Philippine Stock Market Research

Is the Party Over? PSEi Almost 3,800!  Should We Sell Now? Is the PSEi Overbought Already? Here are the Signs!

September 7, 2010

“When others are greedy, it is the time to be fearful. (W.E.B.)”  And fearful we should be as investor confidence is on the verge of overconfidence.  First, let us look at the PSEi’s rise coming from ten months back.  You can see the inverse relationship between corporate bond yields and the PSEi in the graphs below.  In the short term, the PSEi is still seen to rise as corporate bond yields have continued their downward trek as of yesterday.  How low it will go, we don’t know, and it’s up to daily tracking to see if it has hit rock-bottom.

This is a link to a newspaper article about the last Government Securities Auction.  It says demand for long term notes are high and that the system will be more liquid due to PHP38.7 bn worth of maturing papers this week.  This extra liquidity will boost the PSEi again in the short term.

Lastly, we would like to share our observations on our very own Stocks Table.  This week, there are ten bargain stocks and ten premium stocks that can be acquired reasonably with our Law of Averages.  Based on all of the Stocks Tables made here in 3Q10, the table below shows the movement of the PSEi and the bargain and reasonably-priced premium stocks (our number of stocks).  When our number of stocks grew by 52.6% from July 5 to August 2, the PSEi rallied and left the 3,300 level which it found challenging to break in 2Q10.  Our number of stocks is based on a blended multiplier limit which is based on the average year-to-date yield of Peso Bond Funds.  Like in our line graphs above, there is an inverse relationship between bond yields and the PSEi.  So when the average year-to-date yield of Peso Bond Funds declined, it increased our number of stocks and made the PSEi attractive propelling it to the 3,700 level.

The problem now is that the number of stocks is declining from 29 in August 2 to 20 as of yesterday.  This is because the PSEi is becoming expensive.  If the number of stocks continue to decrease, it may be time to shift from stocks to bonds.  Below is our Stocks Table as of today.

There are two Margins of Safety to look at here to see if the party is over.  The first is the Margin of Safety column at the far right of the table.  If the figure is positive, it is best to buy the stock than invest in the Peso Bond Fund.  If the figure is negative, dump the stock and go for safer, less-risky securities like bonds or bond funds.  In our latest Stocks Table, there are 18 out of 40 stocks with positive Margins of Safety for a ratio of 45%.  This first Margin of Safety though only takes into account of PER or earnings and profitability (the health of the income statement of the company).

Our second Margin of Safety takes into account both earnings and financial condition (the health of the balance sheet of the company).  The second Margin of Safety in our table are our two line bars.  The first line bar separates bargain from premium stocks.  This bar is set where the computed blended multiplier limit is.  For this week, it is 24.46x, and it is computed using the average Peso Bond Funds’ year-to-date yield.  The second line bar separates premium stocks that can be acquired reasonably and premium stocks that are very expensive.

As mentioned earlier, as of today, there are ten bargain stocks and ten premium stocks that can be reasonably acquired using our Law of Averages.  This came from 21 bargain stocks and eight premium stocks that can be reasonably acquired last August 2, 2010.  If the number of stocks continue to decline and the two bars disappear, the PSEi is already a Sell.  There is still upside in the short term, but there is already risk looming in the skies.

Pymwymi Fund Performance

The Pymwymi Fund is up 43.9% while the PSEi is up 24.6% from the start of the year to September 7, 2010.  The Pymwymi Fund’s performance notably bests two ICAP Stock Funds with the highest year-to-date yields.  They are the First Metro Save and Learn Equity Fund (up 40.06% from the start of the year) and the ATR KimEng Equity Opportunity Fund (up 35.75% from the start of the year).

Disclaimer

The Philippine Stock Market Research report is solely for information.  It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned.  The information herein has been obtained from sources believed to be reliable.  Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report.  All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice.  No liability can be expected for any loss arising from the use of this report or its contents.  As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.