Gus Cosio says so

Ideas on the Philippine Stock Market

A rational pessimist

11:45 pm   Sunday  27 February 2011

Unless there is a dramatic shift in the global political tensions, I do not think that our market will be going anywhere in the coming days.  It is really quite a pity considering the constructiveness that we saw in the last quarter of 2010.  This only goes to show that we cannot underestimate the fickleness of markets.  It seems that movement of crowds will always be the norm in stock markets which makes it an imperative that we have an insight on crowd psychology.

When the inflation fear gathered momentum, there was no stopping it.  I believe the fear will be among us for sometime more.  Even the tension in the Middle East is a manifestation of inflation fears given that what embeds the anxiety of investors is the fear of oil prices sky rocketing as OPEC supplies get threatened by lower production.

The developed markets while enjoying a bull run over the last two months is showing some signs of weakness.  Of course the downward revision in US GDP estimates from 3.2% to 2.8% does not help the cause for equities world wide.  Surely, strong domestic fundamentals in the Philippines will not affect global mindsets very quickly.  Everybody is looking at the big picture, and, unfortunately with big pictures, small markets can hardly be seen.  The key is for local investors to gain strong conviction on the fundamental values that domestic stocks present.

A case in point is TEL.  I must admit that while TEL has been cheap from 2400 and below, I have yet to be compelled to pick it up in spite of the impending cash dividend which is usually paid out in March.  I guess I value cash more greatly today than I value even high yield stocks.  It gets to be that way when you sense that the crowd will be against you.  Timing is absolutely key to situations like TEL and my instinct tells me that it is not yet time.  I think that sometime soon, conditions can become very attractive to a handful of TEL followers.

In the meantime, investors must come to their levels of comfort before thy increase exposure to the market.  Whether you are a technical trader or one who puts more weight on fundamental value, you cannot escape the prevailing mood of the market.  If you are optimistic on the markets short-term performance, you are in a very small minority.  Fortunately, it is times like these when I remember a quotation from the oracle of Omaha, Warren Buffet: “The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry.  We want to do business in such an environment, not because we like pessimism but because we like the prices it produces.  It’s optimism that is the enemy of the rational buyer.”

Nevertheless, patience and careful analysis of the situation cannot be yet ignored.

February 27, 2011 Posted by | Uncategorized | 46 Comments

A greasy situation

8:00 am  Friday  25 February 2011

The markets around the world continue to react to oil prices.  I noticed that the European markets, except for the Swiss, were not as badly sold as the previous day.  The U.S. indices were off overnight but only slightly.  As a matter of fact, the Dow transportation index was up 0.45%.  The markets recovered when oil prices eased a bit.  I will not hold my breath for oil prices to go down though.

We are now living in a 100 dollar a barrel oil price scenario and prices of all commodities and goods and services will automatically adjust to that.  I think that even if the Libya situation resolves itself soon, which I do not think it will, the anxiety of such sensitivity of oil prices to middle east politics will keep buyers inclined to keep stock levels higher than usual.  That case can certainly be gleaned from China who in recently have tried to be ahead of the commodities curve.

Anyway, my worst case scenario is a  re-rating of GDP growth prospects downward.  At year-end, I was of the opinion that the Philippines had a strong growth trajectory due to prospects of heavy investment spending through Public Private Partnership (PPP) initiatives.  I have become less enthusiastic about the prospect because I think infrastructure investors will be more discriminating with the global scenario becoming less stable.

I guess my message is that we should not expect a market recovery soon rather we should be open to the idea that this situation could languish for sometime.  Some people may find it worrisome and perhaps a bit late to adjust portfolios.  I reckon that if you have cash on your side, you may miss the first wave of a recovery rally, but you’ll still be able to find some bargains.  My suggestion is to stick to fundamentally stong stocks which the market continues to favor.  These are the power and related stocks like DMC (which owns part of Maynilad), MER, MPI, AP, EDC and MWC.  The idea remains to be stability of earnings so you can throw in SCC in there also.  If you get the urge to come in, I think you should stick to a narrow selection of highly tradable stocks without abandoning a trading mindset, at least not yet.

February 25, 2011 Posted by | Financial markets in Asia | 30 Comments

Capital Markets Seminar Series

Surviving the market

We will be resuming our seminar series on Wednesday 2 march 2011.  As usual, there will be snacks and refreshments.  More importantly there will be a lot of food for thought.

I am looking forward to lively discussion among those who come.  If you have questions, write them down and pass it forward when you come on Wednesday.  We will give it a shot.

February 24, 2011 Posted by | Uncategorized | 3 Comments

I’m digging

6:40pm  Thursday  24 February 2011

It is extremely difficult to make a call on the broad market due to the multifarious influences such as global commodity inflation, the price of oil and the tension in Libya.  Cursorily, broad problems exist such as disruption in oil supplies, displacement of OFWs working in Libya, political re-alignment and saber rattling among allies of the troubled countries and possibly long debates in the United Nations General Assembly and Security Council.

My friend used to say that in his household, he makes the decision on the major issues like who should the Philippines have strong diplomatic relations with, global warming and climate change, and whether the Euro should be abandoned by EU member states.  His wife is the one who decides on the minor issues like the monthly household budget, where the kids will go to school, what brand of car they should buy.  I guess they have a notion of what matters the most.

There is very little we can do about what is going on in the world, but we can get to have a look at a few minor details.  One minor item which I have in mind is ORE since I sense that there are a number of people losing money on this stock.  For your benefit these are some highlights of of the notes of one analysts note:

ORE owns 94% of Citinickel which is the sole owner of the mining claims of the Pulot and Toronto mines located in Barangay San Isidro, Bato Bato, Narra, Palawan, 100km south of Puerto Princesa City.  Both mines contain 1.83% to 1.85% nickel at a cut-off grade of 1.2%, which is one of the best explored nickel grade in the Philippines today.

  • ORE’s stockpile as of Feb. 12, 2011 stood at 142,000 cubic meters or 156,000 Wet Metric Tons of ore with grade of 1.8% nickel or better per ton.
  • Several mountains of ore (stockpile) are on  two stockyards, at a maximum distance of  2 km from the mine port and 6 km from the vast expanse of the open mine pit, 400 meters above sea level .  High grade (saprolite) nickel ore can be extracted on shallow soil.  Company officials say that overburden is 2 meters deep and saprolite protrudes at 6 meters deep.
  • ORE’s first shipment has been delayed thrice since last year up to early 2011. They hope to ship two boatloads or 110k WMT to 165k WMT, at best within the month of March.  Subsequently, they plan monthly shipments until Sept. of at least 110k WMT per shipment.
  • Tonnage (mining output) for the year and shipment will be 750,000 WMT on robust selling price of  $83/WMT based on a   grade of  2.1% which is the indicative weighted grade for the 700 ha. Toronto mine per Mines and Geoscience   Bureau (MGB) records shown by ORE officials.
  • Operating margin is 80% on the abovementioned selling price as ORE’s all-in mining cost is $15/ton.  We estimate ORE net profits assuming selling prices at  1.8% nickel grade and 2.1% grade of  $63/ton and $80/ton to be PHP1.1bn and PHP1.6bn for PE of  3.5x-2.5x, respectively.
  • Risks that we see are more rains and flooding of the mine site and a port under repair, which ORE claims can accommodate two barges at a time.  The port is 200 meters long, 3.5 meters deep and faces the Sulu Sea.

I reiterate that I do not suggest this stock to the faint of heart, and I am not saying that the price will not slide further because I think it can.  This is purely for the information of those interested.

In spite of a good number of stocks showing very attractive valuations, the markets are likely to slip further.  It is no longer a matter of value but rather a cloud of fear that people are looking at.  I have no idea when the market will turn except that net foreign selling in our market cannot go much further.  That, however, is no guarantee that there will be local buying to lift the market.  If you are going to stay in the market, you better be prepared to sit on losses for a while.  In my case, I’ve been through cases like this before, so I am used to the shelling and explosions already.  In times of war, you just have to keep your head down; but it is also in time of war that the wily get really rich.

February 24, 2011 Posted by | Uncategorized | 20 Comments

Biblical proportions

This is a bloodbath of biblical proportions if you look at what has been happening to the Asian markets.  While the PSEi is down 1.39%, Shanghai Composite is down 2.60%, Hang Seng down 2.11%, Nikkei down 1.78%, Jakarta down 1.33%, Singapore down 1.68%, KOSPI down 1.76%, Taiwan down 1.87.  Europe is also opening with varying degrees of sell-offs, all these because Maumar Khadafy decide to shoot down Libyan protesters.

The implications get deeper than that since the big picture seems to show a widespread unrest in the Middle East and North Africa which comprise many of the OPEC countries.  Oil futures – West Texas Intermediate  for March delivery – shot up 7.44% overnight.  With inflation arising from agricultural commodities already experiencing extremely large price spikes, the last thing the world needs is a disruption in the flow of OPEC oil which could result in very high fuel prices down the road.

The implication for the market is if much of the world’s liquidity is being used to finance all kinds of commodities, money going into financial assets will be squeezed badly.  The initial sentiment looks to me like fuel being poured into inflationary psychology and I think that is bad for the markets.  Some had already seen inflation to be the enemy but it is only now that it is starting to look like a formidable task.

February 22, 2011 Posted by | Financial markets in Asia | 68 Comments

Disruptions in this site

Dear blog readers,

I noticed lately some discussions that have been rather unpleasant to read.  There have been exchanges that seem to irritate a number of people as well as tirades on other people making comments.  There have also been occasions of bogus comments where identities of regular readers were obtrusively used.  Then one reader commented that there may be some parties who were playing tricks on the site.  These were causing antagonistic sentiments among readers.

I realized that there have been and continue to be a disruptor coming into the blog.  I do not know what his or her motives are, but he or she have managed to get the ire of some people.  I realized this disruptor when I replied to a comment from a public terminal in an airport where I did not log on as the owner of the blog.  after that comment, I saw a comment with my name and email address on it but I did not make the comment.  I deleted the comment when I recognized that it was not me who said it.

Anyway, I do not know who our disruptor is and I do now really care.  I think whoever you are, you are simply trying to destroy whatever good that we have tried to achieve in this blog.

May I suggest to bona fide readers and followers to always use polite language when making comments either to my posts or to others comments.  That way, we will know who are making legitimate comments and who are not.  We should also just ignore those comments which come on as irritating.  Let us not dignify them with a reply.

I am of the belief that many can be helped by this blog with honest and candid thoughts coming from all of us.  I would like to run this blog as long as I can and I will not let any disruptor dissuade me from doing so.  I would like to seek everybody’s cooperation to take it upon themselves to be discreet and honorable.  After all, what we really want in this site is for everybody to benefit.

Thanks and God bless you all.

February 22, 2011 Posted by | Uncategorized | 26 Comments

Kiss and TEL

6:50 pm  Monday  21 February 2011

A three-day weekend at the Bohol Beach Club on Panglao Island was something worth spending money on.  The price of a room was pretty reasonable, air-conditioned with all the amenities, and the enjoyment factor was very high.  They have a very long stretch of white sand beach where the water looks so inviting looking so crystal clear.  They also have several pools in the facility where you can swim if you did not want to swim in the sea.  You can also get a massage in a canopy right next to the beach so you can enjoy the fresh sea breeze while getting a relaxing shiatsu.  I would have wanted to stay longer, but work beckons.

The good thing about getting away is it gives you a fresh perspective on things like the market.  For people like us who are in the market everyday, the danger is to get too immersed one way or another and you get drowned in day-to-day stock price movements.  Getting away is like standing back and looking at the forest rather than the trees.  I tried to think what the big picture was by reading the Global Monetary Analyst (the Analyst) by Morgan Stanley.  The reason why I like to follow the Analyst is because it gives the true big picture based of quantifiable and observable data.  It gives you an idea of how the money/liquidity is being created by the aggregate economy and where the money/liquidity is moving globally.

Reading the GMA in 2008 and 2009 gave me the insight to call the markets bottom in March 2009.  This time around the idea that the GMA presents is the global re-balancing.  In the past 30 years, the emerging markets as a group had been steadily accumulating reserves because of their high savings rate.  This was disrupted by the 1997 Asian crisis but had resumed into the following decade.  Incidentally, the Philippines had only stepped up its savings rate and international reserves after 2003.  The global re-balancing being alluded to is the prospective rise in investment spending in emerging markets and the moderation of the growth of savings and reserves.  This is because the share of investments of emerging markets (EM) in the global economy is larger now than it was a decade ago.

The reason I mention this is to help us gain confidence on what to expect in the Philippine market going forward.  Our economy is one that is still playing catch up with the faster growing EMs.  We have not entered into the stage of bottlenecks where the faster markets are in right now.  Nevertheless, we are being lumped up with the rest of the EM in as far as markets are concerned since global portfolio managers initially look at the major global trends before tweaking for every local market.  The most important consideration that we must look out for is whether the markets are in for a big move in the magnitude direction we saw in 2008.  Personally, I believe that we are not looking at anything like 2008 when the market was in the brink of collapse globally.

A global re-balancing, nevertheless, hurts us because it makes no distinction as to value of individual markets or stocks.  Fund managers simply re-allocate and it would not matter at the onset whether individual prospects are good or not. Re-allocation just has to be done.

Anyway, I think local investors will eventually take up the slack arising from the selling of foreign funds.  I think some foreign funds are gradually accumulating on weakness, but that does not mean that other foreign funds will not sell if we take the markets higher.  In my view, we will have to trade below 3800 before we see the market higher.  Sellers continue to get rid  of their TEL which highlights the fact that they are not focused on value.  We will probably see further weakness, but severe weakness that will alter the up trend is still quite remote.

What is encouraging in today’s trading is to see net foreign buying in spite of declining prices and low value turnover.  Does that say anything at all.  Anyway, I would stay focused on some stocks I like – EDC, DMC, RLC.  I am gathering some research which I will make comments on tomorrow.

February 21, 2011 Posted by | Financial markets in Asia | 31 Comments

Hitting the beaches

11:10 pm  Thursday  17 February 2011

Once again I’ve been on the road and have not had enough time to post my thoughts.  Davao City was very nice – clean, orderly and very wide roads.  I’d like to visit the city again for a longer time. I love Davao pomeloes.

I’ve also notice so much unpleasant posts being made.  I will ignore such posts and not dignify them with a comment.  I would like to suggest that decent people on the site be a bit more discerning and respond only to comments that are sensible and constructive.  This is not a site where everybody has to think the same way, so if people do not agree or like your point, please leave it at that.  I never intended this site to convince people to buy, sell or adopt my views on a stock or the market.  I want people to develop stock market sense with the comments I make.  I also want people to understand that there are nuances to local markets so that they do not become very bookish in their investing or trading activities.

Anyway, I am very pleased that the market has been recovering over the past week although I remain cautious.  Today is a very good example of a market going strong, but the foreign funds are net sellers.  It is likely that they are selling much of their TEL because it has become less important in the index.  It used to be that Foreign funds used TEL as their main exposure to the Philippine market.  Now, you have other blue chips like AEV, AP, DMC, MBT, BPI and the like that can give better Philippine exposure than TEL.

In general, I do not think that the broad Philippine market can go much higher because local investors remain wary of foreign funds.  Foreign funds, on the other hand, are continuing to reduce exposure to the local market.  It will take a few more weeks before sentiment changes, so please think in terms of trading a range.  Nevermind if you take short-term losses.  You can make it back if you successfully trade the range.

In the meantime, I’ll be off to the beaches of Panglao Island for a few days.  I don’t think this market will run away from me anyway, no matter where it goes.

February 17, 2011 Posted by | Uncategorized | 50 Comments

Times are tough!

7:30 pm  Tuesday  15 February 2011

Ours is a market that is still weak.  Sellers continue to appear on market strength indicating further jitters among the large investors.  Even the smaller value turnover today suggests that the market continues to languish in the bearish sentiment that has been hugging the market since the beginning of the year.  Actually, the equities market globally is still looking for a solid trend.  Even if money has already moved back to the U.S. and Europe from emerging markets, there have not been strong signs of conviction in those markets.  I caution everybody, therefore, not to expect any strong rises in prices over the coming days.  If at all, price action in that direction should be met with some selling.

For whatever its worth, I would like to share some views on stocks based on my observation of their price action over the past few days.  This is the way I call it.  The strong stocks which appear to continue to hold its own against all that is negative in the market are AP, DMC, JGS, NIKL, and PX. These stocks look to have very little selling is going on.  Actually, you can detect that buyers appear on dip.  A stock like AEV looks vulnerable to a sell off on further profit taking because of its recent price spike.  Among the banks, BDO and MBT look to be stocks on the rebound, but whether the bounce can be sustained is another matter.

In my view, stocks that appear to be bottoming out are EDC, MER, BPI, RLC,URC, SLI, SECB and CEB.  You can see from their price action that a base is forming where buyers emerge.  I think people are slowly accumulating these stocks.  FLI is one stock that is looking to be bouncing from a double bottom and may be worth a trading buy.

Among the stocks that look very weak are TEL, ORE and PNB.  while these stocks are already oversold, the dumping may continue.  TEL, however, is extremely cheap at this level except that the disclosure from Globe cutting cash dividend payment has cast a pall over TEL’s dividend yield.

I do not know when market negatives will eventually be shaken out.  There are two strategies people can do – choose stocks which they wish to accumulate and nibble slowly or find stocks that look like they are ready for a technical rebound and pick it up for a short-term trade.  It is tough times ahead, so we’ve got to toughen up or else we lose.

February 15, 2011 Posted by | Financial markets in Asia | 71 Comments

Falling in love? Happy Valentine!

5:00pm  Monday  14 February 2011

The rise in the market today should give relief to many investors.  The decline which we have seen so far does not look so precipitous after all.  I would caution, however, that this may just be a corrective rally – either people buying back positions sold earlier or bottom picking for high conviction stocks.  From today’s value turnover of Php 3.74 billion, it does not look like market sentiment has changed substantially.  Furthermore, we continue to see net foreign selling which indicates that the move out of our market into the developed markets is not yet over.

People remain wary and the problem with sentiment like this is that it invites traders to sell on strength.  Judging from today’s price action, I do not think that local traders are fully convinced that the market has turned.  Much of today’s gains was on account of AC, ALI and SMPH.  ALI had good volume but AC and SMPH did not have such impressive turnover.  MBT also accounted some positive index points, but it really looks more like a rebound from oversold levels.

Nevertheless, there are some double bottoms forming notably in property stocks SLI and FLI.  For active traders, FLI could see a run from this point which makes it a good trading buy.  TEL, RLC, MBT and DGTL look to me as being very much oversold making downside risk on these stocks pretty limited.  EDC is a stock that has had quite a long period of consolidation and may also be approaching oversold levels.  It looks well supported below 5.50.  If LPZ holds at these levels, we could see it move up a bit since 4.50 appears to be a formidable support level.

For PNB followers, I think the juice may already have been squeezed out of this stock.  I think it could trade below 45 before it moves forward because interest in the stock is not as wide as in 2010.  perhaps, followers have shifted to another bank.  BPI is usually a boring stock, and it remains to be.  It will probably hold its own if the market turns for the worse.  I think people are willing to hold rather than sell the stock in anticipation of its regular cash dividend in March.  BPI remains to be a defensive stock.

Among Asian markets, we are seeing recovery today after the MSCI ex Japan lost 2.6% last week which is one of the biggest weekly drop of the index.  Investors also saw good news in the 51% increase of China’s imports in January.  That trend is quite favorable for Philippine exporters as China take in more imports from here.

I hope that sentiment will start to turn already because stocks in the PSE are at levels where downside risk could be limited.  Unfortunately, because of the experience in the late 1970’s and early 1980’s, people have a very hard time shaking out inflationary expectations from their mind that it sometimes becomes a self-fulfilling phenomenon.  Fortunately, oil prices, as reflected by the WestTexas Intermediate (WTI) futures contract, is trading lower at 85.22.  As long as one is aware of the downside risk, it could be profitable to trade the rebound which may be forming right here.  Just remember, a good investor never falls in love with stocks in his or her portfolio.

Happy Valentine.

February 14, 2011 Posted by | Financial markets in Asia | 69 Comments