Gus Cosio says so

Ideas on the Philippine Stock Market

I need some room

6pm   Friday   May 29, 2009      PSEi – 2389.31 (+1.48%)       PHP/$47.35

This is getting boring.  Wall Street was up Thursday with the Dow rising by 1.25%.   The PSEi followed suit closing 34.94 points higher.  It was 44 points higher at one time during the session.

Let me point out a few observations.  Whatever rally was started by headline stocks earlier this month has now rolled into second line stocks.  MPI, PAX and WEB have broken into the 20 most active.  FLI, which had come into profit taking earlier in the week has bounced back.  Even mining stocks like LC have come to life and cement firm CMT started to cross the screen again.  It looks like more investors are coming into the market, but they are thinking that the headline stocks have gone too far to chase.  Consequently, they turn to laggard stocks.

What I don’t like about this is that prices look to be moving ahead of themselves.  Yesterday, the government said that annual GDP growth in Q1’09 was only 0.4%.  GDP actually shrank by a seasonally adjusted 2.3% in the first quarter from the last quarter of 2008.  While I am an avowed optimist, but I am likewise a guarded optimist.  I look for sound reasons to be positive in my outlook.  These economic numbers make me rely too much on hope.

The BSP cut policy rates by a stingy 25 basis points yesterday during the latest Monetary Board meeting.  We were looking for 50 basis points.  The fixed income market displayed its disappointment by pushing yields up in the long end of the curve by 5 bps. , i.e. sending bond prices lower.

So why is the equity market going the other way?  Why is the market strong in spite of poor economic performance?  The answer I think it is that people are simply chasing after returns.  The cost of holding cash is enormous with the money market paying next to nothing.  Meanwhile, the exuberance gripping the stock market for over a month now has become contagious.  People are just pouring money into stocks anticipating that prices will keep moving higher.  It is less a search for value than a gamble that there will be a sucker buying right behind.

This is getting to be dangerous.  When speculation starts to dominate the market, the room for disappointment gets bigger.  Of course AC and MER – two of the biggest movers today – are good companies, but the prices that they are trading now do not look sustainable, not with GDP slowing down the way it did.  I venture to say that we will see a major correction next week.  I don’t know what will cause it, but after the 500 point run that the market has had in two months without a real consolidation (that’s more than 25% already), anything could trigger a sell off.

I remain optimistic in this market, but I will not throw caution to the wind.  I will keep my powder dry so that if prices tank, I have some room to buy.  I call it risk management.

May 29, 2009 - Posted by | Financial markets in Asia

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