Gus Cosio says so

Ideas on the Philippine Stock Market

Bear with me a little

12:15 am Thursday 2 December 2010

After Tuesday’s horrific close, we saw some pleasant recovery Wednesday.  Many are probably wondering if a bear market is about to hug us in its arms.  Before we get all riled up and stressed about the prospect, particularly if we are fully or heavily invested, I would like us to have a look at the anatomy of a bear market – as I would diagnose it.

Looking back a few years to 2007, as the great financial crash associated with the sub-prime crisis was about to happen, we were already seeing many signs of bubbles.  This was highlighted by a slowly declining housing and real estate market in the United States.  Almost all financing that support real estate had been transformed into mortgage-backed securities. What followed was a breakdown of the financial market because a huge portion of the business of banks were invested in CDOs which was a superficially understood asset class with its foundations in the predominantly misunderstood derivative products in the form of credit default swaps.  In short, there was a physical bubble in the property market upon which another bubble was built-in the form of the credit default swap contracts which banks in turn traded several times over in a loosely organized market which had no centralized clearing house.  What resulted was a lot of assets reflected in the balance sheets of banks had little or no capital backing.  An ultimate bubble indeed!

Rewinding to the year 2000, we see the earlier bear market coming from an earlier bubble.  That time, it was a dot-com boom that went bust.  Why?  Essentially because there were stocks which took money from investors at very high valuations with nothing but a promise that the internet will bring huge cash-flows from every website or portal created by any wild thinking nerd.  Indeed, a Bubble!

In the Philippines, around the same time, the Erap impeachment brought about huge capital flight.  While a short reaction rally ensued when GMA took over, there simply was not enough money going around to fuel a follow through.  The country was still reeling from an earlier the asset bubble that was burst by the Asian financial crisis dubbed as the Asian flu.  That bubble arose from another episode of capital flight which can be seen as a negative reaction to a rapid rise in real estate prices which could not be supported by the prevailing internally generated savings of the time.  The local economy had been extremely dependent on foreign investments to prop up the value of assets.

From these historical events, we can glean that what brings about bear markets is when people are betting simply that prices will move up with little or no regard to real values that are being created.  In the case of the U.S. sub-prime crisis, too much money was going into a lot less of tangible assets.  The same thing had happened during the dot-com years, too much money was chasing unproven internet business models.  It was the same story in the Philippines at the close of the 90’s and in the beginning of this century, except that there was not enough money in the country to chase highly priced assets.

A bear market is like a pair of scissors: there are two blades that cut simultaneously.  One blade is the extreme over valuation of the asset and the other blade is the money running out.  If we look at our strong stocks today, many are not yet in over-valued territory.  As a matter of fact, quite a number is still in the undervalued region of both their price to earnings and price to book ratios.  Even the forecast revenues are conservatively arrived at given the strong underlying economy.

How about the other blade?  Is there enough real money in the economy?  Well, one only has to look at the SDA totals at the BSP and the level of Gross International Reserves (GIR) to gauge the amount of disposable wealth going around.  Also, PSE listed companies are all under-leveraged with very low debt-to-equity ratios.

One can argue that a contagion is brewing in Europe, but recent history has shown us that our economy can be quite impervious even to the biggest economy in the world – the United States.  Another argument is the potential conflict in the Korean peninsula.  Do not forget that in the two wars in Iraq over the past two decades, these were both followed by very strong global stock market rallies.  Anyway, if the Korean conflict results in a nuclear holocaust, we’d all be dead anyway so why should we worry about our wealth.

Are we in a bear market then?  I do not think so.  The market is simply consolidating its gains.  People are banking in their profits because there has been a lot to squirrel away.  When people re-assess things in the new year, we’ll be in for another strong bull run.  That is why I am not minding the bear.  I’ll probably not wait for when prices recover before jumping in because just like as the veterans say when there is blood in the streets, that is the best time to buy.

Incidentally, I bought back into to position some DMC which I had sold earlier above 34.  I also added some JGS and VLL to my holdings as I see these two stocks to be bouncing off support levels.  I postponed buying MPI because the price action over the past two days tells me it could move lower, but the strength in Wall street overnight might just mark some new support level for some of the well watched stocks.

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December 1, 2010 - Posted by | Financial markets in Asia

44 Comments »

  1. nice post sir Gus! shopping time indeed! I’m thinking of accumulating stocks from the banking sector as I don’t have one in my portfolio. Which one would you suggest for me sir? TIA

    Comment by RmR | December 1, 2010 | Reply

    • MBT because it will be the market leader in big ticket corporate financing. You could consider CHIB for long term holdings and even UBP which is undergoing some structural changes.

      Comment by Gus Cosio | December 2, 2010 | Reply

      • thanks sir Gus for your advice. i’ll buy MBT when my salary comes. haha!

        Comment by RmR | December 2, 2010

      • Hi Sir Gus,

        Will you avail of MBT’s SRO next month?

        Comment by Neo | December 2, 2010

  2. Indeed!

    US and European markets are up more than 2%! (as of 1am) Asia will definitely follow suit later today. I wonder if the PSEi will do the same. It has been moving opposite the US markets for most parts of this year.

    Love the creativity in your titles Sir Gus! ^^

    Comment by Money Magnets| Sun | December 2, 2010 | Reply

    • Thanks.

      Comment by Gus Cosio | December 2, 2010 | Reply

  3. Sir, do u think that the Ip converge IPO is worth buying?

    Comment by Erik | December 2, 2010 | Reply

    • most traders who subscribed IPO for IP Converge will immediately sell their stocks either on its first trading day or second i believe. It was what I have observed from CEB and Nickel Asia… is it worth buying? i dunno, i’m just a newbie. I was just sharing what i have observed.

      Comment by RmR | December 2, 2010 | Reply

  4. hahahahahahaha “Anyway, if the Korean conflict results in a nuclear holocaust, we’d all be dead anyway so why should we worry about our wealth.” I love this line!

    Comment by Wren | December 2, 2010 | Reply

  5. thanks very much for this post Sir Gus….

    Comment by tatels | December 2, 2010 | Reply

  6. December will be a different month.

    Comment by Mars | December 2, 2010 | Reply

  7. Hi Sir Gus! I read your post quite a few times and found a lot of food for thought. Funds have piled into both local equities and BSP SDAs the past two years. I wonder if one or both (or neither) were primarily funded by money sloshing from overseas (QE1&2 perhaps). Maybe while the local equities run was fueled by foreign money thus far, the SDA growth was from local investors fleeing stocks the past 2 years (2008 having been a traumatic financial experience for many). Of the two scissor blades, people probably pay less attention to “money running out”. Yes, there is a lot of money waiting on the sidelines of the stock market. Besides treasuries (record low rates) and SDAs, every retail bond issuance seems to have been successful the past 2 years. What fascinates me about your post is the potential for a “money running out” fundamental indicator. I hadn’t previously thought about this, but wouldn’t be surprised if big banks and brokers already use such a thing. Although local players, with effort, can probably monitor money flows between the local stock market and non-stock financial instruments, I wonder about the other part of the equation… foreign funds. How does one determine when foreign money headed for the Philippine Stock Market is “running out”?

    Comment by abitrade | December 2, 2010 | Reply

    • Abitrade,
      During the Asian Flu of 1997, there was not enough money domestically to sustain the market. Everybody knew that if the SSS and the GSIS stopped buying and foreigners were selling, the market was doomed.
      The landscape has changed significantly as more institutional portfolios in the form of mutual funds and UITFs have emerged. Likewise, many of high net worth individuals are choosing to invest locally than abroad having been burnt badly by the sub-prime and CDO crisis. My sights are no longer trained on foreign funds for direction. I simply look at the company fundamentals because it is value that will attract money. To be sure, money is still looking for yield and it is in the fundamentally strong stocks where they can find it.

      Comment by Gus Cosio | December 2, 2010 | Reply

      • yes sir gus..hopefully more fund managers will follow your lead in prioritizing fundamentals

        Comment by cliffhanger | December 2, 2010

      • Very interesting. Thank you very much, Sir Gus!

        Comment by abitrade | December 3, 2010

  8. the internet bubble is kinda like whats happening to ORE since its incorporation..promises and promises..i bet they have been making promises since their incorporation last august 2007. but until now, no delivery has been able to overcome their expenses…

    Comment by cliffhanger | December 2, 2010 | Reply

    • There’s really a heavy rain in the area according to my source. So, The shipment will be next year.

      Comment by marketbeginner | December 2, 2010 | Reply

    • Cliffhanger,
      I understand some people’s anxiety over ORE,particularly because the broad market had been jittery in the past 2 weeks. Nonetheless, someone pointed out to me that even if the shipment does not go out this month, there is no denying that there is a lot of nickel of commercial grade on the ground in the mine-site.

      Even if it is not yet being shipped, it is being amassed in a stockpile that should be rising in quantity until the shipment is eventually dispatched which should happen the weather clears up.

      I am not suggesting that one should be careless; I think one should process the information to appreciate it properly.

      Comment by Gus Cosio | December 2, 2010 | Reply

    • Cliff,
      i will not be so hasty as to call ORE a bubble. A bubble is an empty asset. The ORE nickel claim has minerals that could last at least 12 years at existing capacity. If it just remains in the ground and no nickel is being extracted, it will still not be a bubble because the reserves are there to be mined and shipped eventually. Remember, the value of a stock is the earnings it produces and the assets that remain for future production. So while earnings will somewhat be delayed since shipment schedules have been shifted, earnings will eventually be produced and the proven reserves will be around for some time to come so that earnings will recur for a period of time.
      For me a possible example of a bubble is something like PRIM. It is spending so much money for producing something like Willing Willy but is not breaking even at all. Even their operating expenses exceeds its operating revenues. The thing is that they are producing shows which have very little tangible value which can dissipate into nothing. Nickel ore, on the other hand, will always be in the mine and will always be worth a lot in this day and age.

      Comment by Gus Cosio | December 2, 2010 | Reply

  9. Hello Sir Gus,
    Please send me an email.
    I have something important to share and something to ask.

    Thanks in advance!

    Comment by Aldrien | December 2, 2010 | Reply

  10. For those worried of Korean conflict, an observation in bloomberg reads ” after a short chest trumping, what can S. Korea do? Attack the north?? In short, the likelihood of it becoming full scale war at this time is still unlikely. thanks

    Comment by alex | December 2, 2010 | Reply

  11. “…if the Korean conflict results in a nuclear holocaust, we’d all be dead anyway so why should we worry about our wealth.” LOL! So true! I love your wit and humor Sir Gus, not to mention the valuable insight we get from you blog, which I follow religiously. Cheers!

    Comment by Kristin | December 2, 2010 | Reply

    • Hahaha that was funny indeed!

      Comment by abitrade | December 2, 2010 | Reply

    • Why thank you, Kristin.

      Comment by Gus Cosio | December 2, 2010 | Reply

  12. Sir,
    would you enter AP at current price levels or are you looking at a correction after this portfolio re-alignment thing.

    Regards

    Comment by Mark Anthony | December 2, 2010 | Reply

    • Mark,
      AP is so much of a favorite of fund managers, it just will not come down.

      Comment by Gus Cosio | December 2, 2010 | Reply

  13. Sir, I am your new follower , thank you very much.

    Comment by Oliver | December 2, 2010 | Reply

  14. Sir,

    just a question, since I am a newbie, what really is a good indicator of a stock? dow jones?,charts-macd,candlestick,.etc.. analyst’s suggestions?, world news?.. etc..
    thanks

    Comment by Oliver | December 2, 2010 | Reply

    • Oliver,
      A chart gives you a picture of what has happened so far. The candlestick tells a more detailed story because it shows where the buying or selling begins and ends. The notion is that if you can see how the short term trend of a stock is, you can make some money by reating to the trend.
      For me, the best indicator of a stock is its value as measured either by its Price to Earnings Ratio (PER) or Price to Book Ratio (PB).

      Comment by Gus Cosio | December 2, 2010 | Reply

      • thank you sir Gus.. 🙂

        Comment by Oliver | December 7, 2010

  15. Everything seems so much brighter when Maiki Oreta is around 😉

    Comment by Money Magnets | December 2, 2010 | Reply

    • I agree. She’s wonderful, isn’t she.

      Comment by Gus Cosio | December 2, 2010 | Reply

  16. Aboitiz Transport – ATS is paying a special php 0.15 dividend that is around Whopping 8.x% of the closing price of ATS today. i loaded on ATS today =)

    Comment by jenny | December 2, 2010 | Reply

  17. Sir Gus,

    I really hope FAMI fund manager is moving out of ORE..last time I checked(weeks ago) 6.5% of the fund went in that stock….

    Scared Investor

    Comment by Scared Investor | December 2, 2010 | Reply

    • I was under the impression that ORE went down purposely so that the FAMI fund manager can add more according to the price action I’ve seen today. Firstmetro had just bought an additional 700K+ shares today. Still buyers beware.

      Comment by Seth | December 2, 2010 | Reply

    • how do you check that?

      Comment by Norman Go | December 2, 2010 | Reply

  18. sir what can u say about PNB? is 80 tp possible?

    Comment by aldrin | December 2, 2010 | Reply

    • Aldrin,
      I really have no clue. I think PNB is fully priced already.

      Comment by Gus Cosio | December 2, 2010 | Reply

  19. I just sold all of my EDC. I used part of the funds to buy MER at an average of 181p (Didn’t quite get the 175p entry price I was hoping for)

    Though, It seems that I fall in-love with stocks and can’t left go that easily.. :/

    So now, I suddenly have buyers remorse. Selling something that has been with me for a long time is like figuratively selling my first born.

    And if I buy TEL, I would have a stable of Pangilinan-led companies. So now, I’m thinking whether to put some funds into the Gokongwei-related things too..

    Comment by jasper | December 2, 2010 | Reply

    • Jasper,
      I think some diversification will be good.

      Comment by Gus Cosio | December 2, 2010 | Reply

  20. Sir is the IP converge IPO worth buying?

    Comment by Erik | December 2, 2010 | Reply

  21. I think it was a bad call when I redeemed all my investments at FAMI based on my assessment that is is heading south already maybe due market consolidation and xmas season. Now that market has rebounded today, I should have taken home more hehe, .

    The proceeds, I bought MER, and DMC before it rebounded today :).

    Comment by rdthedeveloper | December 2, 2010 | Reply

  22. Sir, what’s your take on AGI? Anyone knows the tp of this issue? thanks.

    Comment by Shan | December 2, 2010 | Reply

  23. “Anyway, if the Korean conflict results in a nuclear holocaust, we’d all be dead anyway so why should we worry about our wealth.” -I laughed at this line! Brilliant, Gus. 🙂

    Comment by Dez | December 2, 2010 | Reply


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