Weekend Notes: Gold, Banking sector + The 4 Ps

Gold at US$1,000?

It seems that gold is heading towards US$1,000.0 based on its recent price action. For the first time this year, gold closed above US$700.0. A chartist friend of mine told me over the weekend that a major breakout is in the works for as long as the central banks would refrain from selling gold in the open market.

I totally agree with my friend's observation. There are two things that will trigger a breakout. First, the US Federal Reserve will likely cut interest rates by more than 75 basis points in. Based on the futures number, the expectation is for a 25-50 basis points cut in overnight borrowing rate. The US job report for august - which saw the labor market shrunk by 4,000 jobs, will likely fuel this move. This is the first time since 2003 that the US economy registered negative job growth. Second, holdings of US treasury bonds by government and central banks at US Federal Reserve fell by 3.8%, the steepest decline since 1992. Please read: Treasury Rally May Falter These two trends will likely see the US dollar trade lower in the coming weeks. Considering that gold price is inversely correlated to US dollar, I must say that the writings are clearly on the wall.

Banking sector consolidation seen

Investment banking giant UBS Securities Philippines is bullish on the banking sector due to reforms seen leading to better asset quality, loan growth and operating efficiency. They also expect mergers and acquisitions (M&As) to perk up the industry with the top 3 banks -Metrobank (MBT-P55.0), Banco de Oro (BDO-P58.0) and Bank of P.I. (BPI-P62.0) expected to acquire banks with specific niche. Please read: UBS Bullish on RP Banks

The best way to play the sector is to look at banks that will likely be the targets. I do believe that both Security Bank (SECB - P72.50) and RCBC (RCB - P23.75) are candidates for acquisition. SECB has a strong niche in the mid-size/Chinese merchant market that will fit nicely into BPI's portifolio. On the other hand, RCB can provide the "asset boost" to either BDO and MBT in their quest to become the largest bank. RCB is also the cheapest bank in the sector at .80x P/Bv giving investors the best upside potential in any m&a plays.

The 4 Ps

I am currently reading "Finding the Next Starbucks" by Michael Moe. The book was recommended by CKP through his blogsite www.ckp168.com. Mr. Moe is the founder of ThinkEquity Partners - an investment management company based in San Francisco. During his stint as an analyst in Merrill Lynch, he was amongst the first to recommend Starbucks Coffee Co. The company turned out to be one of the best performing stock in the last decade. From a mere US$250m company during IPO in 1992, Starbucks now sports a market capitalization of US$20.0bn

In looking for the next big winners or the next Starbucks, Michael Moe suggests that we focus on the 4 Ps - great People, leading Product, huge Potential, and Predictability. Please log on to www.findingthenextstarbucks.com to read excerpts from the book.