Gus Cosio says so

Ideas on the Philippine Stock Market

Finger on the pulse

11:39 pm  Wednesday 30 June 2010

I don’t know if many of you follow this relationship, but the daily correlation between Dow Jones Industrial Average (DJIA) and the PSEi fell to 0.19  in the 2nd quarter from 0.93 in the 1st quarter.  The perfect correlation is 1.0 so the decoupling theory was confirmed in the recently ended quarter.  The question that lingers in the minds of many is whether this disjoint will continue in the coming quarter.  Historically, the 3rd quarter is not very straightforward in the local market.  In 2007, we had a strong July only to see it tumbling from August to September.  The market went on to recover until October when a second peak was seen.

Fortunately, even if global conditions are still shaky at this point, most of the bad news is already in the open.  The problem with 2007 was that the crisis was all below the surface and the financial markets were in denial.  This time around, the financial markets have been discounting one crisis after another even if they are not yet sure to happen.

For example, from 2007, most market analysts have been warning of asset bubbles bursting in China and even South Korea.  Actually, overpriced assets such as real estate and large capitalization stocks in the two countries have adjusted in price.  If you look at China, their market has tanked to the 2,500 level and has been stuck in that range for a few months now.  The Chinese monetary authorities have also pulled back financing for speculative purposes.

In Europe, the crisis in Greece sparked anxiety for Portugal, Spain, Italy and Ireland.  So far only Greece has really gone to the tank.  Spain and Portugal has managed to restructure their funding program without much controversy, although they’ve had to pay up for the money.  Italy and Ireland, should they come into further trouble, will no longer be a surprise.  Even now, their financing positions have been analyzed to death by global think tanks, investment banks and supranational financial institutions.  Any possible crisis, I think is already in the price of most assets, including Philippine stocks.

The local market, I believe, continues to present good value for investors.  For one, our financial sector is very sound which is something that cannot be claimed by economies in Europe.  The power sector, for its part, is facing strong growth prospects.  Profitability of the sector is also quite compelling.  Given the enviable consumer spending reflected in the 1st quarter GDP figures, consumer and housing related stocks should present favorable prospects.  The beating that the biggest telco stocks took in the 2nd quarter should start making the stock attractive.  TEL for one is giving dividend yield of 9% per annum at today’s prices.

In short, I think we enter the 3rd quarter with skepticism coming not from internal sources but from troubles outside the Asian region even.  What it will bring is volatility that will be purely sentiment driven.  I for one think that situations such as this is a formula for portfolio outperformance.  Of course, one must watch prices very closely to see the ebb and flows of the tide of buying and selling.  Just like the a skilled sailor is able to sail with the tide, so should a skilled stock market investor.  The thing about the sea, the tide is predictable.  The stock market is little more tricky; nevertheless, the tide of sentiment can be detected, just as a physician is able to detect a pulse rate.  You just have to keep your finger on the artery.  For us market people, the lifeblood is money.  We should the be persistent in following the money flow which is the pulse where our finger should be.

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June 30, 2010 Posted by | Uncategorized | 23 Comments

testing the font

I do not know what happened last night when I posted.  All of a sudden, the fonts were smaller.  It could be that the servers of wordpress had gotten very sleepy since it was past 11pm when I posted.  Anyway, I hope the fonts are normal now.  Sorry for the inconvenience.

For your easy reading, I am re-posting last night’s blog here for easier reading.

Arguing against an idea

11:00pm  Sunday  27 June 2010

According to an analyst that I follow, the DJIA “failed at its declining 50-day moving average.Even worse for the bulls was its failure to attract buyers at last week’s breakout area and 200-day moving average near 10,250. This area may become resistance on a bounce moving forward, so traders should keep an eye out. While DJIA closed flat on Friday, it was well off the lows that could be showing some buyers in the low 10,000. This was where the majority of trading volume occurred in the past few weeks and could represent an area of support.”

He further wrote that:”The markets are at an area where traders need to show patience. Overall, most of the market indexes are right in the middle of their most recent highs and lows. The weakness shown this week was not promising at all, but there is the possibility that the markets will form a higher low in this area. This would be a positive sign, and could cement the recent area as a more important intermediate low. However, it is still too early to interpret the possibility that this will happen, and there is still the real possibility that the markets will flounder in this area for a while before breaking much lower. This is why traders need to show patience, and allow the markets to fluctuate until more clear patterns emerge. While it is tempting to try to pick the bottom of this pullback, traders are probably better served waiting for the markets to stabilize and present a better opportunity.”

Local traders may be wondering why our market is slightly out of sync with the weakness in the global markets of the past week.  My only answer is that there are quite a number of special situations which are too compelling to ignore.  MBT for instance, as a proxy play for the economy, may just exceed expectations.  While this presents a very strong possibility, the market may just have moved ahead of itself already.  I would not chase MBT at this point and try to wait for a consolidation.  I feel the same way for AEV, AP, URC, RLC, and even DMC.  I would use any steep correction, nevertheless, to accumulate these stocks in the coming days or weeks, and I will be patiently waiting.

For stocks like DGTL which to my mind has gathered a lot of following and momentum, I would take bold moves and ride the momentum.  For the likes of PNB, EDC and FGEN, I think that they remain at the low-end of their recent range so I do not think it very risky to position trades for these issues.

As the man who analyzes the developed market say, the real virtue in this market is patience.  Ask any businessman, patience is what you really need for a sustained stream of profits.  I wouldn’t argue against that idea.

June 28, 2010 Posted by | Financial markets in Asia | 38 Comments

Arguing against an idea

11:00pm  Sunday  27 June 2010

According to an analyst that I follow, the DJIA “failed at its declining 50-day moving average.Even worse for the bulls was its failure to attract buyers at last week’s breakout area and 200-day moving average near 10,250. This area may become resistance on a bounce moving forward, so traders should keep an eye out. While DJIA closed flat on Friday, it was well off the lows that could be showing some buyers in the low 10,000. This was where the majority of trading volume occurred in the past few weeks and could represent an area of support.”

He further wrote that:”The markets are at an area where traders need to show patience. Overall, most of the market indexes are right in the middle of their most recent highs and lows. The weakness shown this week was not promising at all, but there is the possibility that the markets will form a higher low in this area. This would be a positive sign, and could cement the recent area as a more important intermediate low. However, it is still too early to interpret the possibility that this will happen, and there is still the real possibility that the markets will flounder in this area for a while before breaking much lower. This is why traders need to show patience, and allow the markets to fluctuate until more clear patterns emerge. While it is tempting to try to pick the bottom of this pullback, traders are probably better served waiting for the markets to stabilize and present a better opportunity.”

Local traders may be wondering why our market is slightly out of sync with the weakness in the global markets of the past week.  My only answer is that there are quite a number of special situations which are too compelling to ignore.  MBT for instance, as a proxy play for the economy, may just exceed expectations.  While this presents a very strong possibility, the market may just have moved ahead of itself already.  I would not chase MBT at this point and try to wait for a consolidation.  I feel the same way for AEV, AP, URC, RLC, and even DMC.  I would use any steep correction, nevertheless, to accumulate these stocks in the coming days or weeks, and I will be patiently waiting.

For stocks like DGTL which to my mind has gathered a lot of following and momentum, I would take bold moves and ride the momentum.  For the likes of PNB, EDC and FGEN, I think that they remain at the low-end of their recent range so I do not think it very risky to position trades for these issues.

As the man who analyzes the developed market say, the real virtue in this market is patience.  Ask any businessman, patience is what you really need for a sustained stream of profits.  I wouldn’t argue against that idea.

June 27, 2010 Posted by | Financial markets in Asia | 16 Comments

Ignoring sentiment

6:45pm  Wednesday 23 June 2010   Philippine Stock Exchange Index  3342.97 (-0.26%)

The index came down again today with TEL and ICT moving down further.  Heavyweights AC and ALI contributed some points to the decline.  Even some of my favorites such as AP and EDC are down.  Why then am I not worried?  I guess with DMC and SCC being strong as they are, I cannot generalize that the market is broadly weak.  Other stocks that are high on my buy list such as URC and MER were also firmly bought today.

The market has become rather selective which is a good sign because selective buyers usually are firm hand buyers.  They are selective because they intend to hold the stock until it realizes its full value.  Of course, if the major markets will always bring ripples and even waves to local stocks, but we must not lose perspective of domestic conditions.    In a statement to Bloomberg News today, Economic Planning Secretary Augusto Santos that there are solid indications of underlying strength in the local economy.  Philippine economic growth may exceed the target the government set with manufacturing and service businesses being boosted by global recovery.  Second quarter growth may match or exceed the first quarter’s 7.3 percent pace.  The fiscal crisis in Europe has little effect on the Philippine exports to the region or on remittances from overseas Filipinos.  The government last week raised this year’s gross domestic product growth target to as much as 6 percent, from a previously forecast 3.6 percent after reporting the first quarter expansion, which is the fastest since the second quarter of 2007.

Another factor not to ignore is the fact that sentiment of businessmen and investors are usually upbeat after an election.  That sentiment is being widely felt today.  If that translates to some concrete foreign direct investments into the country in the next six months, GDP growth may really exceed expectations.  Should all of these materialize then saying that the market could be bullish would in fact be an understatement.

What it would boil down to is money management on the part of investors and portfolio managers.  The game will be won by those who can wisely allocate to the market within the ebbs and flows of extreme sentiments.  What I am trying to say is that one should not be overly bullish when everybody else is nor should be overly bearish when people are running scared.  Based on today’s price action, I think players are being quite deliberate and very cerebral in their buying and selling activities.  To my mind, we are seeing market conditions that is mature and may not be subject to panic even when adverse news come out from the developed market.  We have been outperforming Wall Street and Europe so far this year.  We may just follow it through for the rest of the year.

June 23, 2010 Posted by | Financial markets in Asia | 60 Comments

A path to power

9:45 am  Wednesday  23 June 2010   Philippine stock Exchange Index  3336.79

The Philippine market may have gone down a touch Tuesday, but from where I sit, it did not seem that it did.  The stocks that I was very positive with – MBT, DMC and PNB were all up.  Only EDC was down and by only a fluctuation.  I came to the conclusion when the market closed that all was still well.  I reckon the ones holding TEL and ICT were the only ones that felt the drop of the market.

Anyway, I cannot instinctively reduce my positions for the time being because I cannot help but feel that money is still finding its way into the Philippine market from abroad.  The Asian and European markets are all easing from their bounce yesterday.  It might be that the initial spurt arising from the more flexible reminbi could be running into trouble.  Personally, I like the skepticism.  It tells me that many are underestimating the stronger weight of reminbi in the market.  Many western investment portfolios are probably under allocated in East Asian markets.  Unfortunately, much of their European portfolios could be underwater and funds are unable to rotate out of old positions.  The irony in the local market is that players are always waiting for the foreigners to make the first move.  People have such short memories; if you look back to last year’s rally, it was fueled first and foremost by local funds.

I maintain the view that what would take us to the next higher level will be the locals with greater participation of institutional funds.  The westerners are just too zapped out with one financial crisis after another.  In the meantime, the money that has come home to the Philippines is still waiting to be put to work.

I would approach the market with some caution by continuing to avoid speculative plays or stocks that are being jockeyed.  There will be special situations or recovery plays, but one has to be very careful in picking them out.  It could be a day to buy on weakness as stocks like DGTL, DMC, AP, JGS, URC and MBT are pulling back a touch.  There had been some interest in BPC as the stock starts to recover.  I think BPC, EDC, FGEN and MPI are similarly resting at the lows of their trading ranges.  If I am correct and today’s weakness is a simple consolidation, then we could be up for good times ahead.  I guess, you just have to trade the ranges considering that this sector – the power sector – is firmly in its growth path.

June 23, 2010 Posted by | Financial markets in Asia | 25 Comments

Our small corner of the world

6:45 pm  Monday 21 June 2010 Philippine Stock Exchange Index  3357.88  (+0.67%)

The news that hugged the international financial headlines today was China’s decision to allow greater flexibility in the renminbi.  This caught many by surprise and the initial reaction  in equity markets is likely to be positive.  Beijing sees this as a re-balancing of the global economy, and it has been welcomed by the U.S. and other trading partners as it should ease trade tensions among them for a while.  It will also reduce the need for aggressive hikes in Chinese interest rates, which had worried commodity markets.

This should also reduce the pressure on the safe haven demand for the U.S. dollar because of the positive effect of China’s move on global sentiment.  The reduced Chinese intervention on its own currency should lower demand for US Treasuries, and that other Asian countries including Japan will now be more tolerant of strength in their own currencies against the dollar.

The world is indeed changing and values of financial markets continue to adjust.  Markets are no longer U.S. and Europe centric as investors choose to diversify into the Asia.  Since last year, after the financial crisis in the western hemisphere started to resolve itself, I had mentioned that money will be flowing into our hemisphere.  We are seeing a confirmation of this trend, and I think the benefits will be further felt by our market.  I would continue to be constructive in Philippine stocks as a result.

I think that MBT could breakout above 58 soon as more investors realize that this is one stock that could be a proxy for the banking sector in the market.  I would avoid being underweight in this stock.  Among power stocks, EDC is a definite buy and momentum looks to be growing for this stock.  My senses also tell me that PNB might be popping up anytime soon.  There has been steady volume and strong support at 29 that it could just jump out of this range anytime now.

While DMC has been very strong and looks overbought, I would also be careful not to be without this stock because it could be breaking out soon.  Again, its energy and utility components are just too strong to ignore, not to mention the strength of its property and construction businesses.  MPI looks oversold and could turn up anytime soon.  MPI is in similar businesses as DMC such as water utilities and power.

Among the mining stocks, LC pierced through its 50-day moving average.  I would keep an eye on LC because it may have gone past its doldrums already. I would not ignore PX also because of some recovery in mineral prices and the stratospheric price of gold which hit a record high last Friday.

Looking at its chart, MEG might be trading at the high of its range already.  I would sell MEG and buy AGI, which is appears to have seen strong support at 5.60.  I hear that the hotel and gaming business has gone level up already.    URC is also gathering renewed strength with average volume moving up in the past two days.  If you like the consumer story, URC will be a strong beneficiary.

I think the China story today will be positive on the whole to the global sentiment.  We just have to make the response in our small corner of the world.

June 21, 2010 Posted by | Financial markets in Asia | 23 Comments

What’s the L.A. Lakers gotta do with the market?

9:55 am  Monday  21 June 2010   Philippine Stock Exchange Index  3355.04

The S&P 500 index closed a touch lower on profit taking on Friday while the  DJIA edged higher.  The mixed close looks constructive to me because it hints of consolidation of the broader market while evidence of strength is building among the headline stocks.  Technical analysts think that stage is set for a steady to higher opening this week in the U.S. markets.  It appears to me that in the absence of discouraging news from the developed markets, things can start looking good locally.

It would not surprise me if people are in a buying mood at the start of the week.  MEG and AGI, for instance, are showing good trading opportunities.  I think MEG has gained some momentum and the anxieties surrounding the rights issue has been overcome.  What I think could break out this week is AGI whose price action looks like it has reason to move a level higher in the next couple of days.

A stock that may be worth the punt today is BPC.  I think with the major management moves going on in the company, there should be some new ideas being injected into the company.  Also, given that the Lopez family had lost control of Meralco, it would not be surprising if they try to consolidate resources in BPC which is actually the parent company of FPH.

One should also watch DMC this week because it is so close to its breakout point and with the rights offering of SCC being well subscribed, DMC may just take-off to the next level this week.  DGTL is also one idea that may be worth taking despite the sluggishness of the telco sector simply because it is the only one of the three major telcos that is showing growth through increase in market share.  Of course, enthusiasm remains with its parent JGS.  Having said that, perhaps GLO should be sold and TEL could be avoided.  Nevertheless, we should watch out for the next dividend declaration announcements because TEL has around 8% yield at these levels.

Among the power stocks, I was having a discussion with a broker friend of mine and he was accumulating EDC for the simple reason that it provides the main growth driver for FGEN and FPH.  EDC from a technical standpoint looks pretty much oversold at recent prices.

All told, I think the market is looking rather positive.  I feel constructive with the stocks I follow.  Some investors will likely go for the banking sector as a proxy for the economy which I think is on a firm upbeat.  This week will probably prove profitable for those who play from the long side.

June 21, 2010 Posted by | Financial markets in Asia | 17 Comments

The nervous and the strong willed

7:20 pm  Thursday   17 June 2010   Philippine stock Exchange Index  3313.52  (+0.1775%)

What do we think is the market telling us when it is as volatile as it was over the last 3 trading days.  Tuesday was a price surge arising from stability and strength in the major markets.  Wednesday saw the market opening very strong and rising by 47 points but closing up 29 points only.  Today, Thursday, the index closed 5 points higher but had changed directions practically every quarter of an hour.  The breadth of today’s volatility is quite sanguine, however.  The difference between highs and lows was 15 points.

I think that participants is trying to gather conviction.  Many stocks present very good valuations but prices have come up a lot for many of them, particularly in the power and banking sectors.  With the threats coming from overseas, it is not surprising that players want to pocket their profits.  Looking at stocks like DGTL and JGS, for instance;  these stocks have lagged for sometime until traders realized that they were cheap to comparable counters.  They have had sharp rises over the past few weeks that profit taking is very tempting.  The same argument can be made for  a number of other stocks notably those that have power and infrastructure, stocks like DMC and EEI.  Looking further, I think that the market is base building at these levels considering that the second quarter is about to close.  Earnings reports will be just over a month away and it may be worth the wait for both new buyers and sellers.  Anyway, it looks to me that we have a market that is nurturing some pent-up demand, so I am comfortable that prices are still headed better.

MEG seems to have shaken off the anxiety coming from the last installment of their rights issue.  It should resume on its march to 1.60 to 1.75.  Third liner RFM has seen some buying surges.  I guess the company will try to recover at some point, but I will be careful with this stock as many had been burned badly in the past.

There was a large cross of MBT today at 56 for around Php 1 billion.  I heard that they were foreign funds who changed hands on the stock.  I view this as good support for the stock where a profit taker was met by a big buyer at these high levels.  It give credence to my view that MBT is headed to my 70 target as well as to my notion that MBT can be used as a proxy for the entire Philippine market.

In the international scene, Spain which is one of the so-called troubled sovereign borrowers was able to raise 3.5 billion euros ($4.3 billion) of 10-year and 30-year bonds at yields lower than the prevailing market rates. The bids were as much as 2.45 times the securities on offer, assuaging concern that it would face difficulty meeting bond repayments.  I think things may be normalizing in Europe already.   Most European stock markets are up as of this writing.  In Asia, The Hang Seng has been steadily climbing and while the Nikkei was down slightly today, it remains up for the week.  I can’t help to think that the nervousness that has gripped the equities market last week has been eased and the outlook has become brighter.

I think we should be ending the week on a positive tone.  I think the recent volatility is simply telling us that positions have passed from the nervous to the strong willed.  That could make the support at this level of the index very firm.

June 17, 2010 Posted by | Financial markets in Asia | 17 Comments

Coming to our side

9:30 am  Wednesday 16 June 2010  Philippine Stock Exchange Index 3319.50 (at the open)

The Dow, S&P and Nasdaq all closed higher overnight in new York.  Some analysts believe that the rally that started in the beginning of June has been renewed as the high-range closes on all three indices sets the stage for a steady to higher prices for the rest of the week.   If the U.S. markets extend Tuesday’s rally into Wednesday, it could squeeze out a lot of the bearishness that had been brought about by the European sovereign debt crisis.

We can agree or disagree with that view, but the reason I mention it is because while the Philippine market has not been completely correlated to the major markets, local investors inevitably react to major market moves.  What I see as an opportunity here is that a number of stocks are trading in oversold levels.  The ones I see are EDC, FPH, MPI and PNB.  I think there may be a lot of skepticism on EDC due to the earnings drag that people foresee in their acquisition of the Bac-Man generating facilities from Napocor.  One reason why I think it is worth the trade is because all of the foreign brokerage houses are all focused on the power sector as the main story in the Philippine market.  Of course the favorite has been AP and I have no reason to disagree.  However, i think that most people will agree that the long-term story on EDC remains intact.  The recent price moves may be seen as an adjustment to the lower earnings per share expectation on EDC.  In my view, even if they downgrade the earnings by 15%, at a price of 4.50, the stock will still be trading around 11X PE which is not so bad for a very liquid stock.

MPI could also end up to be a profitable trade as it is trading close to the lows of what I perceive to be its trading range of 2.65 – 3.25.  MPI is an infrastructure play that may seem to be slow-moving to some, but the stock is a good trader for short-term traders.  It’s long-term prospects, nonetheless, cannot be ignored particularly because it owns management control of MER.  Incidentally, MER should also be a good short-term trade.

While the excitement will continue to be in the power sector, there is the view that the broad market will give benefit to banks as a lot of large ticket financing is expected in the first year of the Aquino administration.  Do not forget that in all presidential elections since 1992, the market had gone up at least 14% in the 12 months following the elections.  I will continue to see favor in MBT and PNB while SECB, CHIB and even RCB would enjoy relative firmness.  The reason why I am not too hot on BPI and BDO is because these stocks are quite expensive per my valuation.

My message is really that we will be seeing a favorable market now that the global markets are promising some hope.  Telcos, property and some theme plays like AGI and JGS would also stand very good chances of giving good trading profits.  Just stick to good fundamentals because the market looks to have come back to our side.

June 16, 2010 Posted by | Financial markets in Asia | 28 Comments

Spurts and outliers

11:45am  Friday 11 June 2010  Philippine Stock Exchange Index  3253.78

What I am seeing is a market that wants to move higher but gets fidgety whenever external factors, notably Europe and the U.S., show their ugly economies.  Actually, I am not convinced that it is all that bad after seeing the huge rise in China trade figures announced yesterday.  China’s exports jumped an unadjusted 48.5% in May from the same month a year earlier, while monthly imports surged 48.3%.  The question that nags me is “who is buying and who is selling?”  The U.S. consumer is not buying new houses, cars and refrigerators (consumer durables), but nobody has stopped shopping at Wal-Mart or Safeway.  The point is, the average American still has to buy the day today supplies and gadgets, many of which are produced in China.  Same thing goes for the European consumer; their wine may not come from China but their sneakers and laptops do.

So the developed economies are slowing down, but it does not imply that trade with selected regions will drop drastically.  Life will go on and old habits die hard.  Asia will continue to sell to and buy from the developed world.  Moreover, they are now selling and buying among themselves as inter-regional trade has been growing.  Economic activity in East Asia, including the Philippines, will maintain a growth path.  We’ve seen it in Indonesia, Thailand and Singapore, not to mention our own 7.3% GDP growth.

The more important fact that remains is that we have stocks that are so much of a bargain.  I’ll talk about two stocks today – EDC and PNB.

The power sector has a very compelling story simply because the Philippines needs to add to present generating capacity.  The existing reserve generating capacity is only 3% of demand.  That margin is very thin and needs to be raised to at least 10%.  That is why the rise in price of AP and SCC is relentless.  Now, EDC is the only geothermal operator in the country and its cost is similar to the hydro generators.  In short, EDC will have strong revenues and returns over the next 2 years or so.

Price-wise, it appears to be trading in a range between 4.60 and 5.60.  As I write, the stock is trading at 4.70.  It has a lot of room to make it to the top of the range in a month or so.  One can make a 20 – 25% return over a period of 30 to 60 days.  That’s not so bad.

For PNB, I think that the merger with Allied is a lot closer today than has ever been.  At a price of 29,  PNB is trading at 0.58X book value.  When it merges with Allied, the book value has nowhere to go but up.  Again, this merger could happen in the next 3 months, in which case, the price of PNB could rise to 40.  That is around a 34% over 3 months which is not a bad bet.  PNB has cleaned up its balance sheet.  It has good management and it has good franchise in the markets it serves.  For one, it still has the widest remittance network among Philippine banks having been the first mover years ago in this market.

I think we will have a market that will have spurts, as we have seen today, occurring regularly as we work on a consolidating trading range for the next few weeks.  That is not to say that there will be outliers that will fuel the spurts.  Right now, my bet is on EDC and PNB.

June 11, 2010 Posted by | Financial markets in Asia | 38 Comments