Gus Cosio says so

Ideas on the Philippine Stock Market

Patience for lunch

6:45 pm  Wednesday  9 June 2010   Philippine Stock Exchange  3254.83  (-0.593%)

The market came down by 19 points today in spite of an improvement in Wall Street.  The past two days, the local market was up in spite of huge declines in New York.  Are we decoupling from the major markets?  For one thing, our market, while strongly influenced by Wall Street, does not necessarily follow the trend in the DJIA or the S&P 500.  In fact, over the last three months, the correlation coefficient has fallen far below 1.  The PSEi had outperformed the DJIA by 13 % on year to date measure.  In other words, the PSEi has moved up 6 % YTD while the Dow has dropped 7 % YTD.

There is even greater impetus for our market to go better in the coming days due to enthusiasm coming from today’s proclamation of Aquino as president-elect.  Political stability and smooth government transition has always been positive for any market, most especially ours.

Economic indicators are even being supported by monetary developments with M3 moving up 12.4% in April.  The BSP has not really been pumping money into the system.  As a matter of fact, they have been sucking out money through the special deposit accounts (SDA), yet money supply is growing.  This only means that GDP/GNP growth has been creating money for the economy, and I think that is good for stocks.

What is important for investors and traders to do now is to closely observe price actions of each stock.  When the market is ranging as it has over the past 3 months, it is not very difficult to identify buy entries and profit taking levels.  Here are a few observations and ideas.

MBT looks to be moving sideways for the next couple of days and strong support is 55.  BPC is showing strong support at 3.60 but sentiment on the stock might take it close to 4.  FGEN doesn’t look like it is going anywhere in the next few days; those who follow this stock should buy it on dips rather than chase prices higher.  Its sister -EDC – is a strong buy at 4.65, to my mind.AP and AEV will likely be stuck in the range just below their recent highs.

JGS,RLC, URC and DGTL are stalling at these levels, but because of their underlying strength, I’ll look for good dips for buying opportunity.  AGI will probably skyrocket in a few weeks.  Try to buy this stock on weakness – below 5.50 – because I hear earnings are starting to fly.  SM, SMDC and SMPH should also be bought on dips.  I would be careful, however, on PIP because I think it has limited upside.

Having said all that, I think it will still be useful to follow the developed markets.  In my opinion, China’s stock market is starting to stabilize after a full year of decline.  I think that will be good for our market since China and East Asia(ex Japan) now accounts for 42% of total Philippine exports. Things could get boring as price action would require a lot of patience from investors.  Remember that there are no free lunches and often times the price to pay is our own patience.

June 9, 2010 Posted by | Financial markets in Asia | 40 Comments

Till the fat lady sings

7:10 pm  Tuesday  8 June 2010  Philippine Stock Exchange Index  3274.26 ( +0.25%)

In spite of the two-day drop in New York, local stocks did not see similar negative sentiments from local investors.  It is not unusual because the fundamentals underlying local stocks have remained strong.  Take MER for instance.  Electricity sales of MER are expected to pick up even further in the second quarter in the back of an already strong 14% increase in the first quarter this year.  The thing about Meralco sales is it foreshadows the strength in other sectors of the economy.  In 1Q10, it was the industrial users that buoyed electricity sales implying that businesses are humming quite well.  The coming of the rains bodes even better for agricultural production which contracted in the first quarter.  Strong agricultural production raises consumer spending in the countryside.

Observe that you have very strong demand for stocks like DMC, EDC, and MER due to the strength of the power sector.  You also have follow through support for stocks like JGS, DGTL and URC.  This is further strengthened by obvious buying support for SM, SMPH and SMDC.  The foreign houses seem to be accumulating even TEL which has been a laggard simply because it is a surrogate for the broad market for the larger foreign funds.

Perhaps, the bounce in the local market can be attributed to pronouncements by U.S. Fed Chairman Bernanke that the growth in the U.S. is still on track.  I for one think that the U.S. market is oversold and could see a slow and gradual climb from these levels in the coming days.  While Philippine stocks are not generally oversold, I can sense positive sentiment from investors following our domestic market.  As I mentioned a few days back, institutional investors will find it difficult to ignore the 7.3% growth shown by the Philippine economy last quarter.  Even the magazine The Economist, which does not usually write articles on the Philippines started to highlight the economic gains that we saw last quarter.

In the next few days, we will still see volatility because there are no assurances being seen in the global markets for a steady recovery from the European debt crisis.  I will not hold my breath for that to happen because things will not change overnight.  One thing that I am certain about is that our economy’s dependence on Europe is very small.  Most of our exports – 42% – go to East Asia (ex-Japan) and 34% go to Japan and the U.S.  Whatever nervousness in the major market, to my mind, only strengthens the case for local investors to make their money work for them in the domestic market.

With domestic inflation remaining within the central bank’s target, the latest being 4.3%, the prospects of interest rates moving significantly higher is just not there.  Investors who want return have to come to the equities market in a big way to reap yields to their portfolio.  I think we have a lot more to squeeze in this market.

I would still keep an eye on stocks like PNB, PX, EDC, MBT, DMC, AP, SCC, AGI and URC, to name a few.  I would not abandon equities at this point but use these dips to add to positions.  The show is not over until the fat lady sings.

June 8, 2010 Posted by | Financial markets in Asia | 38 Comments

Worried about getting Hungary?

6:15 pm  Monday  7 June 2010  Philippine Stock Exchange Index  3266.11 (-2.71%)

The 323 point drop in Wall Street sent the markets all over the globe reeling once more.  Again another case of New York sneezing and the whole world catching a flu.  The initial impetus on stock prices was Hungary, but how can this country, whose GDP is smaller than that of the Philippines and whose population is only 10 million and declining, really affect the global economy.  At best, the default is a grim reminder that serious problems continue to exist in Europe and that the austerity program adopted by some countries may extend to others.  the global effect is less contribution to world growth by Europe.

Of course, that would cause some concern for the U.S. based investor because most DJIA companies are global in scope.  These companies could be facing greater challenges beyond the difficulties in the U.S. consumer market.  The employment numbers provided no comfort either since much of the improvement in employment figures apparently had come from temporary government programs which will be expiring as soon as the federal government start reducing stimulus expenditures.

While we cannot ignore global predicaments, we should not forget the things that are going for us.  For one, our GDP had grown by 7.3% in the first quarter of 2010 and GNP by 9.5%.  These are numbers that imply some momentum in economic activity.  I was on the phone with a noted economist last week, and he was of the opinion that GDP growth momentum could provide stimulus well into the second quarter giving rise to a similar growth in GDP.  There is sufficient economic activity in the country to allow much of the PSE listed companies to turn in good earnings figures.

While the index dropped by 91 points or 2.7%, there appeared to be  a lot of  accumulation buying of stocks like MBT, EDC, TEL, AP, FGEN, and ICT .  The drop looks more like a buying opportunity rather than a cause to panic.  My view is that for this week and next, we should remain in a tight range in the main PSE index probably between 3200 and 3300.  There are stocks that may nevertheless trade profitably for the next few days.   On my list are: MPI (2.75 -2.95); EDC (4.65-4.85);  MBT (55-57.50); TEL (2400 – 2450); and BPC(3.60-3.80).  I believe AP, DMC, RLC, URC and JGS will either continue to trend or correct slightly.

I am not really worried about the market in spite of the weakness of the world equities market.  I am sticking to the view that liquidity and money is coming our way.  Fund managers will always be attracted to strong fundamentals, and I continue to sense strength in the Philippine economy, for the time being.

June 7, 2010 Posted by | Financial markets in Asia | 19 Comments

Rabbits in the hat

7:10 pm  Thursday  3 June 2010  Philippine Stock Exchange Index  3355.23 (+2.0%)

We had an unexpected breakout today.  I noticed a sharp rise in the price of MER which was the biggest contributor to the rise of the index today adding 11.1 points.  SMPH added 8.39 points and TEL 6.86.  Ayala stocks  AC, ALI, BPI and GLO together piled up 14.14 points.  All other index shares either added to the rise or did not affect it except for GMA7 and MBT which together took away 1.6 points.

What this looks like to me is that institutional fund managers are buying the market and not just individual stocks.  AP, AEV, DMC, RLC and URC are following through their recent strength.  What looks to be catching up with the rest of its family is DGTL.  If you recall, the strength in the prices of URC and RLC spurred a lot of enthusiasm for JGS.  It appears that DGTL has opened up the imagination of those closely following the Gokongwei group.

I was thinking that the index would be hitting resistance at the 3330 level, buy today’s 66 point rally takes all the bets off that number.  We are poised to take this market to the next level.  It may also be that institutional investor confidence is returning given that the presidential proclamation by Congress is now close at hand.

The movement of MER may be indicating another M&A deal, possibly the SMC group eventually selling out their position.  That remains to be seen.  What is impressive is the movement of SM, SMDC and SMPH together with their cousin CHIB.  In spite of the roller coaster ride in the market over the past few days, these shares have been rock steady and have slowly but surely gone forward.  I was recommending positions in SMDC for a while even though it was a little pricey.  There are some investors who are bullish in Henry Sy companies, and it looks to me that they are coming out of the woodwork.

Personally, I would not be chasing the market despite this break-out.  I am betting that this is a false break because MER may have skewed the movement of the index.  While my long-term view is positive and my general outlook is constructive, I think there a number of investors and traders who may want to raise cash by taking some profits on these strong performers.  I think that prices will not yet run away except for those that are only catching up.  I think we will see some sideways movement since many are still looking to Wall street to gauge if the global picture has indeed turned positive.

As a strategy, I would not recommend getting out of positions at all.  Any selling should just be trained at raising cash for new purchases.  In other words, those who are looking to take profits in some stocks ought to rotate into newly rejuvenated counters.  If the global picture improves, our market could put down another 200 points over the next 3 months simply because valuations are not at all demanding and the domestic economy may still pull out a few surprises.

8:50 am  Friday 4 June 2010 (update)

The markets overseas appears to be shaking off the fears that the European Sovereign debt crisis brought about in the month of May.  This first week of June seems to be drawing people back to the market. Many U.S. analysts are thinking that the market could rise from what are seen to be oversold levels.

Our PSEi did not fall as much as the global markets did.  This week has actually been spectacular for local stock prices.  I think we will end this week even with higher prices as support prices for our favorite stocks have moved higher.  I think it is a good time to pick up some EDC below 5 and PNB around 30.  There is also a good chance that BPC and MPI may rise further.  MER will likely maintain its strength.  DMC, AP and AEV have very strong support at these levels.  SM, SMDC and SMPH should not be ignored either.  I would not be surprised if MBT challenged 60 very soon.

June 3, 2010 Posted by | Financial markets in Asia | 41 Comments

Slicing the tops

10:30 am  Thursday  3 June 2010

We will likely see some enthusiasm in the market following the 2.25% rise in New York’s DJIA.  This comes after a 2.34% two day decline of the same index.  The Market is really fickle reacting to almost any daily indicator.  It appears to me that the global investor, unlike for most of last year, is not taking any long-term view of the markets.  While the volatility (VIX) in the U.S. has come off a bit, it does not appear to be moving lower in the coming days and, perhaps, even weeks.

Most market participants have seen that when New York sneezes, the rest of the financial world catches the cold.  we saw that a few times these past few months.  The latest discomfort was the European sovereign debt crisis, but that is looking to be addressed.  The latest news is that Greece is privatizing part of its national railway and its postal system to raise cash in the government’s coffers.  A drastic and unpopular fiscal austerity measure is being adopted which will probably stave off threats of Greece being booted out of the currency union.  Spain and Portugal have been very positive in their response to the call of fiscal prudence among all European Monetary Union members that the impression being created is that a new era of fiscal union is developing in the continent.  Of course, things will not change overnight but what is important is that investors have something positive to expect.

In the U.S., the impression appears to be that emerging markets are presently overheated.  This is why the Shanghai index is having difficult time lifting itself from the doldrums that it has been having for almost a year now.  Nevertheless, smaller markets like the Philippines have not really seen a deluge of investments coming from the global players.  The PSE, while seeing average daily value turnover at higher levels compared to years 2009 and 2008,  has not reached trading volumes seen in year 2007.  We can be pessimistic and say that the market will not be as robust or we could be optimistic and adopt a view that we are still on our way to 2007 trading volumes.

In the near term, I think that the PSEi will remain inside 3330 which was the high we saw at the end of April.  While there would be bursts of optimism, I find it difficult to see any strong stimulus to push the market into break out levels.  Yesterday, it was the index stocks that lead the gainers.  I think the same will happen perhaps for another trading day or so, but if we do not break out of the 3330 level we may just pull back a bit.  In that case, it may be wise to lighten up on index stocks and put some weight on special situations.

One situation seems to be happening in DGTL.  The market share of GLO has been eroded by DGTL.  Some investors do not favor the telco sector because it is not seeing any growth for the time being.  DGTL, however, is growing but at the expense of GLO.  Perhaps, there is momentum in their earnings stream as a result of these gains in market share.

The merger story at PNB continues to make this stock a good proposition.  It looks closer at hand today than it was a few months ago.  In the power sector, EDC might be worth a punt since it is trading below the middle of its trading range.  MPI is in the same position in the range.

Essentially, my message is that if people agree with me that we are going to stay in this range, then it would not be advisable to add to positions.  Rather, it would be good to top slice on positions and keep the cash for possible dips.

June 3, 2010 Posted by | Financial markets in Asia | 21 Comments

A good show is worth watching

6:00pm  Tuesday  1 June 2010  Philippine Stock Exchange Index  –  3266.62  (-0.19%)

Over the weekend, I watched the final show of my good friends, The APO Hiking Society. They had decided among themselves that after 40 years of performing together, it was a good time to go while they were still high in their popularity.  This was not the first time they had planned to call it quits, and I was around the few times they had planned a farewell concert and made a performance of it.  This time around, I was sure it was the last show, and the guys had given the show all they had in order to leave their adoring audience a memorable curtain call for the performances forty years.  I had been their friend all these years, and I knew that they really meant it.

The stock market just like show business can be just as fickle.  Stocks have to play to an audience and attract their attention.  Stock prices can reflect their true value, but they can be over or under valued from time to time.

The Philippine market has been rallying for over a year now.  In fact, in comparison to the developed markets, the local market has been performing better year-to-date.  Nevertheless, investors have been quite wary on account of the sovereign debt crisis in Europe.  The fear stems from the possibility of contagion similar to what happened in 2008, a debacle from which many are still hurting.

The question bothering a number of investors is where is this market going.  We saw exceptional GDP numbers last week.  As investment professionals, it is something that we cannot ignore.  The 7.3% growth rate were met with doubt by a lot of skeptics.  If these figures are not verifiable against other measures, then I would probably join the ranks of the skeptics.  But seeing a54.9% growth in electrical machinery, as exports of semi-conductors and electronics products to the US and China boomed, then we can have comfort that the growth was solid.  Recall as well that we have had 4 months of above 40% growth in exports.  First quarter  Meralco sales were 14.2% higher compared to the same period last year, and OFW remittances were 7.0% higher compared 2009-Q1.  Both these figures affirm that the GDP release was indeed credible.

With such a strong GDP growth, the question is how fearful should we be of global contagion.  According to a recent update from Morgan Stanley on the European sovereign Debt Crisis they wrote: ” From a credit perspective Asian financials are beneficiaries as the operating models are intact, capital/liquidity is on average strong, but the regulatory trend is nonetheless credit friendly.” The chart accompanying the statement showed that the Philippines had loan to deposit ratio of roughly around 60%.  The significance of this is unlike the Asian contagion which resulted into capital inflows and bank funding dried up in the Philippines, there is enough funding in the hands of domestic banks to provide the necessary finance to companies operating in the country.

From years of observing the market, I had always seen that it is the availability of cash that drives stock prices particularly when fundamentals support their value.  While I do not foresee an immediate rally in the making, I similarly do not see this market crashing the way it did two years back.  What I am expecting is for the range of 3050 to 3330 to work itself out until good or bad news develops.  So far, I think much of our fears are already in the price.  It is even important in the near term to have a visible view of how your favorite stocks trade.

It is probably best to be counter-intuitive in approaching prices, meaning avoid strong prices and seriously consider weak ones.  A good trader should not be chasing prices these days, and if prices of strong stocks drop, have the boldness to pick them up.  Watching enough of price movements should give an investor or trader a good feel of what is going on.  After all, just as I was totally entertained last saturday, a good show is always worth the money.

June 1, 2010 Posted by | Financial markets in Asia | 24 Comments