Gus Cosio says so

Ideas on the Philippine Stock Market

Scars of battle

9:55  Monday  15 November 2010

I think the first order of the day is to ponder at what stage of the market are we.  Let us not forget that this market has been extraordinarily strong over the last 9 months.  The Philippine market has had a life on its own diverging from the major market and somewhat moving close to lock step with Thailand and Indonesia – the area which has been referred to as TIP.  The global story from the middle of this year has been that emerging markets, notably those in East Asia, was the place to be in investing.  As investors fled the U.S. dollar, many added to asset allocation in TIP.

Let us once again put things into perspective.  We began the year with the PSEi at 3050.  On November  4, the index closed at the day’s high which was also the all time high of 4397 representing a 47% gain for the year.  This comes after the previous year’s gain of 62%.  We have seen tremendous gains in the most popular stocks such as AEV, AP, DMC, URC, MBT, PNB, UBP, AGI, JGS, and SM, just to name a few.  We have also seen investors pay less attention to old favorites such TEL, GLO, AC, and BPI.  We have similarly observed some attention moving to previously ignored stocks such as SCC, LPZ, SECB, MER and MPI.

We have to be rational about our market.  Unlike the bigger markets of the world and the region, we have less than a hundred stocks that trade with acceptable liquidity.  There are less than fifty stocks that institutional fund managers can trade with ease of liquidity.  What this all means is that it is inevitable that fund managers, whether foreign or local, would try to protect gains.  To put it succinctly, profit taking is unavoidable.  This market needed to consolidate so that portfolio managers can earn their keep.  In terms of money flow, cash has to be generated so that portfolio incomes can be realized.

How do the text books describe consolidation.  One book I am reading describes it as: “A pause to refresh after a strong move.  Also known as a pivot, because the relative-strength line of a strong stock will flatten or even turn down a bit during a consolidation.”

From this description, we can glean that all strong price moves necessarily eases at some point.  I liken this move to that of an advancing army.  In war, even if victory is at hand, the main body of a driving army does not deploy itself in the front lines.  It regroups in a defensible location way behind the battle front.  This way, it can adequately protect all the territory it has gained and set the stage for the next offensive.

At the beginning of the year, I was happy to see the market advance to 3600 by year-end 2010.  Surprisingly, a surge of capital inflow pushed the index to that level in mid-year.  My colleagues and I began to raise our expectations to 3800 for year-end, but the market continued to surge further even as the major developed markets meandered.  Now that the U.S. market has regained its strength, it is no wonder that some money may be redeploying itself back to the U.S. at the expense of the strongest erstwhile market performers – emerging markets Asia’s TIP.

So, what can we expect?  Is the bull run over?  Are we facing the bear already?  Are assets in bubble inflation at this point?

Well, I am the ever optimist.  I have never seen macroeconomic conditions in the Philippines as good as it is today.  I have also never seen companies in such strong financial and operating conditions as they are today.  Even as the market appears to have gone through the stratosphere already, it does not look like the bubble that it was in 1997.  Buildings are rising, but property prices have not yet exhibited any frenzied speculation unlike that in China.  Furthermore, interest rates are at a level that easily can support current affordability levels.  Bear in mind as well that 15 and 20 year mortgages are now commercially available which was not the case in 1997.

For us who choose to be in the market, we just have to put all of these factors in perspective.  Like an advancing army, we must be prepared to set ourselves back and prepare for the next forward move.  The fiercest warriors are those who have been battle-scarred.  To be successful in trading this market, we should be prepared to take the scars of price retreats.  Otherwise, we should not be here at all.

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November 15, 2010 - Posted by | Financial markets in Asia

59 Comments »

  1. arrr.. me scar be showing scurvy mate.. arrr.. 🙂

    For my part, I have identified what my core holdings are. i.e. something that will be kept through thick and thin. All others will be subjected to periodical re-balancing.

    And i guess in times like this, is where the value of the concept of margin of safety shines. i.e. I’m a little bit protected from the decline as I have limited myself from buying only when I thought the price was very low. And the power of diversification is felt too. As even if half of my holdings are going down, some are surprisingly steady.

    Threshold buy prices: MER@180, ORE@3.5, MBT@68

    Comment by jasper | November 15, 2010 | Reply

    • Hi Gus.. Jasper…. just curious, what do you have in your portfolio now? core holdings? Thanks.

      Comment by newbie | November 15, 2010 | Reply

      • I’m curious too. As for me, my top holdings are VLL, ORE, and UBP. Soon, I’ll have NIKL too.

        I’m looking to get AGI and/or DMC back in my portfolio when extra cash comes along. 😀

        Comment by Sonn | November 15, 2010

      • My current holdings are:
        ALI – has been with me long
        CEB – bought it after IPO when it went down
        DGTL – I’ve been nursing this position since September
        DMC – took profit on some but missed buying below 34.
        EDC – I bought this last Friday but did not catch bottom.
        JGS – bought it just befor CEB was listed.
        ORE – waiting for Nickel to be listed
        PX – bought this 6 months ago. willing to hold it longer.
        SLI – bought this 2 months ago and patiently waiting
        SPH – who know, maybe this stock will recover.
        FYI, I lightened up on AP, DMC, TEL and EDC earlier. EDC was below my sell price so I bought it back. TEL is also way below my sell price but I’m taking my time buying it back.

        Comment by Gus Cosio | November 15, 2010

      • Good day Sir Gus and Jasper,

        You guys are true-blue value investors 🙂 Having said that, what do you think of LPZ? (I’ve noticed that neither one of you guys have it). It’s trading at 7x and according to a reliable source, “If EDC and FGEN are cheap, FPH is cheaper, BUT LPZ is the cheapest”. Looking forward to your very constructive ideas. Tia!

        Comment by KennyV | November 15, 2010

      • LPZ is really cheap, its actually trading at only 0.75 of its book value..

        Comment by cliffhanger | November 15, 2010

      • i already have EDC. I avoid having securities from the same family. i.e. I have edc so i don’t plan on buying fgen or lpz except on unusual circumstance.

        I’m trying to diversify by buying from a wide range of industry.

        Comment by jasper | November 16, 2010

    • I have a total of 8 – DGTL, MPI, VLL, CHIB, SECB, RCB, DMC, EDC

      My core will be MPI and CHIB. The others will be rebalanced time to time.

      But take note that I don’t trade much. Most of these I bought and then held on to. Even during the correction last week, I was seriously considering selling some of them because I wanted to stack up on MPI and VLL, but I couldn’t because they are all still relatively undervalued and I wanted some diversification.

      but man, why couldn’t the correction happen later this month instead. I would have had my 13th month pay then :/

      Comment by jasper | November 15, 2010 | Reply

      • your 13th month pay must be really big.
        who knows, there might be another correction before the end of the year

        Comment by rodimus | November 15, 2010

      • not so big.. but imagine if I had it last week. it would be bigger by 5% now.. and a 5% increase is a 5% increase. i mean every little bit helps right..

        Comment by jasper | November 15, 2010

  2. Well said..well said..sir gus.. thanks for sharing your thoughts on this blog

    Comment by jopard | November 15, 2010 | Reply

  3. very encouraging post sir gus 🙂

    Comment by sdrobob | November 15, 2010 | Reply

  4. “The fiercest warriors are those who have been battle-scarred. To be successful in trading this market, we should be prepared to take the scars of price retreats.”

    AGREE!
    Those scars will remind us that market are not for faint-hearted people.

    Comment by Raymond | November 15, 2010 | Reply

  5. nice blog gus! we’re in a bull run again.. I think the army will move 2 step at a time this bull run, faster than before.

    Comment by joppy gwapo | November 15, 2010 | Reply

  6. what a nice analogy of a war game to our quest for a financial empire. very inspiring guru. last week during the bloodshed in the market im busy re-reading my war books
    and the world war 2 history video. in all mankind history darkness are just temporary..to make it simple the good always prevail.

    have a nice trading i hope everybody is happy now. the market is again green..but do not be complacense..remember the market is our battlefield, wear your shield of knowledge and ready your spear of experience.

    Comment by richard | November 15, 2010 | Reply

  7. Sun Tzu will be very proud of you, sir Gus!
    Thanks for the inspiring blog.

    Comment by chechako | November 15, 2010 | Reply

  8. Go PSE ….Bull RUn again..4600 in December..SM Corp and SMC will led the Way…

    Comment by Benny | November 15, 2010 | Reply

  9. The market has bounced back nicely. VLL(+4.55%), EDC(+6.55%), ORE(+4.72%). If you had money last week and purchase something like one of these.. I bet you’re really happy right now.

    Comment by jasper | November 15, 2010 | Reply

  10. Nice post Sir Gus! There is a net foreign buying of 110 Million last friday after 3 straight days of huge foreign selling. We are seeing strong foreign buying again today. I think the good fundamentals of companies like URC, VLL, DMC shifted the cashflow sentiment towards PSE again, at least for the meantime. Or is it the “Pacquiao effect”? For the sake of curiosity, anyone who cares to check if PSE went up everytime Pacquiao emerged victorious? hehe

    Comment by Chris M. | November 15, 2010 | Reply

    • 8 out of the last 13 fights of Pacquiao the PSEi went up.
      Check here: http://www.psebuzz.com/2010/11/pacquiao-effect-to-economy-and-psei.html

      Comment by psebuzz | November 15, 2010 | Reply

      • Nice! Thank you psebuzz. Over all, PSE went up 119 points based on your data from 2005 to 2010. Within these years the PSE went two fold or gained 2000+ points from its current level and therefore has an average increase of 1.7 points per trading day (TD) (assuming 240 TD/year) or 22 points in 13 trading days. So during Pacquiao’s victories, the PSE gains 5 fold its market average, well above the statistical margin .:)

        If we remove his fight against Marquez (which is not a very convincing victory for Pacquiao) and the PSE went -112 points, then the total gain of the PSE market in 12 victories will be 231 points, 10 times our average market gain!

        Conclusion? One way to sustain our bull run is for the government to make sure that Pacquiao keeps on fighting and beating his opponents. It can probably be his greatest contribution as a congressman to our economy. haha!

        Comment by Chris M. | November 16, 2010

      • The PSE ends the day with a net foreign selling amounting to ~100 million. The 1.5% increase can then be attributed to locals buying our market! Hmmm, go Pacquiao! 🙂

        Comment by Chris M. | November 16, 2010

    • That’s interesting ha.
      8 out of 13, it went up
      8th world title

      Comment by Nik | November 16, 2010 | Reply

    • it means that everytime he wins a world title psei goes up.
      therefore let’s forget about mayweather if there is no world title at stake

      Comment by Nik | November 16, 2010 | Reply

  11. Very encouraging thoughts. We all needed that. Thank you.

    Comment by John | November 15, 2010 | Reply

  12. thanks Sir Gus for the encouraging blog. Ahhhhh…we needed that to keep our sanity on the market.

    Comment by Shan | November 15, 2010 | Reply

  13. Sir Gus, I thought you have VLL in your portfolio?

    Comment by Flick | November 15, 2010 | Reply

    • I took some profits.

      Comment by Gus Cosio | November 15, 2010 | Reply

  14. I think this is the answer already to the question I posted to your previouse Blog. Thanks Sir Gus. I do really believe that the local companies will be able to perform well in the coming year and I think the stock market will be in the same trend as well.. I just hope that the government does not mess things up…

    Comment by Ryan | November 15, 2010 | Reply

  15. Hi Sir Gus,

    do you mean that you will sell ORE once NIKL is already listed on PSE? Pls advise. Thanks!

    Comment by Blogspot | November 15, 2010 | Reply

    • Blogspot,
      I put no corresponding sell action when NIKL is listed. My view is that ORE’s value will start to track that of NIKL. If NIKL is valued at 12X P.E. and ORE is currently trading at 4X P.E., then investors will strike a balance in their portfolio for the two stocks in order to adjust their risk reward expectations. Example: 80% NIKL and 20% ORE in their mining allocation.

      Comment by Gus Cosio | November 15, 2010 | Reply

      • Thank you very much Sir! How about Atlas? would NIKL listing would also affect its performance? AT has been down for quite sometime..

        Comment by Blogspot | November 16, 2010

      • you mean to say sir gus that ore already posted a profit for the last quarter? i thought shipment was still on its way?

        Comment by cliffhanger | November 16, 2010

      • Blogspot,
        I think AT will have a life of its own like PX, although a halo effect might make AT and PX glow as well. NIKL and ORE are like cousins not only because the same mineral but also their location – Palawan. Investors cannot help but compare the value of ORE even if I believe ORE will trade at a discount to NIKL on a PE basis.

        Comment by Gus Cosio | November 16, 2010

      • Cliffhanger,
        The PE I refer to is 2011.

        Comment by Gus Cosio | November 16, 2010

    • i’ll buy everything you could sell in ore..lolz just kidding! but i like ORE very much.. im adding volume with ORE everytime i have funds. I like what I saw in the disclosure of ORE.

      Comment by marketbeginner | November 16, 2010 | Reply

  16. Awesome perspective sir Gus. 🙂

    Comment by Pau | November 15, 2010 | Reply

  17. Sir Gus,

    Thank you for sharing your knowledge and insight with us newbies via this blog. Thank goodness Firstmetrosec recommended following your blog in their website. I’m starting to be more appreciative of firstmetrosec and their research recommendations.

    Comment by Kristin | November 15, 2010 | Reply

  18. well thought Mr.Gus.I have been following your blog after 2 wks and im impressed.Talking abt LPZ it is a bargain at its current price,similarly the same concept applies to JGS.wonder why MPI is not performing well??Have MVP lost its golden touch?

    Comment by jack | November 15, 2010 | Reply

    • mpi as a company has been performing really well. even the stock. it was 2.6 just 6 months ago. Last nov 4 or so thats a +73% move. You might have come relatively late to the party.

      but anyway, value takes time to be realized and I’m thankful MPI has not been flying too high. I still have designs of adding at least +50% more shares.

      Comment by jasper | November 15, 2010 | Reply

  19. @ Jack like also Lpz and Mpi…Right now Big volume in on SMcorp and Ayala Corp..Lpz might go to 7/sh Mpi 5/sh SM 750/sh while Ayala Corp to 600/share by early next year…

    Comment by Jenny | November 15, 2010 | Reply

  20. I just got the DGTL 3Q results. The numbers seem good. I thought it would take time for them to reach 1B net income, but it turns out it might even be possible this year.

    —— By the numbers ——
    Gross Income Net Income
    2010 1Q2009 2010 1Q2009
    1Q 3.90B 3.21B (+21%) 334M (286M)
    2Q 7.97B 6.69B (+19%) 145M (638M)
    3Q 12.12B 10.28B (+22%) 851M (311M)

    Details
    eps 0.1338 => 0.1675(annualized)
    p/e 7.47 => 5.9pex
    net cummulative subscribers 15.12M
    postpaid subscribers 1.14M
    prepaid subscribers 13.98M

    Balance Sheet
    Asset 91.6B
    Liabilities 89.4B
    Equity 2.1B
    LTD 12.3B
    Market Cap: 6,356,976,300 * 1.67 = 10B

    Liabilities
    Parent Company Zero coupon convertible= 1.1B
    DCPL Zero Coupon(JGS fully subscribed)= 14.6B
    Loans from foreign banks(Less current)= 12.3B
    —————————-

    btw: I dont know how to interpret the large liabilities. I don’t know if the cash flow is strong enough that they are able to pay such high debts. Does someone know how to interpret this?

    Comment by jasper | November 15, 2010 | Reply

    • Gross Income
      Because its hard to read..

      —–2010 1Q2009
      1Q – 3.90B – 3.21B (+21%)
      2Q – 7.97B – 6.69B (+19%)
      3Q – 12.12B – 10.28B (+22%)

      Net Income
      —- 2010 – 1Q2009
      1Q – 334M – (286M)
      2Q – 145M – (638M)
      3Q – 851M – (311M)

      Comment by jasper | November 15, 2010 | Reply

    • is the question about ability to service debt or pay it off completely? are there any notes about the conditions of their loans from the foreign banks?

      Comment by ed | November 15, 2010 | Reply

    • Jasper,
      Given that the bulk of its debt is held by its parent, JGS, i would consider this almost equity since the company will see it prudent to service the regular bank loans before the shareholder-creditor.
      The D-E ratio of DGTL may still look to be a cause of concern, but given that the company’s cash flow has become quite strong, creditors will be more comfortable going forward particularly since it has gained a lot of market share.

      Comment by Gus Cosio | November 15, 2010 | Reply

    • I havent seen the 17Q yet but it does seem to be looking brighter for DGTl.

      For those who have read it, is the turn around due to the growing subscriber base, an increase in ARPU or just temporary forex gains?

      Thanks

      Comment by kentwait | November 15, 2010 | Reply

  21. jasper

    if your figure is right the gross income for the 3 quarters of 2010 is not sustained,it declined from high of 21% in first quarter to 19% in 2nd quarter and much lower to 17% in the 3rd quarter.however its net income is quite impressive 1 quarter a 16% up, 2nd quarter a -77% decline and 3rd quarter a 1.73% jump. if is a recovery stocks its gross income must be more impressive than this. take note it battled in an advance maturing market where competition is the rule of the game. it has either to knock out one big player or protractedly weaken its competitors. it is a long war competition and i usually do not engage in a protracted investment game.

    aside from this no matter what we say debt is still a burden that lessen shareholder value. liabilities are the direct competitor of stockholders from its assets claim. imagine it is 97%owned by its creditors and its stockholders just owned the meager balance of 3%.what a higly financed company it is.

    however we cannot discount the entreprenuerial skills of its owner who manage a succesfull conglomerate of jgs, urc, rlc,ceb and so many others. if you banked on these go ahead.

    Comment by richard | November 15, 2010 | Reply

  22. some say we are going down to 3990 psei, a retracement of 50% from the highs? foreigners still selling in the market pushing the index downwards, they should be covering their positions now as net buyers but the other thing as happened today they are still net sellers. should we join in and take profits as well?

    Comment by gerald | November 15, 2010 | Reply

    • Gerald,
      You have to be more insightful than that. Foreign buying did not drive thee market this year and last. They merely followed local buying.

      Comment by Gus Cosio | November 16, 2010 | Reply

  23. hi guys,
    I kept thinking why are we affected of the profit/income of the company where if we buy their share we dont get part of the profit. If they start distributing the profit then i think its reasonable to chase the stock.

    Comment by butchick | November 15, 2010 | Reply

  24. It seems like gold is following the same trajectory as the previous tech and housing bubble. Sir Gus, assuming that gold would follow the same path as the two previous bubbles, when do you think it would pop? Would mining stocks rise on the same proportion as gold? Thanks.

    Comment by Seth | November 16, 2010 | Reply

    • Seth,
      Gold is different from the housing and tech situations. Gold is a commodity, therefore, follow demand supply swings. However, gold has another aspect – that of a monetary asset therefore a store of value. It is also much more rare than real estate and tech stock. It might be dangerous to conclude that gold is a bubble asset.

      Comment by Gus Cosio | November 16, 2010 | Reply

      • Well said Sir Gus, and I hope you are right. Maybe I can start calling it a bubble when my neighbors are actually buying it.

        Comment by Seth | November 17, 2010

  25. Sir,
    What do you think of AT? It went down form its high of 19+ to 16.

    Comment by jolly | November 16, 2010 | Reply

    • Jolly,
      You seem to be following AT closely. I think 16 is a safe bet for AT. It could go back to 19 again or even past 20.

      Comment by Gus Cosio | November 16, 2010 | Reply

  26. Guys, no need to get excited and start pulling the trigger. I think yesterday was just a dead cat bounce. We will see down days ahead so conserve and preserve your capitals. Accumulate bits by bits strong stocks like Smc, SCC. Buy and hold them and you will see your capital grow. Sell weak stocks like SLI, it broke the very important support of P2. Flight to quality in times of uncertainties.

    Comment by Richie lim | November 16, 2010 | Reply

    • Well said Richie. Brace yourself for the consolidation…

      Comment by Average Joe | November 18, 2010 | Reply

  27. Buy on Dips….I like Big Caps stocks Like SM Corps and Ayala Corp….SM might go to 750/sh …..while Ayala Corp. to 600sh by 2011

    Comment by Jenny | November 16, 2010 | Reply

  28. Great article Mr.Cosio! I have been following your blog for a while now and i was wondering if you would have any tips for new investors?:) Looking forward to your next entry!

    Comment by jhonel | November 17, 2010 | Reply


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