Times like these... you need AIG!

(http://farm4.static.flickr.com)

Phisix sinks 4.26% again

It's Valentine's at Philippine Stock Exchange. You don't need to look at individual stocks. Looking from afar, you will immediately see the red numbers, indicating that stocks are down.

Applying the contrarian principle again, we see that most stocks are worth a second look now. Take the case of Megaworld. It closed at 1.50 last week. This day, it fell to 1.30. Now, the income of Megaworld last year was 0.152 per share. Last June, its accumulated income for the year was at 0.09 per share. If this trend continues, it will end the year with a 0.18 per share income.

Usually, companies trade at 15 x the eps value. Using this simplistic formula, Megaworld should be trading at 2.28, given a flat income this year. But, since it is currently posting a growth, it should not be trading lower than 1.80 (at 10x anticipated eps).

When to buy then? If I am purely considering fundamentals, I will buy now. But, since we are also considering technicals, the right point to buy may be a little tricky. Right now, the market is trending downwards. Either we ride the trend all the way down to its rock bottom, or plunge in the market when there is a greater probability of rise. I think, it is still best to await the third quarter data.

(Image above is from (http://www.thedigeratilife.com. It was taken almost three months ago. Today, is gloomier.)

Chapter 11: Of Financials and Free Fall

Lehman brothers filed for chapter 11 bankruptcy. It was still trading at US$15.00 per share 11 days ago. It is now trading at $0.30. Care to buy Lehman for US$206.7M?

Major holders include some of the biggest mutual funds and financial companies all over the world.

Lehman's major holders include the following companies (figures inside parenthesis are their holdings valuation as of June 2008):

1. AXA Life (US$1.3B)
2. FMR (US$783M)
3. Clearbridge Advisors (US$776M)
4. Barclays (US#539M)
5. Fidelity Diversified (>US$420M)*
6. Vanguard (>US$452M)*

* represents mutual fund exposure

In the Philippines, Metrobank, BDO, RCBC, and Philam Life are some of the companies associated with Lehman. Already, the market crashed 4% yesterday. This day, it inched up 1%.

What is peculiar about this resort to Chapter 11 is that Lehman seemed to be in good shape. In March of this year, Citigroup researchers even upgraded its recommendation for Lehman from Hold to Buy. Its report for May 2008 however, registered a loss of -5.14 USD per share. Four months later, it filed for bankruptcy.

Lehman's financials appear to be fine. It is even awash with cash (US$540B). However, what really troubled Lehman is its debt. It has a standing obligation in excess of US$350 B. Debt to equity ratio is at a staggering 13 to 1. With this, and a falling income statement, there is really nothing else to do but file for bankruptcy. Lest it bleeds to death. In the end, it would have been wiser to show the real color of the financial statement, rather than prolong the agony.

Financial sector is being shaken by a meltdown. Since the financial sector is exposed in every major industry, the grim face of the world market is understandable. The 1929 Wall Street Crash was brought about by too much optimism, driven by the loose lending policies of commercial banks. When the average P/E reached 32 or so, the pressure was too much. Eventually, realism found its way back into the minds of investors.

Now, if this is a recession and a start of a bear market for US (and the rest of the world), it started with the housing sector free fall. Lehman is exposed in real estate. The latter's failure to move up, overextended Lehman. Too much optimism again. AIG now needed an 85 Billion Dollar bailout to be able to continue doing business. Merill Lynch needed a buyout from Bank of America.

For an ordinary investor, the only thing that is still making me smile is the fact that when the World Trade Center crashed in 9/11, world markets fell. The Phisix went to as low as 999.79. Meralco traded at 6. PLDT was at 300 or so. Now, these stocks are trading at 10x those values.

All these things will pass.

My namesake, George Soros, once said that we have to be a contrarian. The market is always wrong. If it is selling, we have to buy. If it is buying, we have to sell. He earned a billion dollars overnight as the British pound fell in 1992.

The best principle is still fundamentals. We have to look at the financial statement of a company before buying it. If you are AXA, how can you sell 1.6Billion Dollars worth of Lehman? Hence, Buffett buys for life. Even if the markets close for ten years, he would say, I can still wake up with a smile. Because billions of people around the world wake up, shave with a Gillette, and drink Coca Cola.

Technicals principle: Do not ride the bearish market all the way down. Sell now, and buy later. Well, you can do this if your exposure is very low. Have I exited the market? Not yet. I will, tomorrow.

Sleep principle: Sleep peacefully, because BPI will still be banking strongly in the Philippines, Filipinos will still use electricity and water, and communicate using Globe, Smart, or PLDT. And yes, barkadas will still drink San Miguel, and eat out at Jollibee.

I sleep in peace. But, I still read the Business Section. Like crazy.

Phisix (September 12, 2008)

Phisix dropped to 2646.12 this week from 2724.72 last week (2.88%). Most stocks went down, except for San Miguel Corp (SMC), which posted a magnificent increase in income last quarter. In fact, based on fundamentals, SMC is still number one, for being most undervalued, that is, compared to its income performance. For my part, I would like to see first the 3rd quarter earnings of SMC. After all, with the current run, it may be in for a correction this coming week.

For the composite index, the downtrend is seen in the MACD, Stochastic, RSI (measure of strength). Based on the latter, we can surmise that should the downtrend continue next week, it is still to far from oversold levels. Oversold levels is at 25, where usually, the market reverses. Current RSI is at 45.11. Moving average seems to indicate a correction, because long term still points positively.

Companies to watch out, based on fundamentals are:

1. SMC
2. SMC B
3. Philex Mining (probable uptrend in excess of 150%, long term given positive income continuity)
4. Vista Land
5. RCBC

With the downtrend of SM, it became a company worth watching. It has an uptrend potential of just 20%, but its continued weakening can pose it for a fundamental buy.

For my part, I am looking at Aboitiz Equity Ventures and Megaworld. Any of the two can be a good buy, given good income results this end of September.

Ayala Corporation (AC) moved up a notch in the stocks list of good buys (from 14 to 13). It is still 24% undervalued.

(Image is from Yahoo! Finance)

Phisix (September 5, 2008)

For this week, the Philippine Stock Index closed at 2724.72, up from 2688.09. Though it suffered a correction last Friday, moving down 1.065%, both MACD and RSI points to a positive direction. The 25-day average is beginning to move up, nearing the 75-day average. In Risk Investing Theory, this is the mark of a buy in the general market. When the market bounce back from a downtrend, usually the 200-day average (long term) is higher than both the 25-day (short term) and the 75-day average (intermediate term), where the short term is lower than the intermediate term. When the market starts to strengthen itself, the 25-day average is the first one to move up. By the time the 75-day average is overtaken by the 25-day average, it is already a marked bull run.

Hence, it is better to invest before that happens. The caveat there is the continued oil crisis at home, and the weakening peso. When the 3rd Quarter numbers come out, this bullish sentiment will be confirmed. The best thing to do now is to invest in a balanced mutual fund. While doing this, we must look for companies to invest on, using fundamentals. This can be done using the Quarterly data of September. Usually, the companies with the highest positive variance over the same data from last year are the ones that should be considered for investment.

Business bits (week ending September 7)

(Image is from finance.yahoo.com, showing a 2-year chart of the USD-PHP exchange rate. Currently, the peso is at a year low)

Inflation registered at 12.5% in August. Last year, it was merely in the 3-3.5% region. Likely results may be a further decrease in the purchasing power for our salaried workers. A further increase in the incidence of poverty naturally follows. For the business people, this may mean a continued brand-shifting because of price considerations.

Education sector was clearly hit by the economic slowdown. A few years ago, the trend for tertiary education is 60%-40% with private schools being favored over public schools. That means, parents chose private education 6 times out of 10. Now, it is the other way around.

For entrepreneurs, the hardest hit will be the small and cottage industries. Some of the lower-end medium industries will also collapse, if this trend continues. On the part of employment, the direct result is the increase in the unemployment rate, which is already at 8.0% in April 2008 (See attachment on unemployment data from 1999-2008, from the website of NSO) Together with this, an increase in the crime rate looms.

Employees belonging to the middle class might think twice to venture to start their own business, or to change employers at this time.

A salary below 15,000 a month escapes poverty only if the one receiving it is a single person. The poverty level should again be readjusted.

Hopefully, the trend will reverse when December comes. I think that even though times are hard because of the oil problem brought about by the Middle East Crisis, corporate Philippines is still doing well. Banks are resilient as ever, and manufacturing sector is still on top shape, increasing at 9.3% in value (June 2008 data) from last year. When the crisis abates in the Middle East, hopefully after the US election in November, things will start to turn positive at the turn of the year. December will probably be a better time for the market since the peso is at a year low now. We expect peso to strengthen a bit when the remittances from our OFWs peak in December.

Let us just hope that the Republicans lose, or if they win, that they still pull out the US soldiers in Iraq, for fuckin' chrissake. That will somehow pull the oil prices further down.