Gus Cosio says so

Ideas on the Philippine Stock Market

Again in perspective

9:00pm Thursday  20 May 2010  Philippine Stock Exchange Index 3222.19 (-1.32%)

I would like to put some perspective on the local market moves.  we have been buffeted by events which have all been external in nature.   Just recall the relief rally that the market saw last week after we had a very convincing elections which for the first time had been automated.  We were encouraged by the swiftness of the results.  What impressed me more was the early conceding of Manny Villar who was a very strong contender in the last polls.  The act was further supported by the rest of the losing candidates likewise conceding.  Only Erap, who probably has very little comprehension of the science of statistics and information technology, has not conceded.

If the European sovereign debt scare were not around, we would probably be seeing a stronger market.  Unfortunately, the greater majority of investors have very little understanding of the situation in Greece and would rather take profits rather than risk losing.  I have no argument with that.  Last week, we saw a single day low in the DJIA which sent the index to a 996 points intra-day drop.  At first, it was thought that it was a computer glitch; but when the dust had settled, authorities realized that there was really some massive selling in what is known to be the dark pools of liquidity.  These are private trading platforms in developed markets where very large trades go through and eventually mapped in the formal exchanges after the trade.  I think the selling was sparked by fears coming from the debt crisis in Greece.

In a post-election forum on Tuesday, economist Dr. Bernardo Villegas said the debt problem in Portugal, Ireland, Italy, Greece and Spain could spill over and cause another recession in the United States and Europe and, should it occur, will cause a slump in Philippine exports.  “Things are looking rosy in 2010, that’s why exports rose by more than 40% in the first semester. But I’m warning the new government next year may not look as rosy,” Dr. Bernardo said.

There may be some difficulties ahead in global trade, but there are also positive signs that these stumbling blocks to growth are being mitigated.  Yesterday, Applied Materials (AMAT) of the U.S. reported results that exceeded analysts expectations.  I think this is very significant especially to a semi-conductor manufacturing country like the Philippines. AMAT is the largest supplier of manufacturing systems and related services to the global semiconductor industry.  It is a grandfather company to the electronics market, therefore, its strong recovery presages a strong recovery in the global electronics market.  That will be good for Philippine exports and will fuel some consumer spending in the country.

So there is a growing opinion that Europe may affect the real economy because of our level of exports.  While I think our exporters should be cautious, other indicators do not fully support this particular expectation.  As a market practitioner, I think that it is merely the relative value of assets between Europe and Asia that investors will be pricing in to their portfolios.  It may move the general level of  local asset prices, particularly stocks, but not to the same degree that it will affect Europe because over the past few months, the strategic moves of global portfolios is to raise their level of exposure to Asia.  We had seen that strategy recommendation from every investment banker that had come to Manila since the end of 2009.

At the end of the day, it will be the sound fundamental conditions of individual companies that should lend support for the markets.  With corporate earnings mostly showing positive growth, our market will likely revert to its normal course over the next few days.  We were disrupted by election anxieties and the possibility of another global contagion coming from Europe.  The election discomfort is already playing itself out.  All these calls of massive automated cheating is being discredited simply because the evidence bears out the contrary.

If we focus on earnings of local companies, we really have lots of reasons to rejoice.  For example, DMC disclosed net income rise of 82% in 1Q10 to Php 1.4 billion due to dramatic increases in its construction business and power and energy businesses.  Net income at SCC which DMC owns a majority of was up 99% to Php 594 million which now owns Calaca Power.  Both DMC and SCC are trading at single digit PEs.

One reader sent me information on GMA7/GMAP GMA7 1 Q10 results.  Net income is up 71% YOY to Php 855M showing an ROE of 29%.  That should perk up the stock price although I would be slightly careful as network competition may erode market share.  Anyway, GMA7/GMAP may see a bounce when the market perks up.

I guess the question remains whether or not the rally that we have been seeing has finally run its course.  I cannot say definitely if it is intact or over.  All I know is that money or excess liquidity is the fuel for asset prices and financial assets are the most elastic of all asset classes.  One thing for sure is that in the face of another recession, the major central banks will not pull out money from the system.  Certainly, they will not squeeze the rest of the world all because of Greece.  What Europe will do is they will strap Greece with stringent austerity measures if they want to save the Euro as a common currency.  Otherwise, they will have to kick Greece out of the monetary union which is probably the better thing to do.  Furthermore, inflation has been very tame.  Headline CPI in the U.S. was reported at -0.1% down month-on-month for April. Core U.S. inflation as measured by CPI rose only 0.9% year-on-year.  what this means is that there is no threat that the Federal Reserve Bank will pull back monetary growth.

All told, I think what we are seeing is a classic case of fear overtaking the greed behind the most recent rally.  remember that our market had gone up one the whole by 9% at its peak last week.  At today’s close, we are barely 6% from the beginning of 2010, a 33% consolidation.  Will our economy tank in the next 6 months such that stock prices should also spiral downwards?  That is what is causing the fear.  I do not want to second guess the economy; what I would like to do is choose companies that would do well even if the economy slows down again because I am still of the opinion that equities as an asset class is where returns can be significant.


May 20, 2010 - Posted by | Financial markets in Asia


  1. sir gus, which stock is better to own EDC or FGEN and why :)? Thanks.

    Comment by jovy | May 20, 2010 | Reply

    • Jovy,
      I have no idea which is better to own. I like both stocks.

      Comment by Gus Cosio | May 20, 2010 | Reply

    • Hi,

      Also please take a look at AP and study further if you want exposure to power generation, cheaper PE, better dividend yield, lower management pay.

      Comment by alex | May 20, 2010 | Reply

  2. I guess PNB is a company that is a bit dependent on the economy huh Sir Gus :(… Oh man, I hope Greece turns out ok

    Comment by wren | May 20, 2010 | Reply

    • wren,

      What is your problem with PNB? I think it’s a very good stock to own, if you bought it somewhere around 32-33, i suggest you buy more at these levels. The stock is a sure win in 3 – 6 months time.

      Comment by JohnTheMan | May 20, 2010 | Reply

      • I agree with John on his outlook.. im also accumulating this stock @ 30….

        Comment by mike | May 20, 2010

    • Wren,
      I think the better expectation is to see Greece to go under. That would force the rest of the EMU members to stick to strong economies within the monetary union. Otherwise, they’ll keep on getting into crises such as these. As to PNB, remember that this stocks moves in spurts. It was inert within 22-24 for a long time before it leaped to the 33.50 high. I expect it to be flat around 29 to 31 in the next month or so until new developments on the merger with Allied is again announced.

      Comment by Gus Cosio | May 20, 2010 | Reply

      • Ok John, you are the man. Thanks for the advice.

        Thanks too for putting it in perspective Sir Gus!

        Comment by wren | May 20, 2010

      • Sir Gus, Gentlemen:

        Whats your view on the Phil banking sector in general? I think with the current market situation, trading gains may not be easy unlike last year when valuations are depressed. There is also proliferation of bond issuances by big companies instead of bank borrowing. I read in the papers that competition among banks for top corporate borrowers maybe pushing net interest margins down.

        I understand that when economy improves, companies will borrow to expand benefitting the bank’s bottomline. But with so many lenders competing, (and the bond market direct to the savers) will that be enough for the banking sector to have respectable earnings growth?

        Appreciate your thoughts on this.


        Comment by alex | May 20, 2010

      • Alex,
        As a matter of fact, I will be giving a presentation next week to a provident fund client. My advise is to increase weighting on financial stocks notably MBT, SECB, PNB, UBP, CHIB and RCB. I think banks can generate a .ot on net interest margin with very little risk in their bond portfolios.

        Comment by Gus Cosio | May 20, 2010

  3. sir,

    is this the best time to do “all-in” moves?
    im looking the situation now as a golden opportunity to increase investment or this is just my consolacion words of wisdom?
    by the way im holding pnb, dmc and px. thank you sir.

    Comment by draco23 | May 20, 2010 | Reply

    • Hey Draco,
      Those 3 stocks plus MBT form the core of my portfolio. I added DMC and MBT today. I’m waiting for a clearer global outlook before I add to my PX.

      Comment by Gus Cosio | May 20, 2010 | Reply

  4. Hi Sir Gus,

    I take out FGEN in my stock positions, instead replaced it with EEI (I bought it at 3.65). What do you think about this stock, some say it target price is between 4 to 4.5 because of its revenue generating projects in abroad…Trendwise, though slowly continues to accelerate higher.

    Thanks in Advance.

    Comment by Romy | May 20, 2010 | Reply

    • Romy,
      EEI is fundamentally a good stock. It is not, however, a trading stock. You must sit on it a while to earn a good return, so don’t be impatient with it.

      Comment by Gus Cosio | May 20, 2010 | Reply

      • Sir Gus,

        There was a time, about 2 years ago, when EEI was trading at 0.80/ share. I didnt buy any because I do not understand why everyone seems to be selling it. That would have been 5x return at it current price if you just “park” your money as you sometimes would have it.


        Comment by alex | May 20, 2010

  5. Sir Gus,

    What your experience on share buy back for companies ? I noticed AC actively does it, JGS for instance does not but instead buy additional shares of UIC slowly. I wonder what is reason for it because income of UIC is not anyway added to its income attributable to holders of JGS equity?

    My apologies for having so many queries. Regards

    Comment by alex | May 20, 2010 | Reply

  6. What do you think of Pepsi. Fairly valued P/E. Do think there’s still a growth trend in the juice market. How about mindanao plant expansion, do you think theres a strong potential growth play here. 1st 3 months is bad. Higher cost of sales and operating expense. Eps rate of change -50%. Sir what do you think?

    Comment by Simple | May 20, 2010 | Reply

  7. What’s your analysis on Pepsi? fair valued P/E Do you think Pepsi can outshine the Phil market.

    Room for target market – mindanao, A growing trend consumer in juice market? 1 quarter 2010 was bad, cost of goods sold and operating expense are high. EPS rate of growth change was -50% from 0.06 to 0.03.

    Comment by Simple | May 20, 2010 | Reply

    • Simple,
      I think PIP has run its course. Top side, I think is 3.25.

      Comment by Gus Cosio | May 21, 2010 | Reply

  8. any news if sph is planning to redeem their frns later this year?

    Comment by ed | May 20, 2010 | Reply

    • Ed,
      they probably will. they are still sitting on a huge pile of cash.

      Comment by Gus Cosio | May 21, 2010 | Reply

  9. Hi Sir Gus, I think the Euro Crisis is very similar to Asian financial crisis that lasted for more than 2 years.

    Comment by Boysi | May 20, 2010 | Reply

    • Boysi,
      Yes, it could.

      Comment by Gus Cosio | May 21, 2010 | Reply

  10. Best Strategy right now Buy on Dips sell on Rally….Chasing any Rally will result to a Financial Disaster…

    Comment by Roy | May 20, 2010 | Reply

  11. Sir Gus,

    How about rlc? Do you think it’s a good buy at this level?


    Comment by jolly | May 20, 2010 | Reply

    • Jolly,
      I like RLC. You could buy some now, and some again later.

      Comment by Gus Cosio | May 21, 2010 | Reply

  12. Sir Gus, what must we do tomorrow? Sell or hold? Im quite worried now

    Comment by charmagne | May 20, 2010 | Reply

    • Sell …i sold everything last wednesday…

      Comment by karl | May 21, 2010 | Reply

      • SELL!!!! So i could buy more! hahaha 😀

        Comment by JohnTheMan | May 21, 2010

    • Charmagne,
      If you look at the ones who make the most money in the market, they are those who are not afraid to lose it. The age old wisdom that those who hold tight to their money end up losing it apply very well to stock trading. Think before you move. Do not let emotion overcome your decision. Look at the fundamentals and manage your cash position wisely.

      Comment by Gus Cosio | May 21, 2010 | Reply

      • Thanks sir Gus. I decided to hold because I have good stocks anyway. I will just wait for a good rebound.

        Comment by charmagne | May 21, 2010

  13. The worst is yet to come….Sell before everybody sells…

    Comment by karl | May 21, 2010 | Reply

    • hopefully if the level of prices come down as of Mar’09, then should be another opportunity to buy hoping for another strong accumulation of profits. seems that dow is still 30-40% up vs. March’09 as well as PSEI.

      Very excited to buy again.

      Comment by mark anthony | May 21, 2010 | Reply

      • Mark,
        I think if you intend to wait for 2009 price levels, you should go on a very long vacation. Then, when you come back, you may have to wait some more.

        Comment by Gus Cosio | May 21, 2010

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