STOCKS EXTENDED ITS DROP to a fifth session mirroring the fate of its peers in the Asian region and taking the hint from a continued fall in US equities.  Trading was nevertheless tepid, with value and volume turnovers below their respective 14 period averages.

The PSEI dropped -30.25 points, mostly at the run-off stage, but keeping above the 5,200 psychological support.  Total value turnover fell short of the php5.0 billion mark, with breadth thinly positive.

The government remains optimistic on hitting its full-year economic targets despite growing concerns on global growth.  Last week, the US Federal Reserve revised their forecast half-a-percentage point lower, to the 1.9% to 2.4% range from 2.4% to 2.9% it saw in January.  The local economy however continues to post encouraging numbers, the latest of which is the jump in May exports.  Despite this, and the recent upgrade the economy has received from the S&P, some have expressed apprehension over the government’s optimism, casting a degree of doubt on the projected numbers.  At this point, we are inclined to share in the government’s estimates.

Investors appear to be headed for a rather choppy ride as we move deeper into July and moving closer to the 2Q earnings cycle.  Over the last couple of session, we have taken most of our hints from markets abroad aided in some ways from mixed interpretations of fresh domestic economic numbers.  A big jump in May exports have rekindled hopes on the sector’s prospects.  Lending continues to grow, albeit at a slower month-on-month pace.  The uneasiness over the recently released Executive Order on the Mining Industry have kept  the sector depressed and generally heading south.

The near-term does not look encouraging for the market, technically, after it broke support at 5,235, even as it held the psychological 5,200-level.  The line coincides with the rising top of an uptrend channel formed after the index hit an interim bottom at 4,863.42 in mid-May.  The channel was broken on the upside enroute to the most recent all-time high, which then triggerred a sell-off, eventually closing Thursday below the line.  Critical support moving forward is painted by the 38% mark off the Fibonacci line seen at 5,190.  Incidentally, this line was the low point of Wednesday’s trades.  A futher breach of this line opens the next buy window at 5,130.

While this condition, over-all, suggests continuing bias to hold cash in the next couple of weeks or until a restoration of the uptrend (or at least an invalidation of the downside breakout), to us, this suggests the exercise of extended patience in terms of pricing entry points.  This is particulary true for index component counters.  In this context, with alternative assets expected returns still below equities’ potential, activity may shift to an accumulation of second- or even thrid-line counters over the near term as the advised patience in exercised on pricing top line counters.

Pursuant to the SEC’s approval of the Amendments to its Articles of Incorporation, RCM shall effect a change of its corporate name to LAFARGE REPUBLIC CORPORATION.  In this light, the trading/ticker symbol will be changed from RCM to LRI.  This modification will begin to reflect in the PSE Trading System on Friday, July 13, 2012.

Disc. No. 5162-2012

TA and Frontier Oil Corporation has agreed to extend the former’s option to acquire a 10% participating interest in SC52 to “until 90 days after the programmed re-test operations of the Nassiping-2 well in Gattaran, Cagayan Province is completed.  The Farm-in Option Agreement subject of the amendment was entered into last January 12 of the current year.

Nassiping-2 (SC52) is held by Frontier Gasfields (30%), EF Durkee and Associates (20%) and Frontier Oil (50%.)  Originally, Frontier Gasfields (FG) had rights to 80% interest which called for a full contribution to costs.  However, FG, 50% owned by ASX-listed BioProspects Ltd (ASX: BPO) farmed-out 50% to Frontier Oil in exchange for reduced cost-sharing.  The latter shoulder 75% of operating cost, standing as the operator of SC52. FG’s share of the cost is reduced to 25%.

Nearly a month after the original Farm-In Agreement was signed, TA announced the completion of re-entry and testing operations.  However, the test was suspended after Frontier Oil failed to establish a stable and sustained measurement.

Volume activity (not shown) has picked up in the last two sessions, moving above the 14pdMA even as price continues to trade inside the short-term (2-month) horizontal consolidation region (HCR), which in turn is right below the longer-term HCR between php1.23 and php1.28.  On balance, this favors accumulation – a stance that gains more validity if and when volume turnover continues to pick up and rises above the 200pdMA of 2.638M particularly as it trades near the major support range of php1.18-1.20. ACCUMULATE.

http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-5162_TA.pdf

MARKET REVIEW & OUTLOOK:

INVESTORS ARE SEEN TO REMAIN OPTIMISTIC entering the 28^th week of trades as the balance of considerations tilt toward the domestic front. The local economy has been producing numbers in line with, if not better than, official targets making market watchers, stakeholders and analysts a seemingly conservative lot.  Such numbers have provided a buffer against a still uncertain global environment and growth prospects.

Last week, following hints the Asian Development Bank (ADB) may raise its Philippine growth forecast, Bank of America Merrill Lynch, anticipating a boost from a more aggressive public-private partnership (PPP) roll-out,  revised its own numbers, raising projected 2012 GDP by 120 basis points from January levels to 5.6%.  However, it pulled its 2013 forecast to 5.7% from 5.9%, citing the weakness in exports.  Ironically, ADB is yet to release its estimates even as it sees improved sentiment, ratings upgrade expectations and fiscal gains as the main contributors to the revision.

At the middle of the just concluded week, the country received a largely expected credit rating upgrade from the Standard & Poor’s to a notch  below investment grade and at par with Southeast Asia’s largest and progressive economy, Indonesia.  This is the highest grade the economy has reached in over a decade and is a strong confidence vote on the Aquino government’s management of the country’s fiscal and monetary affairs.  Although S&P cites several risk factors that may derail the push to investment grade, it has kept the outlook stable.  Previously, Moody’s and Fitch Ratings have likewise moved the country’s rating close to investment grade.  On the political side, the Aquino administration continues to enjoy considerable good performance ratings in surveys conducted by various pollsters.  Although the numbers have characteristically dropped from its highs, opposition has not gained as much traction to disturb the peace.

Inflation remains inside the 3%-5% target range with June prices rising at a slower 2.8% pace off May’s 2.9% and year-ago’s 5.2%.  The year-to-date average rests on the lower end of the earlier cited target range.  While previous months’ numbers were a bit of a surprise in light of successive oil price hikes, the latest figure jives well with consecutive roll-backs after global oil prices fell on expected weaker demand from troubled major economies.  Being able to contain inflation gives the BSP enough elbow-room to intervene if the need arises either to spur economic activity further or to pre-empt inflationary pressures when they arise.

Risks on the domestic front are subdued, pushing equities high up on the financial assets table.  Activity has been slow at the start of the third quarter, however, possibly on the overhang of apprehensions over external risks.  Average value and volume turnover, taken over a 14pdMA, dips slightly to php6.399 billion from php6.426 billion and 4.388 billion from 4.460 billion, respectively.  Number of trades have also slipped to 24,819 from 24, 918.  These we can consider to be flat.  On a brighter note, the ADL, considered to be a leading indicator, improves to -201 from -332 on the year-to-date narrowing negative breadth to -0.75%.  Consequently, AD Ratio inches to 0.98 from 0.97.  Taken together, these numbers point to a positive bias moving forward.

The PSEI has dropped almost a percent off the all-time intra-day high of 5,403.16.  What is important to note is that most major corrections since 2009 have amounted to approximately -10%, give or take,  off the major peak.  The accompanying chart draw trendlines marking the main legs of the recent cycles.  It romped 43.46% over an 8-month period from September last year to May, before it slipped -8.73% in the next 8 sessions or 28.8% of the aggregated prior advance.  From thence, it rebounded, bettering the previus peak with a total 538.93 points in a 33 session period to the new high.  What history tells us, is that a 10% pull-back presents a good BUY window for a short-term rebound, while a 15%-20% retreat opens doors for long-term acquisition and profit opportunities.

Our portfolio continues to slightly outperform the market.  RFM has nearly tripled while EEI approached the doubling-level.  These two stocks have provided sufficient buffer to hold up the total return vis-à-vis the market, despite a 20% loss absorbed on the ANI position (closed at the end of last month) and continuing paper losses in BOD, PCOR and MPI.