It is NOT now.


Stock Market Valuation

We are right on the average!

Looking at the chart above, we can see that the Philippine stock market (2nd from the left) is trading around its 10year average valuation.

The recent market decline made the market NOT expensive. But it would be prudent to keep in mind that it did NOT make the market cheap, at least not yet.

Though some thinks the Philippines deserves premium valuation considering the developments that happened in recent years, some even say we are ripe for an 18x up to 20x P/E valuation — a hefty upgrade from around 15x average P/E in the last decade, current macroeconomic distortions might not be very kind to give us just that, at least at the moment.

This is the time when we straighten out our investment criteria, scan the market for possible buys, look for consolidation/reversal technical clues, set your buy prices at a good enough discount, post buy orders GTC (good-’til-canceled), and wait for the price come to you.

Happy investing!๐Ÿ™‚

Less than a month’s worth of trading and the PSEi is already down by more than 10% (-12.48%ย as of 21 January 2016).


In my view, O.C.D. has been doing a lot of damage to the financial market.


What’s O.C.D.?


It is not Obsessive Compulsive Disorder, although, as the Mayo Clinic puts it (http://bit.ly/1RBNLpS), “With OCD, you may or may not realize that your obsessions aren’t reasonable, and you may try to ignore them or stop them. But that only increases your distress and anxiety. Ultimately, you feel driven to perform compulsive acts in an effort to ease your stressful feelings.”, it may have played a rather significant role in the current market downfall.


O.C.D. stands for Oil, China, and the mighty US Dollar.


It is a good thing that we benefit from low oil price, but only up to that point where it does not hurt whatever petrodollar (i.e. oil revenue) is financing.


An analyst estimated (http://bit.ly/1Qd05tK) that the Philippines stands to lose about US$400 million up to US$2 billion in remittances if the Middle East gets so crimped by the current oil situation.


Data from BSP says that remittances from the Middle East amount to US$5.334 billion in 2014 (US$4.783 billion in Jan-Nov 2015), about half of which or US$2.525 billion (US$2.274 billion in Jan-Nov2015) was sent by our “Bagong Bayani” in Saudi Arabia.


China is experiencing a deceleration — from a double-digit growth in the last decade to just 6.9%, and that is if we are to believe their official statistics which some (or should I say many?) highly doubt.


The slowdown in China’s economy brings with it expectations of lower demand for almost anything that it has been splurging on in the recent past. This development causes some countries to worry, especially those who adjusted themselves to feed the once thought unsatiable requirements of a once believed to be an ever-growing economy.


And lastly, the mighty Dollar, which have been increasing in recent years against a broad basket of currencies. The increase in the value of the US Dollar has not been kind to commodities as well as to the countries that produce, export, and depend on them for a living.


The US Fed liftoff of its interest rates in December might have contributed to the continued strength of the US Dollar. And, should the Fed continue (that is, if it can) to increase rates, US Dollar-denominated financial assets may well be a better alternative for money hungry for yields.


But, as investors, what are we going to do about it?


In my earlier post, I pointed out a technical case that this market may still go down.


psei - elliot - 16nov2015

Elliot Wave Analysis on PSEi – 16 November 2015

psei - elliot - 21jan2016

Elliot Wave Analysis on PSEi – 21 January 2016 update


If my Elliot is right, a possible next stop for the PSEi is around 5,800 (-4.6% down from jan21 close). If a Fibonacci of the weekly chart is to be believed, 38.2% retracement is at 5,700 (-6.3% down from jan21 close) and 50% retracement is a tad lower than the 5,000 mark.



PSEi Weekly Chart as of 21 January 2016

Fibonacci Retracement on PSEi Weekly Chart as of 21 January 2016


Also in my earlier post, I said that that PSEi at around 5,800 makes it NOT expensive based on a P/E of around 15x which is PSEi’s long-term average.


The thing with average, however, is that it was arrived at with some numbers above AND below it, so let us not underestimate what a bad sentiment or a negative money flow could do to valuation. But, at least we know when it is “cheaper than usual”.


If we are to stick with this market, we should find a way to know which PSE-listed companies are worth sticking it up with.


Like in many things, there are several ways to do it. At this point, let me propose one simple way to know what we need to know.


If this downtrend decides to take a while, I want to know:


1. Which companies can give me cash while waiting for a trend reversal or for its value to be realized. I want interim cash flows. I want dividends.


2. Which companies have been performing well in terms of profitability.


3. Which companies are cheap, not based on recent good years, but based on a longer time frame which may have included both good and not-so-good years.


So, what I did is to look for data, processed it a little, and came up with the following:


1. I identified 32 companies which have been giving dividends WITHOUT FAIL for the past 10years (2006-2015) — AC, AEV, ALI, ANS, ATI, BDO, BPI, CEU, CHIB, FEU, GLO, ICT, IPO, JFC, JGS, LFM, MBT, MWC, PSB, PSE, REG, RLC, SCC, SECB, SHNG, SM, SMC, SMPH, TA, TEL, UBP, URC.


2. Among the 32,
—– 5 companies had single-digit Return on Equity or ROE (TA, SMC, REG, JGS, RLC).


—– 15 companies had ROE of 10%-15% (CHIB, SMPH, AC, ICT, SM, SHNG, LFM, BDO, PSB, CEU, ANS, MBT, BPI, ALI, MWC)


—–12 companies had ROE of more than 15% (SECB, UBP, AEV, FEU, ATI, IPO, JFC, URC, TEL, GLO, SCC, PSE)


3. Interestingly, only six companies saw their ROEs accelerating throughout the years (meaning, 2014 ROE is higher than the 3-year average ROE, which is higher than the 5-year average, which is higher than the 10-year average — ROE is accelerating). These companies are SHNG, PSE, URC, ALI, BDO, and JFC.


4. Of the six companies with accelerating ROEs (i.e. improving profitability), only ALI is selling at P/B which is less than its 10-year average P/B (12.6% cheaper vs. its 10year average P/B).


5. Of those whose recent ROE exceeded its 10-year average ROE, only four companies are selling at P/B which is less than their 10-year average P/B:
—– MBT (20.6% cheaper vs. its 10yr average P/B)
—– ALI (12.6% cheaper vs. its 10yr average P/B)
—– UBP (11% cheaper vs. its 10yr average P/B)
—– CEU (8.5% cheaper vs. its 10yr average P/B)


For those interested, I want to share my worksheet (link). Let me know if you’ve found other interesting things.๐Ÿ™‚


Again, knowing the possible candidates for a BUY order does not necessarily mean you have to buy them at the next market open. This is where the charts come in handy.


For instance, ALI, which has been consistently paying dividends for the last 10years, has experienced acceleration in ROE, and is selling at less than its 10year average P/B, last week broke below the 150-week moving average which seems to be supporting its uptrend since the 2009 recovery (see chart). ALI is already down by -21%ย this early in the year.


ali - weekly - 22jan2016 - breakdown from 150ema weekly

Ayala Land (ALI): Weekly Chart as of 21 January 2016


Watch out for signals of a bottom (e.g. hammer, bullish engulfing, piercing pattern, morning star, oversold oscillators, bullish divergences, among others).


And when you see them, be ready for the possibility that they may just be a pause and not a consolidation and start of a reversal you hope it to be.


Happy investing!๐Ÿ™‚

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