Gus Cosio says so

Ideas on the Philippine Stock Market

Not all that glitters is Goldman’s

10:00 am   Monday   19 April 2010  Philippine Stock Exchange Index  3208.05 ( down 61 points from Friday close)

The 125 point drop in the Dow is what I think is a classic example of buy on expectations and sell on news.  A large number of investors had been expecting better than expected results from the blue chip companies that normally report ahead of the less followed stocks.  Companies like Alcoa, J.P. Morgan, UPS, GE, BofA, the early results were above expectations.  So why did the market sell off because of the news of a Goldman Sachs scandal?  For one, Goldman’s are a very powerful force in Wall Street.  It influences a lot of fund managers through its sales and trading of stocks and bonds.  It also directly moves the market through the firm’s proprietary trading positions and the various hedge funds that it either owns or sponsors.  Bottom line, what I see is the market looking to bank some profits before going into the next profit cycle.

In our local market, we have been seeing some profit taking as well.  On last Thursday’s trade, we saw a bit of selling which took the index down 21 points.  This was followed by another wave of selling taking out another 13 points off the index.  Actually, we should not ignore the price actions the days prior to this decline.  On Monday last week, we had a very strong rally which took the index 38 points higher.  However, on Tuesday and Wednesday, the PSEi got stuck at 3299 – a foreboding sign that buyers are being reluctant to commit at those levels.  Anyway, our market saw profit taking ahead of Wall street for our own reasons.

Nevertheless, I do not think that local investors are impervious to what is going on in the major markets.  Asian markets have started to slump due to the anxiety brought about by Goldman’s facing U.S. SEC indictment and ongoing probes in Europe.  Remember that a few weeks ago, Greece revealed that Goldman’s had engineered financial products for the country to disguise its digression from the standards imposed on the members of the Euro – the common currency of member European nations.  Something like this could be very disruptive to the markets.  Furthermore, it tends to make investors suspicious of the recommendations they receive from their investment advisers.  Trading desks all over the world likewise will be taking a defensive posture which will tend to contract value turnover all over the world.  Short-term, this looks bearish for the big picture.

For the domestic picture, things have not changed much is as far as company fundamentals are concerned as well as for the underlying macroeconomic fundamentals.  The political picture has also not changed but because of recent global market events, there will be reason to provide more focus to the election factor.  Until today, investors have been comfortable that elections will go smoothly despite the various hoopla brought forward by many devil’s advocates in this country.  Personally, many of our countrymen appear to prefer the company of devils that the only position they wish to take on national issues is that of the devil’s.  At the end of the day, our country has had a good history of resolving political issues peacefully.  It just takes time.  So whether the various election scenarios play out, there will be a Philippine economy chugging along after May 10 and life and markets will go on.

In the meantime, I would advise careful following of strong stocks.  Remember that our economy will continue to hunger for electricity and power so keep an eye on your favorite power producers or distributors – AEV, AP, FGEN, EDC, MER, DMC and SCC.  Watch out for the banks as well because some are looking stronger than ever – MBT is one and PNB is another I continue to like.  It is helpful to remember also that you should enter at levels where you can handle the volatility.  There is no sense putting out money then losing sleep over it.

I think that the fact that markets are consolidating – no matter the reason – is constructive.  At the end of the day, in a situation like this, we all win.

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April 19, 2010 - Posted by | Financial markets in Asia

24 Comments »

  1. sir Gus, my broker told me this correction he foresees is long and could end up until the later part of the year, so he advice me to be on the safe side and liquidate half of my holdings on mpi and vll… any advice sir? thanks and good health to you sir!!!

    Comment by migs-ron | April 19, 2010 | Reply

    • Migs,
      I am not sure that this will be a long correction at all. What the Goldman fiasco did was give investors a reason to take profits. Why don’t you sell all your VLL because I think that stock is vulnerable whether Villar wins or not. MPI,I think is cheap at 2.85, but it depends on your level of comfort.

      Comment by Gus Cosio | April 19, 2010 | Reply

  2. Hi Gus,

    Ever since I started reading your blog, I’ve shied away from buying basuras and stuck with blues that have good liquidity and volatility. This I have done particularly for the kind of scenario we have right now. Currently, I’m holding ALI, AP, DMC and FGEN. Among these stocks, I’m most worried about FGEN dropping below 10 because the board lot increases to 1,000 and I will be left holding an odd lot. But in the medium-long timeframe, I’m not nervous at all.

    I personally think that this correction worldwide will not last longer than a month. I’d even be surprised if it goes on for more than 2 weeks.

    In any case, I wish to sell maybe ALI and FGEN even at marginal profits so that I can make the most of this correction since I am heavily invested with little cash left to bottom-fish good stocks like PNB, MBT and SM among others.

    I would love to hear your opinion on this.

    Thanks!

    Comment by richard | April 19, 2010 | Reply

  3. I tend to agree with you. I took my profit just around the 3200 level two weeks back. I decided to watch the market a little further from the sidelines. I think, this should blow over in a week or so. What you should do is look at the fundamental values of these stocks before make your decision because those will underpin the prices.
    For example, PNB will still be headed towards 45, but it may be stalled by this consolidation. MBT is headed for 60, but it may also be stalled. I don’t know what price SM is headed, but I believe it is cheap relative to its NAV.
    Good luck.

    Comment by Gus Cosio | April 19, 2010 | Reply

  4. Sir gus, i got FGEN at 2.75, its falling steeply in the past few days, not to mention that the coming election is still three weeks from now, should i sell it to cut losses or should i average down? im confused! wahhhh! hehe tnx in advance 🙂

    Comment by JimBoy | April 19, 2010 | Reply

    • oh thats 10.75, sorry for the typo error.

      Comment by JimBoy | April 19, 2010 | Reply

    • Personally, I would not worry about FGEN. 10.75 is not a bad price. It is a fundamentally sound stock and if you have some cash left, wait for a support price and buy some more. It is not the stock that is the problem right now; it’s the market.

      Comment by Gus Cosio | April 19, 2010 | Reply

  5. Sir Gus, whats your Entry price for MER?
    tia

    Comment by norman | April 19, 2010 | Reply

    • Norman,
      I do not have an exact target for MER. Now that it is below 170 (it closed 169 today), I am already looking at it. It is now a matter of WHEN to come into the stock rather than the exact price. That means watching to see a price support.

      Comment by Gus Cosio | April 19, 2010 | Reply

  6. Sir i got MPI today at 2.8, is this a good buy or not?:) tia!

    Comment by JimBoy | April 19, 2010 | Reply

    • Hi JimBoy,
      I think MPI at 2.80 is not bad. Just hang on to your seat because the ride may yet be bumpy.

      Comment by Gus Cosio | April 19, 2010 | Reply

  7. Hi Gus
    At what point would you say is a good entry point again for PNB given what’s been happening around us lately?
    Thank you.

    Comment by Adrian | April 19, 2010 | Reply

    • Adrian,
      I think any price below 30 should be okay although I sense a lot of demand waiting down there.

      Comment by Gus Cosio | April 20, 2010 | Reply

  8. Hi Sir Gus,

    Given PAL’s woes for the past few years, will it affect PNB? PNB may have a large exposure with PAL as both companies are under the control of Mr. Tan. Hoping for your advise on this matter. Thanks!

    Comment by James T. | April 19, 2010 | Reply

    • James,
      The simple and straightforward answer is that it will not. PNB cannot lend to PAL at all nor can Lucio Tan borrow from PNB without BSP oversight because what shareholders, directors and officers can borrow from their own banks is almost prohibited.

      Comment by Gus Cosio | April 20, 2010 | Reply

      • Oh yeah, that’s right. I think they called it DOSRI loans. Thanks for knock on the head. Hehe!

        Comment by James T. | April 21, 2010

  9. Hi Gus,

    I just checked the Bloomberg site now and it seems as though the market’s reaction to the Goldman suit might serve as a bear trap. Citi just reported earnings more than doubled and the Dow is back in the green after last night’s sell-off and the futures declining. If this bounce is sustained till the US markets close, and even gets stronger, we might see a strong performance of the Phisix tomorrow. Those who panicked earlier might jump right back in and with the profit taking last Thursday and Friday, quite a number of investors must be liquid.

    Congratulations to those who were able to buy at today’s lows. (Hope I don’t jinx it haha)

    Comment by richard | April 19, 2010 | Reply

  10. Sir Guys, what’s your take on RCM? My friend seems to be very excited about this stock. Thank you sir! 🙂

    Comment by JimBoy | April 19, 2010 | Reply

    • JimBoy,
      This stock is cheap and has always underperformed the market because it is illiquid and very few follow the stock. Until you find more than 5 other guys apart from your friend to be excited about the stock, I would avoid it. How will the price go up if nobody is interested.

      Comment by Gus Cosio | April 20, 2010 | Reply

  11. Sir Gus,

    Do you think that it would be better to stay liquid until some concrete election related negative news surfaces to create a good buying opportunity? I am concerned that if I stay too liquid (and most people are probably going to be quite liquid at election time) that I might miss the boat, if the thing that everyone expects to happen doesn’t happen (I mean if everyone buys during the elections then maybe the correction won’t be steep at all and I might end up buying at higher levels). I know that in a true bull market missing the initial phase is ok, but I have been reviewing my trades and have found that I really perform best as a counter trader then a pure trend follower.

    So I am thinking of shifting my money towards a mixture defensive and election related stocks that have been laggards so far (rather than staying very liquid) so that I am exposed to the market but with some defensiveness and with risk leaning more upwards than downwards (because of the laggard and election related nature of the stocks that I choose). The problem though with these stocks is that they are not very liquid although they are almost sure to be liquid again at some point within the year. These stocks are MWC, GMA7, and PIP. Then perhaps I can also keep some of my FGEN and FPH, which, although have historically been high beta stocks, have been forming large consolidation pattens over a long period of time now.

    Another option is to stick to just FPH and FGEN and probably a little bit of SECB and around 50% cash/SDA.

    My last option is to liquidate everything and cost average on an equity UITF throughout late April to Late June, with a view to exiting during the “ber months” or when the PSEI hits around 3800, whichever comes first. Obviously I would be making less, percentage wise, but I will have the benefit of being 100% exposed with no liquidity (exiting) concern. I guess you could say quantity over quality/efficiency of earnings.

    You thoughts would be most appreciated, perhaps by your other followers as well. Thanks!

    Comment by Warren | April 19, 2010 | Reply

  12. Warren,
    My fundamental view is that the market is headed higher this year. There will be times when the market will be overbought. During these instances, I will chose to take profits and reduce positions. Because I would not want to be naked in positions, I chose to keep only strong stocks while I wait for an overbought or strong support condition to occur at which time I will increase my positions gradually. I’m not so self-consumed to think that I can catch tops and bottoms, because no one can do that consistently. What I want to do is catch most of the trends and squeeze a return for the exercise.

    Comment by Gus Cosio | April 20, 2010 | Reply

  13. Thats actually what I’m doing with FPH right now.

    I guess with all the negativity recently it would make sense to buy the stocks that have already been trending strongly, but which are currently correcting, rather than those that have been slowly consolidating. Then maybe I’ll maintain core positions in those while taking some profits, as opportunities arise, on a portions of them.

    Thanks!

    Comment by Warren | April 20, 2010 | Reply

  14. Hi Gus,

    Last night the Dow went up on positive news and yet the local market went significantly down. This makes 4 straight red days, 3 of which were in contrast to the US markets. I know the Phisix doesn’t always track the Dow but I don’t think I’ve seen it behave this way before. Could it be that the election woes are finally catching up with the market?

    Thanks.

    Comment by richard | April 20, 2010 | Reply

    • Richard,
      It is no surprise to me that the market is correcting. We diverged as early as Thursday last week and rightly so because of political uncertainty. Nonetheless, Fundamentals are strong and so is investor sentiment; so while I warn people to be cautious, I think they should be clever enough to judge real value in stocks. I still believe that returns on stocks for 2010 will approach 20%. That should eventually take the index to at least 3600 by year end.

      Comment by Gus Cosio | April 20, 2010 | Reply


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