 or the U.S. sub-prime mortgage and banking crisis of 2007 to 2008.  The Euro zone sovereign debt crisis will not be as damaging because the countries inside euroland can muster enough resources among themselves.  The only negative is that they will put a drag on global economic growth.

Here in Asia, sovereign debt as a percentage of GDP is relatively low and government deficits are of even smaller percentages.  The Philippines for instance has foreign debt of roughly a quarter of its GDP and a budget deficit of low single digit proportions.  All of the ASEAN 5 have similar debt proportions which is really an off-shoot of the Asian financial crisis of 1998.  China is trying to rein in growth, but it has such a robust economy that growth seems to perpetuate itself.

Anyway, potential problems like the major crises of the past two decades plus the dot-com bubble at the turn of the century are nowhere in sight yet.  Yes, there is inflationary pressure but not to the degree that it was in 1982 when interest rates had gone sky-high to the high teens and low twenties. (Yes, I was already trading then but in the FX markets.)  The real big question for us locally is whether or not we’re seeing a major economic bottleneck that will be difficult to overcome.

I keep on scanning the landscape because I do not want to be blindsided as most people were in 2007.  The sub-prime and banking crises had lurked its ugly head but many chose to ignore the early signs.  As a result, a major bloodbath followed.  I do not think the credit squeeze in China is going to bring about any crisis.  If at all, the credit squeeze should mitigate it.  The U.S. on the other hand is starting to pick up steam and the manufacturing sector has reversed decades of a down-trend.  To top it all, they are very far from heating up so no potential bottlenecks there.  Housing may take some time to recover in the U.S., but I think it is also because everybody has one or two houses already.  Why buy more?

Nevertheless, I think that this consolidation could last a few more days.  I will not ask anyone to be a hero.  I would actually encourage people to sell some positions on rallies and get some cash back.  We could be trapped in this range for a few more months.  It could be a wide trading range evolving.  It may be time for counter intuitive thinking.

Happy Days?

1:48pm  Wednesday  20 January 2011

Practically all of us who have been in the market this past few months have one thing in common.  We are all long in our portfolios.  Many are hurting and some are hurting very badly.  Today, when I looked at my portfolio after the market closed, I have only one stock that is making money.  The lucky position is that of NIKL.  I am happy to have kept this stock and even happier that my long-term view on the company seems to be working its way in the stock price.  Spot nickel prices eased a bit overnight, but it is still above US$25,000 per metric ton.  Copper prices have also remained firm, and it looks like the industrial metals group will be in favor as the U.S. shows signs of manufacturing recovery.

China posted 2010 annual GDP growth of 10.3% a tad higher than the 10.2% consensus forecast.  Watchers were looking for a smaller figure seeing that the monetary authorities have been tightening since the middle of the year.  Some regions will also be raising minimum wages in the months to come.  While the faster growth would normally be good for the China market, the counter intuitive thinking is that efforts at cooling the heating economy is not happening.  China may have more tightening to come.

Anyway, the Philippines has very little reason to tighten monetary policy.  there has been very little credit expansion.  Any growth in the money numbers have been due to income growth which is essentially non-inflationary.  Compounded by aggressive mopping up of excess bank liquidity through the SDAs, I cannot see how monetary tightening will squeeze any inflationary pressures since prices of rice and other agricultural commodities are beyond monetary tools.  Mathematically, price increases in the economy will just further tighten non-credit money expansion because any income growth will simply be used for paying for higher prices of food and transport.

What has that got to do with stock prices then?

Well, the inclination to invest in markets become less when interest rates are rising.  Investors tend to hold back until they have seen the extent of the interest rate hike.  This is probably why the property stocks have been badly hit over the last three trading days.  Investors are pricing in higher financing cost for developers and buyers which will tend to slow down both development and unit sales.

The question is, how is the slow down likely to happen?  Well, I am not really sure it will.  Mortgage rates in this country have not come down at all.  Very few are able to access single digit interest rates for housing.  In effect, interest rates have not fueled home buying demand.  Most buyers have been end-users and landlords who see positive yield in renting affordable units.  My inclination is to think that fears in he China housing bubble is being transferred here.  In spite of all these construction, I do not think that the Philippines is facing a housing bubble.  Perhaps, the high-end sector of the property market may just be approaching saturation point.  After all, how many really can afford to live in The Fort or McKinley or Ortigas or New Manila or Alabang.  But hey, when you talk about the fringes of the metropolis, apartment prices are not that demanding.

Anyway, people are running scared because many are long and wrong.  Is this the end of the rally that started in 2009?  Did we just have a blip and now it has all dissipated?

I am still the optimist.  This economy will show solid growth when the figures are released on the 31st of this month.  I think earnings growth will follow economic growth.  I think stocks are closely approaching realistically cheap levels.  Think about TEL.  There are very few sellers for this stock now.  Think about the mining sector; metal prices will surely raise profitability.  Think about the banks; should they raise lending rates, they will just be widening their spreads.

I do not want to raise false hopes.  If you have to cut losses at this point, by all means do so.  Just remember that when this thing bottoms out, happy days will be here again.  As of now, I’m off to Tacloban to give a talk to teachers.

Enjoying a roller coaster ride

8:35am Wednesday  19 January 2011

For most of 2010, the Philippine market had only one identifiable trend which was up. When stock prices were as strong as they were, people are lulled into believing that the risk of investing in stocks is small.  People then tend to overestimate their ability to handle that risk.  Reality starts to set it only when you start to lose money.  In the first two weeks of this year (actually even in late November 2011), we had very volatile markets.  Many investor who entered the market only in the last 12 to 18 months may have never experienced this kind of roller coaster.  It is only now that they are realizing what the real risks to investing in stocks are.

In my view, now is a great time to reassess your individual risk threshold.  Do you own too many stocks? Are you over-weighted  in a speculative plays?  Are your stocks all in the power sector?  Are you tending a lot of dogs in your portfolio?  Are you long because you chased the market? Do you have positions simply because somebody gave you a tip? Do you never keep cash or are you always fully invested?  If you are feeling very uneasy now, you know that you need to raise cash.  I for one feel that in our market, which is not very deep, you should always have 20 percent in cash.

I think people are worried that the time for a long market decline has come.  I will not try to argue that point because my opinion would be only one in a thousand.  It is just that I often choose to look at the fundamentals without ignoring market dynamics.  Right now, the market is saying that many investors notably the foreign funds want to get out.  I believe there is a lot of wisdom in that view.  It is a proper time to bank some profits in.  Also, foreign fund have a variety of reasons to cash in – currency gains, windfall on some stocks or they simply underweight allocation to this market among others.

What matters now is whether or not this market will rebound because when it happens, you should be holding the stocks which should gain the most.  I do not have the crystal ball to tell me when this market will bounce back.  Presently, I hold the view that stocks are generally in a trading range.  For one, I think DMC will range between 33 and 37.  I could be wrong but I will take that view and play the range since I like DMC over the long haul anyway.  Another is AP which I thought was a screaming buy at 26.20.  It looks to me that AP should range between 26 and 32, but beware if it breaks 26.  MBT will likely range between 61 and 67 while MPI will trade between 3.50 and 4.20.  Range trading is a strategy where you make your best guess when taking a position with a disciplined decision to play the range.  This also means that if the support and resistance are broken, you mast take appropriate action: cut if it breaks support or buy up if it breaks resistance.

I foresee further volatility within the 3950 to 4250 range of the PSEi.  While this represents tough times ahead, it is also a tremendous opportunity for outperforming the index.  I think technical trading would characterize the market in the coming weeks.  My guess is we will not see a breakdown in prices.  The business sentiment in the country is not bad at all. Furthermore, I believe in cycles and I sense that we have not yet seen the peak of this one which started 18 months ago.  Like all roller coasters, there are ups and downs; but at the end of the ride, you always feel exhilarated.  Yes?

Protecting profits

9:00 am  Tuesday 18 January 2011

Asian stocks fell yesterday which was probably why the PSEi gave back 10 points from its intra-day high of 4156.  The region was seeing five consecutive weeks of gains, amid speculation that governments throughout the region will need to do more to tame inflation.  The MSCI Asia-Pacific Index lost 0.6 percent. Recall that MSCI Asia climbed to a two-and-a-half year high last week after Germany indicated it would take necessary steps to stem Europe’s sovereign debt crisis.   The MSCI Asia-Pacific Index rose 14.3 percent last year,compared with gains of 12.8 percent by the S&P 500 and 8.6percent by the Stoxx Europe 600 Index. The index was valued at 14.2 times estimated earnings on average at the last close, compared with 13.6 times for the S&P500 and 11.2 times for the Stoxx 600.  It is no wonder that fund managers are a bit edgy in the region since many would like to protect their gains.

Inflation apparently is the sword that hangs over most markets in Asia.  The growing sentiment in the region is that pressure on interest rates will constrain economic performance of some countries in the region.  In China, the  region’s big brother, rising inflation expectations may pressure the central bank to raise interest rates by 25 basis points in February, possibly followed by another increase in the second quarter, according to a Bloomberg report.  The Hang Seng Index dropped 0.5 percent; the Nikkei 225 Stock Average was flat; the Kospi retreated 0.4 percent.

Regional concerns appear to be the basis of foreign funds moves in the market.  Fundamentals may take a back seat for a while, so in spite of strong developments in the Philippines, we may see subdued constructiveness among local investors.  Yesterday, OFW remittances  rose in November by 10.5 percent from a year earlier to$1.61 billion.  That follows a 9.3 percent gain in October and an 8.2percent to $17.1 billion in the 11 months through November.   Remittances now account for 11 percent of GDP which makes a full year GDP growth of as much as 7 percent in 2010 to be feasible.  The full-year GDP data will be reported on Jan. 31.

Given this scenario, I think that we will eventually see price gains up to the middle of February when most company earnings report comes.  I do not expect strong surges though.  I would accumulate stocks which are relatively well shielded from inflation such as the utilities and power.  They are allowed to add fuel surcharges when fuel prices rise.  Incidentally, airlines are also able to add fuel surcharges to fares.

Inflationary expectations may dampen demand for housing and property, but seeing that mortgage rates have not really dropped by any significance, maybe it will not matter that much.  Companies that may be squeezed are the consumer companies like URC, RFM and PIP which may feel the brunt of rising agricultural commodity prices.

All I can say today is that I cannot be too bullish, but I sense that the up trend is still intact.  Volatility may rule for the time being and foreign funds may either be absent or might use strong days to flee.  It is of utmost importance that we stick to the stocks with the very strong fundamentals so we can weather any potential storms.  needless to say, there will be special situations such as CYBR, LR, APC and the like.  Just remember that they are special situations where money management is extremely crucial, i.e. protect your profits always when touching these stocks.

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