Cory + Erap = Power Power Fatigue

I grew up admiring Pres. Cory Aquino. I was awed by People Power I when I was a kid. I remember those yellow headbands and shirts worn by my sisters during that time. I was too young to know what was going on at that time. All I knew was a housewife drove out an evil person from Malacanang and became the country's president.

I was part of People Power II, when Cory and Cardinal Sin again asked people to troop to EDSA to ask for the resignation of Pres. Erap. It was another glorious moment for the Philippines. Erap resigned and Gloria Arroyo became the president. It shows the magic of people power.

Why is there people power fatigue then? I guess, with Cory and Erap leading the interfaith rally last Friday sums it all up.

I cannot understand why Cory has to stoop down to the level of Erap. I cannot imagine why a God-fearing and incorruptible Cory would share the stage with a convicted grafter and a womanizing ex-president. Let's be straight about it. A thief cannot ask another thief not to seal. The scene speaks for itself. It speaks a lot about compromise and transactional politics. Cory represents the oligarch while Erap represents the "masa". It shows that politicians are willing to compromise principles for the sake of power. So, in the end, it is all about power grab.

I guess, we should put people power in context. Cory has only herself to blame. People are wise enough to see the motives behind their moves. Until a genuine people power is put in place, there is no choice but for the protagonist to slug it out in 2010.

Unfortunately, while all these things are happening, it is the country that is suffering. In the end, we just have to accept that we are mere pawns in this chess game.

It's never too late to buy a stock. It's never too late to sell a stock.

Turtle Traders

Writings on the Wall: Rate Cut + Meralco

Buy when the writings are on the wall.

That's the best advice my mentor gave me while I am still a budding analyst learning my craft. As always, the best time to buy is when the writings are on the wall. No amount of technical or fundamental analysis can beat this advice.

Two things have emerged, the US Federal Reserve (US FED) is bent on cutting rates to prevent the US economy from slipping into a recession and the movement of Meralco (MER). I see these events as "triggers" in going back to the market.

Last week, US Fed Vice Chairman Donald Kohn said that policy-makers must be "flexible" and "pragmatic". This triggered a 331 points rise in Dow Jones Industrial Average as Wall St. see this as a signal that the US FED will cut rates when it meet on Dec. 11. Already, the futures market is pricing in a 100% chance that the US Fed will cut rates by 25 basis points and a 50% chance that it will cut rates by 50 basis points.

However, the surprise will likely come from a concerted effort by central banks to simultaneously cut rates in order to shore up the US dollar. More than the looming US recession, the weak dollar is creating havoc in the financial markets. As they say, what goes around, comes around. Previously, it was the US FED that acted as the savior for Japanese Yen and Euro.

In 1998, then Treasury Secretary Robert Rubin initiated a US$2.0bn purchase of Japanese Yen to prevent the Yen from falling below Y150.0 to US$1.0. The move stabilized the currency markets and brought the Yen back to Y135.0 to US$1.0 within days. Interestingly, the Japanese banking system was reeling from a US$600bn bad debt that was accumulated during the go-go years of the late 80's. Please read Can This Yen Be Saved?

In 2000, the US Fed and the Bank of Japan (BOJ) stepped in to buy Euros in order to shore up the currency. At that time, the Euro fell by almost 25% to US$0.85 to 1 Euro from its opening rate of 1.16 Euro to US$1.0 in 1999. Since then, the value of Euro has almost doubled to 1.48 Euro to US$1.0 Please read Euro Crisis

In the local market, I guess the movement of Meralco (MER-P82.50) is a sign of things to come. What's good for Meralco is good for the market. From its low of P68.0 last week, the stock has rallied by almost 22.0%. Meralco, is a bell-weather stock. The move tells us that money will be flowing to the utility/power sector. Two weeks ago, the Dept. of Finance (DOF) sold the 60% stake of the government in PNOC-EDC (EDC - P7.00) for P58.0bn. The winning bidder paid P9.75 per share, effectively paying a 40% premium over the market price of EDC. Next week, the government will bid out the concession of National Transmission Co. (Transco). Proceeds from the sale is expected to reach US$3.0bn. So from the looks of it, utility stocks will likely outperform the market. As always, go where the money is.

The bullish case for Meralco is defensible. Last week, Finance Secretary Margarito Teves indicated that the government is bidding out its combined 29.0% stake in Meralco early next year. Meralco is currently trading at 12.0x PER to 12/08 earnings. On the other hand, EDC, was sold at 18.0x PER to 12/08 earnings. Comparatively, Meralco should be priced within the same valuation range. This should put the indicative selling price of Meralco at around P102.0-115.0 per share.

If my assumptions are correct and the market indeed bottomed out at 3,400 levels, then there is a strong chance that the PSEi will make new highs by 1Q08. Note that the PSEi managed to establish higher lows versus the 2,800 (low) that it reached last August. So how high will the market run? Again, will just have to watch for the writings on the wall .....

For comments, you can send me an email at jack.galt888@gmail.com

Quote for the day: "Managing risk is an art in itself"

David Harding, Managing Director, Winton Capital Management

Random thoughts: Gold at 28-year high, Peso at P43.20, PSE at P1,300; Asian Godfathers

Gold gold gold

Gold surged to 28-year high to close at US$831.0. The slumping dollar coupled with renewed credit concern triggered by the US sub-prime crisis prompted investors to bid-up the price of gold. Last September, I wrote about the possibility of gold hitting US$1,000.0, please read: Gold at US$1,000

On a contrary view, I think it is prudent to take some money off the table. I guess, there is too much bullishness right now on gold. Everyone is talking about it. On a risk/reward basis, the trek to US$1,000 represents a 20% upside from current levels. To my mind, the big gains may have already been made.

Peso peso peso

Peso closed at 7-year high to reach P43.22 to US$1.0. The break below P44.0 confirmed the long-term uptrend of the the Peso. Most likely, we will see the Peso at P40.0 to US$1.0 by year-end.

The situation right now is an interesting turnaround of the Asian currency crisis that happened 10 years ago. Investors are now shifting out of US assets and moving into other better yielding currencies. Note, that the Asian currency crisis triggered the longest bull-run in US equities market that saw the Dow Jones rose from 3,000 to 11,500 in a span of 4 years. During that period, investors shifted their money out of emerging markets and poured money into the US market.

Analysts are arguing that the "dollar crisis" will have the same effect on emerging markets. My only concern is that the world cannot be immune from the slowing US economy. Unless, we see a clear decoupling, emerging markets will continue to be baffled by the weak US markets.

However, what is obvious is that emerging markets have outperformed the US market since July. Exchange rates are leading indicator for the markets. Funds will most likely invest in markets with an appreciating currency. Since 2002, the US dollar has fallen by 50% against major global currencies. On the other hand, the Peso has appreciated by 23% during the said period. Thus, on a relative basis, the Peso still has a lot of room to appreciate. This might be the catalyst for the Philippine market.

PSE at P1,305

Shares of local stock exchange operator, Philippine Stock Exchange, Inc. (PSE) rose to as much as P1,400 before settling at its current price of P1,305.0. PSE turned out to be my best pick (so far) for 2007. The good thing about PSE breaking above P1,000 is that member-brokers are now more willing to sell their stake. Note that the Securities and Exchange Commission (SEC) has mandated that member-brokers should hold no more than 20% stake in the exchange.

A PSE that is majority owned by institutional investors will generate better shareholder value in the long-run. It is quite ironic that an entity that regulates listed companies cannot even get its own stock dividend approved. Hopefully, with better shareholder mix, PSE can move towards professionalizing how it manages the business and at the same time maximize shareholder return.

For one, I cannot imagine why PSE should be sitting on close to P2.0bn cash that generates a measly 5% return whilst the PSEi is hitting new highs. PSE should come up with a dividend policy that pays out quarterly cash dividends to its shareholders. The exchange does not need to have excess cash in its book considering that it generates close to P150m cashflows per quarter. To my mind, the annual dividend pay-out should be P32.0 and not P8.86 per share.

Please read my past articles on PSE:

Hidden Gems

Hidden Gems II

PSE at P850.0


Current read: Asian Godfathers - Money and Power in Hong Kong and South-east Asia.

Asian Godfather is an interesting narration on how few "godfathers" control the economies of Hong Kong and Southeast Asia. The book, by Joe Studwell, compares these "godfathers" to the mafia overlords in New York who's business competencies are acquired through "concessions" and "wheeling-dealing" rather than innovating.

The book also gives a historical insight on how the "godfather" class emerged during the colonial times and how it continues to maintain its position.

Amongst the Philippine tycoons mentioned in the book are Henry Sy., John Gokongwei, Lucio Tan and Jaime Zobel de Ayala.

For reference,please read the commentary by William Pesek; Strictly Business: Godfathers in South East Asia. Please read: Godfathers in Asia

For comments, you can send me an email at jack.galt888@gmail.com

Quote for the day: "Survive first and make money forward"

George Soros

Quote for the day: "My theory is that the next bubble will only come when everyone stops talking about bubbles all the time"

Marc Andreessen, Founder, Netscape Communications