Portugal? Que Paso?

8:30 am     Thursday  25 March  2010   Philippine Stock Exchange Index  3166.60 (+1.19%) pre-opening

Once again, we had a good market Wednesday in reaction to the triple digit rise in the DJIA of the previous night .  What drove up U.S. stocks Tuesday was the situation where many hedge funds were running short positions in the market.  Last Friday was triple witching hour in the U.S. when stock futures, options on stocks and options on futures expire.  Normally, this brings about a lot of volatility because investors either unwind or roll into the next contract period.  I think because volatility did not rise and whatever spikes were sold into by traders, hedge funds mangers realized that long only investors were very much willing to add more stocks to their positions.  I find that condition consistent with the liquidity situation in the U.S.  The sustained low interest rate environment encourages investors to put more money into any possible leveraged returns in stocks.

My theory is that the same liquidity situation is driving our market higher.  Oh yes, there will be threats from time to time.  The fear of election failure is one.  The sovereign credit anxiety in Europe is another.  Overnight, Portugal was downgraded a notch by Fitch with a statement that there could be further downgrades, and Greece is rekindling a scare again.     After the announcement, the DJIA dropped around 50 points and hovered at the level for the rest of the day.  In spite of the drop, banking shares were mostly up as further resolution measures to the bad housing loans are being taken by big banks such as BofA, CITI and JP Morgan.

Actually, things like Greece and Portugal will continue to haunt the markets.  That is why stock prices never go up in a straight line.  The question that is bothering people is whether the European dilemma will douse water into a newly fueled rally in local stocks.
My reactive answer is that it will, as it always does.  After all, the markets are global and money tries to find its best geographical use.  The jury who decides the verdict in these situations is usually the investing public.  They decide where they think their money can be safely tucked away.  That is the bottom line.

In the U.S., it looks like investors are happy staying at home although a lot of  interest is seen in Asian markets and resource based economies such as Australia and South Africa.  Domestically, I think some investors are still reeling from losses incurred during the 2008 meltdown in the developed markets.  This brings us to the real reason behind the buoyancy of the local market.  Investors are more comfortable keeping money close to home nowadays.  I think domestic liquidity will continue to be the driver and the beneficiaries will be the fundamentally sound stocks.

So, we could get buffeted around by what happens in China and Europe, but at the end of the day, it will still be the earnings growth of local stocks that will save the day for us stock market disciples.  New York and London had a mild sell off on account of Greece and Portugal, but I do not think that it will put a dent into the profitability of AP and AEV.  Neither do I think that it will reduce the prospects for DMC and MPI and certainly not TEL.  We may see some pull-back in JGS, RLC and URC, but I do not believe that the immediate and long-term future has changed for these stocks.  I think Ramon Ang will still tender for PCOR at 6.85.  The prospects for MBT, BPI, SECB and UBP have not changed.

Tell me then, what do you think smart money should be doing in a shake out such as Greece and Portugal?  Will that stop me from using my cell phone, taking out a housing loan or participating in the next elections?  Life will go on in the Philippines and so it will be with  Philippine stocks.