Gus Cosio says so

Ideas on the Philippine Stock Market

Games people play

6:00pm Tuesday  27 October 2009   Philippine Stock Exchange Index  2935.74 (down 0.20% from Monday)

For two trading days now, this market has opened weak but attracted buyers at lower levels.  This follows two down days of the Dow.  We have also seen two days of the VIX – the volatility index futures of the S&P – moving higher after a few days of below nearby support levels.  U.S. fund managers have been seeing better than expected earnings report, but looking beyond, they do not appear to be as enthusiastic.  U.S. 3Q09 GDP will be released this Thursday and many market players don’t seem to want to make bets on that number.  The consensus is for a 3.3% growth which is probably already priced in the markets.  Global investors appear reluctant to raise risk exposure for the time being.  My take on the simultaneous decline of oil futures, metal prices and soft commodities is that hedge funds are taking profits and unwinding trades.  That’s why I think the US Dollar has strengthened against the Euro and all other currencies for the time being although it is starting to weaken again.

I always feel better after a correction.  In oil, for example, the price target people had taken on WTI was US$80; the nearby NYMEX contract hit US$82 on Oct.21 and moved sideways around $80.  Then on Monday, there was a sell off to $78 which will likely spook short-term punters.  Remember, to make money in commodities, you must liquidate your contracts.  The same thing is happening in gold which saw its price tumble from a high of 1070 to a low of 1037.

What does all this mean to the local market?  Well, the game people are playing in practically all corners of the world is the “carry trade.” The underlying strategy of a carry trade is to borrow money from low-interest currencies and finance leveraged positions in anything that you expect to move up.  The thing about the Philippine market is at about this time of the year, the economy sees an unusual surge in foreign remittances (I’m talking about from November to December) due to local tradition of giving presents to your loved ones for the Christmas season.  A carry trade can really work for Philippine stocks especially because some of them can still pay good cash dividends.  And even if they do not, local investors are in a quandary on where to invest their overflowing hoards of cash both pesos and foreign currency, that the same motivation that carry traders have is in the back of investors minds.  In short, where can you put your money to make more money but in the stock market.

I would like to be contrarian for the time being and go for the stocks that are declining.  My bets in the next few days would be on AC, AGI, MPI and PNB.  These stocks, save MPI, have been unusually weak over the past few days, and I am not convinced that these stocks will be losing underlying values.  It is really a matter of the market training their sights on issues that are in play like FPH and EDC.  Anyway, I am not convinced that the market will be changing directions in a big way yet.  We could be moving sideways again inside 2800 and 3000.  This was what had happened from the end of July to the beginning of October.  The good thing about a ranging market is the prospect of making money trading the range.


October 27, 2009 - Posted by | Financial markets in Asia


  1. Sir Gus,

    What do you think of RCB? The 2 year chart and forward PE looked very good a few weeks ago, but then news came out that it will be removed from the index, and so it starting going down a bit. Do you think I should cut losses before Nov. 3 or just hold? Thanks.



    Comment by Warren | October 27, 2009 | Reply

    • Warren,
      I do not follow RCB closely because I have every serious doubts about its long term profitability. I would recommend getting out of the stock. I prefer UBP, PNB or SECB to RCB. If you want to stick to a banking stock that will likely go up by 30% in a year’s time, I’d recommend PSB. While it is not liquid, who needs liquidity if you can hold it for around a year.

      Comment by Gus Cosio | October 28, 2009 | Reply

      • Thanks, I’ll keep that in mind.

        Comment by Warren | October 29, 2009

  2. Sir Gus,

    With regards to MPI, it pulled another fast one to its shareholders announcing a private placement has been made which is priced at 2.5+ per shares. Another dilution for its shareholders. What is your take on this? The company seems like to be on a buying frenzy by selling a lot of its shares. Are they not being too aggressive?

    Comment by Kerwin | October 28, 2009 | Reply

    • Kerwin,
      The MPI transaction at 2.57 is not really a market trade but a merger & acquisition transaction. What it does is it brings Lyonnaise Water up from the operating company, Maynilad, to the holding company with no prejudice to Lyonnaise Water because they will still have an effective minority in the water operations, but it will be in MPI . Personally, I view this as positive because Lyonnaise is a global water player. I do not think that Lyonnaise will be selling those shares anytime soon. What it does it it helps Lyonnaise value its investment in the water company through the price of MPI. No need to worry about MPI. In fact, I would buy more of MPI if it touches 3.30.

      Comment by Gus Cosio | October 28, 2009 | Reply

      • I am quite confused. So what happened with Lyonnaise Water’s share in Maynilad? Did they give the shares to MPI?
        Lyonnaise Water’s cost in MPI is 2.57 + Maynilad shares, is that correct?


        Comment by Oliver Mia | October 28, 2009

      • Lyonnaise share in Maynilad waas exchanged for MPI shares completely. Lyonnaise is now a share holder of MPI only, no longer in Maynilad. In terms of corporate partnership, they still have a say in Maynilad by virtue of their minority stake in MPI who owns the majority of Maynilad. It is actually irrelevant what the cost of MPI is to Lyonnaise because they will not likely sell its shares.

        Comment by Gus Cosio | October 29, 2009

  3. Hi Sir Gus,

    What is happening with MBT? Support at Php 40 is broken.


    Comment by Oliver Mia | October 28, 2009 | Reply

    • I’m taking a counter intuitive stance with MBT. I have nothing negative about MBT. Sone brokers may just be lightening up on the stock. My view is that this stock ought to move up to 50, so I’m a likely buyer when it stabilizes around the levels today.

      Comment by Gus Cosio | October 28, 2009 | Reply

  4. I’m wondering if the weakness in most bank stocks reflects a re-shuffling and re-allocation of portfolios to accomodate the stock rights of SECB?

    Comment by Melvin | October 28, 2009 | Reply

    • You may be right. SECB is a very cheap stock with a good ROE history. If you go down the line, only UBP and PNB are cheaper than SECB but SECB trades better than the two plus it is in the index starting next week. Being in the index, institutional portfolios will keep a permanent weighting of the stock. I, however, think that the SECB stock rights is not big enough to cause a sell off in other banking stocks. I think that hedge funds are unwinding trades or have unwound them that some funds have to take profits and much profits have been made this year on Philippine Banking stocks.

      Comment by Gus Cosio | October 28, 2009 | Reply

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