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 »

  1. Hi sir Gus, Im losing money on DGTL every trading day i bought it last week @ 1.58 & 1.54. is it good to cut my losses today before it get worse?Planning to transfer to TEL today.

    Comment by andy | July 1, 2010 | Reply

    • Andy,
      DGTL in my view is a trading idea on a recovery stock. TEL on the other hand is a defensive stock at this point. If you feel edgy about the market, by all means, do the switch.

      Comment by Gus Cosio | July 1, 2010 | Reply

  2. Wow! So eloquent writeup today Sir Gus. You just made my day. Thank you po 🙂

    Comment by Cris | July 1, 2010 | Reply

  3. Andy,

    If I may, while TEL may have gone down, it is not going that much up in the near term because its income growth prospect will not be in the double digit.

    Booking a loss in DGTL and waiting for TEL to cover via a gain maybe a tall order. would be different if you are investing new in TEL. IT is easy to incur a loss in the market than making a gain.

    Instead, it maybe worth to wait for the june 30 results to be released Aug 15. By then, we will have clearer idea of Dgtl turn around and tel picture.

    Incidentally, I have a chance to travel in provinces in Phils regularly. Sun seems to have expanded offering 3G broadband say in Cebu. I wont be surprised if the rate for wireless broadband goes down like the story on the wireless segment as competition heats up.

    Finally allow me to point out that while past performance can be a guide in the stock market, growth and future prospects will guide whether stock prices will go up or down.

    Thanks.

    Comment by alex | July 1, 2010 | Reply

    • thanks alex…but i need

      Comment by andy | July 1, 2010 | Reply

    • Thanks for your insightful comments, Alex.

      Comment by Gus Cosio | July 1, 2010 | Reply

    • Nice one buddy 😀

      Comment by JohnTheMan | July 1, 2010 | Reply

    • thanks for the insight

      Comment by tatels | July 2, 2010 | Reply

  4. Thanks alex…but i need to rectify my error in buying dgtl..its better to cut your losses and wait for a much better or cheaper price to get in….

    Comment by andy | July 1, 2010 | Reply

  5. Great read, Mr. Cosio.

    Comment by Dez | July 1, 2010 | Reply

  6. The market has been unfortunately down today. I hope to see recovery by tom.

    Thanks Gus for this insightful article. Looking forward for more in the future.

    Comment by TopMace | July 1, 2010 | Reply

    • You’re welcome.

      Comment by Gus Cosio | July 1, 2010 | Reply

  7. Hi Gus,

    What’s your short term view of both the US markets and PSE? Today, our market played catch-up to the world’s bloodbath that started with the US markets Tuesday night. In terms of percentage drop, we are much better of than the rest of the world since the PSE dropped by only 1.7% whereas Asian bourses have lost about 4% cumulatively. I heard than one of your analysts at FMSBC sees red days until Monday. I share his opinion.

    Somehow, I feel that if the DOW challenges the 9700 support in the immediate future, the support will break. My fear stems from the mixed economic figures from the US, China revising down its growth forecast and the austerity measures the European governments are planning to take. The US was able to recover somewhat quickly because of the effective monetary policies adapted by the FED, which other central banks took as a model. Now that they plan on making a u-turn on these policies, I fear that some major economies might slow significantly and concerns of a double dip spreads thus pulling other markets down with them.

    I’m not really against a major pullback for the PSE since I am left holding DMC and BPC(inauguration-play-gone-bad). I just wish for a BPC rebound to be able to get out. DMC I don’t really mind since I know how strong the company is. I’ll treat big dips as a chance to reenter my favourite stocks.

    Thanks.

    Comment by richard | July 1, 2010 | Reply

    • Richard,
      My short term view is that the market will be on the soft side as very few markets will be willing to buck the trend in Wall Street. Even Japan and China are showing dismal figures and the rest of the region has been affected. At the end of the day, it will be valuations that will determine where prices should settle. Fortunately, valuation for a lot of local shares are cheap. I am hopeful that those who allocate assets to the Philippines will use the near-term downtrend as an opportunity to buy. I think the Dow could break 9700 but will bounce off 9400. July will bring a lot of anxiety to the markets, but I think DMC will not lose too much in price because value-wise, it is very cheap. BPC is a special recovery situation so it may not cause you a lot of harme either. Just be sure you have cash on hand to take advantage of dips even if you have to cut some small losses to generate it.

      Comment by Gus Cosio | July 1, 2010 | Reply

  8. Hi Sir Gus,

    I almost sold all my stock positions today even companies with strong fundamentals (DMC, URC and JGS)just to protect my gains. Left only in my portfolio is SCC and VLL.

    Any idea about VLL, I thought its price will drop significantly today but surprisingly, its price gone up at the close (thanks to foreign buyers). Will VLL participate to REIT?

    Comment by Olive | July 1, 2010 | Reply

  9. Olive,
    I think you did well in selling some of your positions. Keeping SCC was a very good idea because I think downside risk on this stock is very small while the upside is wide open. As to VLL, I’m glad that it moved up. Will it be able to set up a REIT? I doubt it at this point. Unlike ALI, RLC, SMPH and FLI, VLL does not have many rental properties.

    Comment by Gus Cosio | July 1, 2010 | Reply

  10. Sir gus,

    In this blood bath, would you be a buyer or a seller?
    I currently hold MPI, AGI, PNB and EDC. Should i be worried sir? Thanks and more power.

    Comment by JohnTheMan | July 1, 2010 | Reply

    • John,
      I did a little nibble today, but I am a buyer a bit lower from here, say around 3250.

      Comment by Gus Cosio | July 1, 2010 | Reply

  11. Hi Sir, What will be the effect to the Market if the Govt is selling bonds and also launching big Ipo’s…Just read in Market Watch the Spanish Govt selling 3.5 billion euros and China selling Agricultural bank shares worth 23bn dollars..

    Comment by Willy | July 1, 2010 | Reply

    • Willy,
      Right now, it is not supply that is hurting the market, but the anxiety that fundamentals of various economies are deteriorating. The sovereign debt of spain will clear the market albeit at a higher credit spread. The Agricultural Bank IPO will also be placed except, unlike the large Chinese IPOs of the past, this one will likely not push its way above other stocks.

      Comment by Gus Cosio | July 2, 2010 | Reply

  12. I hold edc @4.65, MBT @55.5, FGEN @10.25, PNB @29 & TEL @ 2500. Was planning to buy more PNB and EDC and take advantage of the low cost of TEL to lower my cost plus add PX to my portfolio . However, the market went down today with so much bad news. Being new in the market, am I in the right direction if I take advantage of dips for the same stocks or other stocks? or should I sell all my stock positions to protect my gains and/or cut my losses? Your valuable advice will be highly appreciated. Thanks.

    Comment by Bobby | July 1, 2010 | Reply

    • Bobby,
      You are actually holding very good stocks. I just hope you still have cash on hand to average down when this decline settles. You can average down on EDC should it go to 4.20 which will significantly lower your average cost. PNB averaging down should be below 28. PX at 11 will be alright. TEL at 2350 to 2375 would be okay.

      Comment by Gus Cosio | July 2, 2010 | Reply

  13. Hi, Sir Gus.

    How much market activity is attributed to locals in the first half? It was close to 70% in 2009 right?

    Thanks.

    Comment by Oliver Mia | July 1, 2010 | Reply


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