Gus Cosio says so

Ideas on the Philippine Stock Market

Sub-prime all over again?

10:37   Sunday   7 February  2010    Philippine Stock Exchange Index   2855.64  Friday Close

Looking at how both the S&P and the DJIA traded last Friday, I would say that there is either some short-covering going on or that some positive influence is starting to creep back into the market psychology.  The unemployment report was a definite encouragement as it dropped below the 10% level, but the 20,000 decline in non-farm payrolls in January remains to be a drag on the economy.   Of course the earnings reports have been positive and we know that already.  What we don’t really know is what’s going to happen to the Europeans because of the emerging debt crisis arising from Greece and is now spreading like a contagion to Spain, Ireland, Portugal and even Italy.  Such anxiety has widened credit spreads on these countries’ debt securities that risk metrics have gone to a tailspin similar to when the sub-prime crisis erupted in the U.S.

One thing that I am sure of – the drop we saw in last week’s market is not the end of the world.  While I do not think it was an over reaction to the global markets, I have confidence that the local market is in much better shape than we think.  We had sold off not because we thought earnings would turn sour or that the economy would suffer again.  It all happened in sympathy with the global and regional markets.  Surely, it will be difficult to shake off negative psychology especially since everybody looks to New York to set the tone.  With how prices behaved last Friday in the PSE and the way stocks recovered as the U.S. market closed, I think we should be seeing a rebound in prices this week.

I think the key to the rebound are the individual stocks: TEL at 2535 is 12.5 X trailing earnings, has a dividend yield of 8.17% and has an ROE of 32%.  That is very compelling.  MBT at 37.50 is 13 X trailing and has dividend yield of 2.67.  MPI, while its PE is 13.8 X, is trading at its 52 week low.  MEG at 1.08 is at its six months low and is trading at 5.8 X PE.  The power plays in the market, namely, FGEN, EDC, EDC, FPH and even MER haven’t been this cheap since November 2009.  Like MEG, FLI at 0.76 is at its 6-month lows.  Even BPI which is always expensive has gone to its low since August 2009.

A good strategy for this week’s trading is very simple; just pick out those fundamentally sound stocks that are trading at their 3- or 6-month low.  I think that we’ll see some recovery in prices already.  I would caution, however, that this market will not trend up for periods longer than two weeks.  Fear is still in the air which is technically good, but when a market is expected to range, the guiding psychology is to sell at times when the market is very confident and buy when things don’t look so good.  It is going to be a matter of nerves and brains which is what you really need when trading any market.

Have a good week.


February 7, 2010 - Posted by | Financial markets in Asia


  1. Gus, with all the (possible) sovereign default issues/crises, how do you see the Philippines in this light? In the case Greece and Dubai, were there no red flags raised before? What are the signs we should look out for?

    Comment by Lene | February 8, 2010 | Reply

  2. Lene,
    Actually, banks were already wary about Greece and Ireland during the height of the U.S. sub-prime crisis. They had started to limit exposure and I think it was because liquidity dried up for Greece, they fell into liquidity trouble. Even Dubai was a crisis that was waiting to happen as early as 2007 when global property prices were losing steam. As with any asset, when the returns are being seen only from price appreciation and not cash flows from income, trouble is afoot. For sovereign credits, I look at the country’s international reserves and balance of payments, if it is borrowing too much such that it is merely debt that shores up it’s reserves, there is great reason for worry. That was what happened to Dubai; they expected Dubai property prices to keep going up and they would pay the debts from profits from property appreciation.
    With Greece, it was government debt in relation to both GDP and a persistent fiscal deficit that had no end in view.

    Comment by Gus Cosio | February 8, 2010 | Reply

  3. Sir Gus,

    Some investors actually dumped MPI when they extended their call option to purchase the lopez stake of meralco, raising concerns that they may be short on cash. Do you think MPI has bitten off more than it could chew on this one?


    Comment by wren | February 9, 2010 | Reply

  4. Wren,
    MPI has a lot more cash than you think. I thought that it was good that weak hands dumped MPI because I was able to buy it at 2.22 and I’d like to hold on to it for some time more. I thought it was cheap at 2.50, therefore I think that any price below 2.50 is good.
    I reckon, they extended the call option to make sure they do not fall into any technicality for a tender offer.

    Comment by Gus Cosio | February 9, 2010 | Reply

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