Gus Cosio says so

Ideas on the Philippine Stock Market

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

Evolving a community of decent and constructive people

11:30 Sunday  February 13, 2011

Over the weekend, I read a few comments on this blog that had indecent or harsh language.  I also noticed some exchange of comments that were exceeding the boundaries of the free exchange of ideas that I am trying to promote in this site.  I would like to remind our readers that we should rise above our narrow self-interest because that is not my intention in this blog.  If you noticed, I do not push my ideas on any of you.  If some ask my opinion, then I give it as I see it objectively.  I also lay no claim that I know everything nor do I claim that everything I say in this blog is infallible.   I do this blog for the benefit of those who want to learn things in the market.  I am an investment advocate and the purpose of my sharing of my ideas is so that people who read my articles can eventually have a good experience in the market.

Sometimes, I make calls on some stocks because that is how I process the information.  A regular follower with a bit of common sense should be able to glean after a period of time how to process information in a way that suits his or her investment parameters.  I do not push stocks in this site; I push ideas which is what investors would normally get from their advisers.

I would therefore ask all those who post comments on this site to be civil in both their attitude and language.  After all, if you do not like what other people are saying, you can just ignore it.  what I would really like to develop in this site is an investing community where people can help up build each other and contribute to the growth of our very own capital market.  Let us not be like the run of the mill crab minded people that we all hate.  Let us be people of genuine goals and motives.  We all want to make money and arguing anybody’s point to death is simply not the way to do it.  What will really serve us is if we can be constructive in everything that we say.

If you have a trading system or technique to share, fine.  If you do not like the trading style being offered, fine as well.  As I said to two readers about their argument over this site, in the end, it is the market who determines that is right.  That is why I assert my points about following the market and gleaning thoughts from what the market action is telling us.  Remember, the stock market is an accumulation of all the information available.  The art is to make more favorable moves than the unfavorable ones.  You cannot make it work for you if you are bull-headed.

So much for that.

I received some texts expressing delight that the Egyptian crisis is over and people can start looking at the economic and market fundamentals that should steer the course of the local market.  I had thought that what had been driving our market was the exodus to the developed markets.  Surely, foreign selling has taken its toll on many stocks.  Our market is down over 10% from end 2010 levels and close to 20% down from the 2010 highs.  That is 670 points at Thursday’s close.  The levels where we are now make a lot of sense to me.  After a record-breaking 62% gain in 2009, I was just really expecting around a 20% gain of the index in 2010.  That would have had the PSEi settle around 3615 at the end of the year.  Instead, it far exceeded my expectation and surged to 4397 and eventually closed around 4200.

With the index back down to 3740 level, it does not look too far from where it should have been.  Why a 20% gain of the index in 2010?  Because that is what is in line with aggregate earnings of listed companies more or less.   That is also consistent, in my opinion, with the two-year compounded growth of earnings.  I think the market exceeded valuations that were acceptable to sophisticated portfolios.  I think the S&P 500 was trading around 12.7X PE in December 2010 while the PSEi was trading around 13.7X PE.  Today, the relationship may already be reversed with the PSEi already cheaper.  This is why I think we are coming close to the end of this sell-off.  Theoretically, the market can dip to 3615 or 3620.  That level will be very cheap for a good number of stocks.  I must caution you, however, to remain with the strong issues at this point.  I may have some speculative favorites, but if one were to be prudent, he or she should stay with stocks with strong earnings.

February 13, 2011 Posted by | Financial markets in Asia | 48 Comments

Is this such a stubborn move?

5:20 pm  Thursday  10 February 2011

Wow! this is one of the worst trading days I’ve seen since I closely followed the Philippine market.  Can you imagine, of the 20 most active stocks, all were red except BPI which was merely unchanged.  Yesterday, I was thinking that because selling by foreign funds had thinned out, things would start to get better.  I was pinning my hopes on the 3800 level to hold.  Now that it has been penetrated, I think the 3620 level is pretty much at hand.  There was not specific reason for the sell-off except that the entire region save Shanghai and Sydney were all in the red.  Nonetheless, the PSEi was the biggest loser, down 2.73% with KLSE Composite following a far second at -2.09%.  The tide is surely against us.

The good thing, though, is valuations are really becoming very attractive.  Unfortunately, valuations are not what traders are looking at right now.  People are just looking to sell at any price whether it makes sense or not.  One thin I noticed though is that the strong stocks have remained strong.  Take DMC, for instance.  The stock may have been languishing between 32 and 35 for a few weeks now, but it did not see a drastic sell-off today.  It merely slipped from 33.10 yesterday to 33.50 today.  The same thing with AP, closing 27.30 today from 27.50 yesterday.  Of course it gave a bit of a scare when it touched 26.85, but the fact that it closed much higher tells us that there are value shoppers out there.  BPI closed unchanged from yesterday although it traded to a low of 52; again, people are stepping up to the plate for this stock.  JGS closed at 19.50 against yesterday’s close of 19.60; perhaps most JGS sellers have gone to the exit already.

The stock that had it in a big way today was MBT, down 5.25%.  I hear that people reacted to a published December 2010 statement of condition which reflected a decline in total loans and total assets from the balance sheet published in September 2010.  Another stock is RLC, which has very strong fundamentals and yield but it had suffered the biggest loss for the day among blue chip firms – a bloody 6.98% drop.  This is a stock that I really like and took into my portfolio only yesterday (Wednesday), but it’s given me a one peso loss already in one day.

The big question again is whether this market would hold at these levels or not.  I’d like to see it happen but I would not put my life on the line for it.  I think until global sentiment in emerging market turns, we will not get much traction.  Not only should all these selling stop, but also the  propensity to sell has to die down.  Fear has been plaguing the market for more than 6 weeks now and people are still scared.  I think one should not be a hero at this point.  I think the indicators for net foreign buying should be watched closely such that when they run out, the locals can step in for stocks that have come to bargain basement levels.

This market will not change its direction overnight.  We have to be very sensitive to whether or not sentiment will change.  People have become very concerned about future inflation resulting to tight monetary conditions.  That kind of mindset does not reverse itself quickly.  There will, however, be special situations which will allow us to make money; but these will not be as plentiful as in the last 18 months.  Investors have to be very selective, prudent yet bold.

February 10, 2011 Posted by | Financial markets in Asia | 118 Comments

A February effect

Thursday 10 February 2011

It looks like we cannot escape the negative sentiment of higher interest rates down the road.  Stocks in the Asian neighborhood are generally down with most players wary about China’s rate hike yesterday.  A Hong-Kong based economist at Credit Agricole says: “Global markets may begin to see the frequent rate hikes as a sign that a growth slowdown in China is inevitable.  But in the end, the move will be seen as a sign of strength, with solid growth momentum allowing policy makers to raise rates.”  What the guy probably means is that monetary authorities are not at all worried about halting the growth momentum in China.  They just have to cool down inflationary forces before it structurally prevents further growth.

Property prices had been a major concern for China since 2007 with the Olympics related boom in asset prices.  Actually, property prices have cooled down a bit but commodity prices have moved higher.

In the Philippines, property prices are also creeping up inspiring confidence among developers. I am not sure if the confidence of developers is credible enough, but ALI has been disclosing through mass media that it is looking to beat its record residential property launches of PhP50billion in 2010 with at least a double-digit increase for 2011.  Sales take-up by MEG and FLI in 2010 were very encouraging.  MEG disclosed sales of PhP39.6bn (+51%) while FLI said sales were PhP9.9bn (+42%).  There should be very good prospects for 2011  as  players land bank more aggressively with offers for the 103 hectares FTI property from MEG affiliate ELI of PhP14billion above the DoF’s minimum price of PhP13billion.  RLC  made an offer for the same property last month for an undisclosed amount.

Fundamentals are definitely sound but sentiment is ruling the trend and property stocks are among the worst performers YTD: MEG (-17%), RLC (-14%), and FLI (-11%). The reason I mention this is because in our seminar last week, our analyst Mark put a few stock through Benjamin Graham stock screener and RLC stood out.  I also saw a property report of two large houses having RLC as a top pick stock.  Considering the interest shown by some readers of this blog, I thought it appropriate to talk about the property sector and RLC which look to be both defensive and cheap valuations-wise.

I was thinking of the January effect that did not materialize this year.  In fact, the market had a very negative January taking February even lower.  Net foreign selling has not yet ceased, although it has slowed down.  Sentiment will eventually give way to fundamentals.  It would be wise to stick to stocks with strong fundamentals.

February 10, 2011 Posted by | Uncategorized | 38 Comments