Morning Brief: 24 January 2011

Exporters see catch-up year EXPORTERS OF FOOD, garments and furniture expect faster sales growth this year contrary to forecasts of a general correction, industry officials said late last week. Trade barriers, raw input shortages and foreign exchange costs, they explained, had prevented these sectors from mimicking last year’s sharp rebound by the electronics sector. Roberto C. Amores, president of the Philippine Food Processors and Exporters Organization, said 2011 food export sales could grow by a brisker 10-15% this year versus the 8.6% increase to $846 million as of November 2010. Garment export sales could similarly rise by 12-15% in 2011, possibly surpassing the 12% increase seen with a month left to last year, Confederation of Garment Exporters of the Philippines Executive Director Teresita Jocson-Agoncillo said in a separate interview. Furniture shipments are also expected to enjoy faster sales growth this year, Chamber of Furniture Industries of the Philippines President Joy C. Cancio said. This contrasts with government projections of a slower 13% growth in total export sales this year from the 34.5% surge seen as of November 2010. The official target tracks the performance of electronics, the top export earner, which is expected to post just 10% sales growth versus the 42% spike seen so far last year. "Semiconductor exporters do not use indigenous raw materials. We have very low supply of raw materials [in comparison]. That’s why we didn’t grow much last year and we have more room to grow now," Mr. Amores said, noting that weather disturbances had caused a shortage in farm crops. "We have many problems with raw materials. Our local source of wood is limited," Ms. Cancio echoed. Mr. Amores added: "we’re very sensitive to foreign exchange movements and non-tariff measures." Exporters that use locally made inputs transact mainly in peso and were thus hurt when the currency strengthened against the dollar in the second half of 2010, making their goods more expensive. Electronics, in contrast, are assembled from imported components. Food, garment and furniture exports are also slapped with higher tariffs and stricter product safety standards while electronics enjoy duty-free entry under the World Trade Organization’s Information Technology Agreement. Coming from a low base, faster growth is likely this year, the officials said. "I expect it will be better because we came from a slump," Ms. Cancio said. "These goods are basic necessities," Ms. Jocson-Agoncillo said. Gov’t eyes tax cuts for foreign airlines MANILA, Philippines—The government is studying the reduction of airline tax rates to make the country a cheaper destination and attract more foreign airlines to fly to the country, thus resulting in increased competition in the country’s air travel market. But as with other policies aimed at developing the industry, tax perks will only be given to airlines from countries that do the same for carriers from the Philippines. Deputy Executive Director Porvenir Porciuncula of the Civil Aeronautics Board (CAB) said the regulator recently met with the Bureau of Internal Revenue (BIR) to discuss the taxes imposed on foreign airlines operating in the Philippines. The government earns an estimated P3.2 billion by imposing a 3-percent common carriers tax on gross receipts and a gross Philippine billings tax of 2.5 percent. The duties have made the country an unattractive market for foreign airlines, especially those from Europe, which operate longer flights and have higher ticket prices, in turn requiring them to pay more taxes. The European Chamber of Commerce of the Philippines has called on the government to scrap the “onerous” taxes. By doing so, the group said more airlines from Europe would consider flying to the Philippines, which would support the government’s programs to increase tourist arrivals and spur investments. “We’ve had meetings with the BIR and the Bureau of Customs. They seem willing to cut the taxes,” Porciuncula said. “But it will have to be on a case-to-case basis because some countries also charge similar taxes on foreign airlines,” he said. “It will have to be reciprocal.” Earlier, the CAB said it would also prioritize reciprocity in implementing the government’s planned “open skies” regime, which would make it easier for foreign airlines to gain rights to fly to the Philippines. The CAB said this privilege would only be extended to airlines that come from countries that are just as open to Philippine carriers. Today, Dutch flag carrier KLM is the only European carrier with direct flights to the Philippines. No local airline has flights to Europe. The route is currently dominated by Middle Eastern carriers, which are able to offer lower ticket prices because they are able to buy fuel at a discount. There is also a standing ban on Philippine carriers from flying to Europe—a result of the government’s inability to enforce minimum international safety standards.

Earnings onslaught coming - but Wall Street may not care NEW YORK (CNNMoney.com) -- Nearly half of the companies in the Dow Jones industrial average are scheduled to release quarterly reports this week, and expectations are very high. But don't be surprised if stocks have a muted reaction to stronger-than-anticipated profits and sales. The stock market has grown "complacent," traders say, and it's going to take more than blockbuster earnings and strong economic data to move it higher. What that could be, though, no one was certain. At the same time, many analysts also believe the market has run out of steam and needs to "rest" for a while. After climbing steadily since the start of December, stocks hit some resistance last week. The Dow added 1.2%, while the S&P 500 ended last week flat. The Nasdaq, which is looking particularly tired, fell 1.7% over the last five trading days. "There's a level of complacency in the market, and some of the contrary indicators suggest the market is overbought," said Nick Kalivas, vice president of financial research at MF Global. "Even if the news next week is favorable, it might not translate to higher prices." The weakness in tech last week -- which came despite blowout quarterly reports from IBM (IBM, Fortune 500), Apple (APPL) and Google (GOOG, Fortune 500) -- is indicative of the market's fatigue, said Kalivas. This week investors will have a slew of top-tier reports to sort through, including numbers from 13 Dow components. Investors are also expecting this week's statement from the Federal Reserve to be a snooze. The central bank is widely expected to leave its benchmark interest rate unchanged when it wraps up a two-day meeting on Wednesday. "I would be shocked if they said anything," said Abigail Doolittle, founder of Peak Theory Research. "The markets are moving ahead and the economy is doing better; they don't want to upset the apple cart." Still, she said the stock rally that started in August has been driven largely by the Fed's stimulus efforts. In the weeks ahead, she added, "the smart money" will be looking for signs the economy can stand on its own two feet. On the economic front, reports are due this week on housing and consumer confidence, as well as an early reading on fourth-quarter gross domestic product. The economy has been showing signs of strength recently, with many economists raising their forecasts for 2011. But there is still much skepticism about how the economy will fair as government stimulus programs fade. "If it turns out that the economy needs another round of government aid in the form of liquidity, I think you'll start to see the market decline into the summer as investors send a message to the Fed," said Doolittle. Monday There are no economic reports on the agenda, but quarterly results are due in the morning from fast food giant and Dow stock McDonalds (MCD, Fortune 500). Three challenges to McDonald's growth After the market closes, fellow Dow company American Express (AXP, Fortune 500) is scheduled to release results. In addition, transporter CSX (CSX, Fortune 500) and technology company Texas Instruments (TXN, Fortune 500) are among the others scheduled to report. Tuesday The Case-Shiller November index of home prices in 20 major U.S. markets comes out before the market opens. The Conference Board, a business research group, will release its January report on consumer confidence shortly after the opening bell. There are five Dow stocks scheduled to report earnings in the morning, including 3M (MMM, Fortune 500), DuPont (DD, Fortune 500), Johnson & Johnson (JNJ, Fortune 500), Travelers (TRV, Fortune 500) and Verizon (VZ, Fortune 500). Yahoo (YHOO, Fortune 500) is one of the companies slated to report after the bell. Wednesday The Federal Reserve is widely expected to hold its benchmark interest rate near rock-bottom when it concludes a two-day meeting Wednesday. A policy statement is expected around 2:15 p.m. ET. New home sales data are due after the market opens from the Commerce Department. Economists expect sales rose to an annual rate of 300,000 in December from 290,000 in November, according to consensus estimates from Briefing.com. Also before the bell, results are due from blue chips Boeing (BA, Fortune 500) and United Tech (UTX, Fortune 500). ConocoPhillips (COP, Fortune 500), US Airways (LLC) and Xerox (XRX, Fortune 500) are some of the other companies scheduled to release earnings and sales figures. After the close, coffee chain Starbucks (SBUX, Fortune 500) is slated to report. Thursday The government's weekly report on initial claims for unemployment benefits comes out at 8:30 a.m. ET, along with data on durable goods orders in December, and pending home sales in November. AT&T (T, Fortune 500) and Caterpillar (CAT, Fortune 500) are the Dow stocks reporting results Thursday morning, along with DR Horton (DHI) and Eli Lilly (LLY, Fortune 500). Microsoft (MSFT, Fortune 500) and Amazon (AMZN, Fortune 500) are up after the bell. Friday An advance reading on fourth-quarter U.S. gross domestic product is due before the market opens. Economists are forecasting a 3.8% annual rate of growth, up from 2.6% in the third quarter. Chevron (CVX, Fortune 500), a Dow stock, and Ford (F, Fortune 500) and Honeywell (HON, Fortune 500) report results in the morning. After the market opens, the University of Michigan will release its final report on consumer sentiment in January.

Oil Falls a Fourth Day in New York on U.S. Supplies, Chinese Rate Outlook Crude oil fell in New York for a fourth day, the longest losing stretch in nine weeks, on rising U.S. stockpiles and speculation China will increase interest rates to curb inflation. Oil dropped 0.5 percent after the Energy Department said that U.S. crude and fuel supplies rose last week. Prices climbed earlier as German business confidence unexpectedly climbed to a record in January amid booming exports to Asia and French business confidence surged. “There were a lot of people betting on $100 oil, but it looks like they were a little optimistic,” said Kyle Cooper, director of research for IAF Advisors in Houston. “Oil at $90 is actually looking a little high, given that inventories are in pretty good shape and demand isn’t that great.” Crude for March delivery slipped 48 cents to settle at $89.11 a barrel on the New York Mercantile Exchange. The contract fell as much as 72 cents to $88.87 earlier. Futures are up 17 percent from a year ago. The March contract in New York declined 3.7 percent this week. The February contract expired yesterday after dropping 2.2 percent to $88.86, the lowest settlement since Jan. 7.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Philippine Markets: 20 January 2011

20 January 2011

USD/PhP: 44.50 + 0.24 PSEi: 4006.24 - 33.32
USD/JPY: 82.16 PFINC: 907.55 - 4.46
EUR/USD: 1.3432 BDO: 54.95 - 0.25
GBP/USD: 1.5934 BPI: 57.00 - 0.25
PDSTF3M: 2.7091 MBT: 62.80 + 0.05
Prices as of 4:00pm Source: Bloomberg, Reuters


Local stock prices continue to slide
By Doris Dumlao
Philippine Daily Inquirer

MANILA, Philippines—Local stock prices tumbled further on Thursday as the sluggish investor sentiment seen in the last two days was aggravated by an overnight pullback in US equities.

The main-share Philippine Stock Exchange index lost another 33.32 points or 0.82 percent to 4,006.24 as profit-taking continued to dominate the market alongside jitters concerning the capital gains tax. The market is wary of a prospective rise in interest rates as Asian countries face rising inflation.

Risk appetite has also been dampened by the Bureau of Internal Revenue's order to slap a 5-10 percent capital gains tax on shares of companies that fall below the minimum public float requirement.

The day's decline was led by the interest rate-sensitive property sector, which slumped by 2.8 percent as investors sold down Megaworld Corp. and Ayala Land Inc.

The industrial counter was likewise down by 1.1 percent.

Only the services counter bucked the downtrend.

There were 87 decliners, which outnumbered 56 advancers, while 34 stocks were unchanged.

Value turnover amounted to P5.3 billion.

Other stocks that fell on heavy volume were Aboitiz Power Corp., Manila Electric Co., International Container Terminal Services Inc., Jollibee Foods Corp., Universal Robina Corp., SM Investments Corp., Leisure & Resorts World Corp., Bank of the Philippine Islands, DMCI Holdings Inc. and Energy Development Corp.

Among the stocks that stayed afloat were Alliance Global Group Inc., Philippine Long Distance Telephone Co., Cebu Air Inc., Metropolitan Bank & Trust Co., Phoenix Petroleum Philippines, APC Group Inc. and Nickel Asia Corp.

Overnight, the Dow Jones Industrial Index shed 12.64 points or 0.11 percent to 11,825.29 while the broader-based S&P500 and Nasdaq indices succumbed to the worst selldown seen in two months.

Morning Brief: 20 January 2011

BOP surplus hits record high of $14.4B Bangko Sentral sees further improvement in 2011 By Michelle Remo Philippine Daily Inquirer MANILA, Philippines—The sustained increase in remittances, higher export earnings and a surge in foreign capital inflows lifted the surplus in the country’s balance of payments (BOP) to an all-time high of $14.4 billion in 2010. The Bangko Sentral ng Pilipinas on Wednesday said the BOP surplus cemented claims that 2010 was a banner year for the Philippines especially in terms of inflows of dollars and other foreign currencies. The surplus, the highest ever recorded, was more than double the $6.42 billion registered in 2009. For December alone, the surplus stood at $1.23 billion, up slightly from $1.22 billion in the same month of the previous year. The BOP is a record of the commercial and financial transactions of the country with the rest of the world. A surplus, which indicates that the inflows are more than the outflows, adds to the Philippines’ total reserves of foreign currencies or the gross international reserves (GIR), which reflects the country’s ability to pay for imports and services and settle maturing debts to foreign creditors. The central bank earlier reported that the country’s GIR registered a historic high of $62.1 billion as of the end of 2010. Asian FDI gains noted by UN; investors bypassing Philippines? SEVERAL Southeast Asian economies enjoyed as much as a five-fold increase in foreign direct investments (FDI) last year while the Philippines was recording a decline, United Nations data released on Monday showed. The national elections in May and the ensuing government transition, said local observers, possibly caused the hesitation, which was also exacerbated by the country’s allegedly unattractive business climate. FDI flows into Malaysia, Indonesia and Singapore in 2010 were estimated to have surged by triple-digit rates from yearago levels as Southeast Asia was among the regions that led the global economic recovery, the UN Commission on Trade and Development (UNCTAD) said in its Global Investment Trends Monitor. Malaysia was projected to have grown its FDI by 410% to $7 billion while Indonesia similarly enjoyed a 163% rise to $12.8 billion, the UN agency said, annualizing available data for the three quarters of 2010. Singapore, meanwhile, likely saw FDI levels grow by 123% to 16.8 billion. These improvements allowed inflows to South, East and Southeast Asia to rise by 17.8% to $274.6 billion while the global average flattened to $1.122 trillion in the same year, the UNCTAD said. Full-year estimates for the Philippines were not included in the report but the country, according to latest central bank data, recorded an annual 36.5% decline in FDI as of October. The disparity was likely caused by last year’s elections, University of the Philippines economist Benjamin C. Diokno said in a text message yesterday. "Investors adopted a wait-and-see attitude given the change in political leadership," Mr. Diokno said. He added that the high level of investments already in neighboring economies allowed them to enjoy a faster recovery as well. Foreign business group officials echoed this but also noted that the country’s perennial lack of competitiveness was also to blame. "We’re not competitive," American Chamber of Commerce of the Philippines Executive Director Robert M. Sears said in a telephone interview. "It behooves the administration to realize that all three [branches of government] from the executive, legislative and judiciary have to work together to improve the country’s investment image." Long-proposed moves to improve infrastructure have just started, European Chamber of Commerce of the Philippines Executive Director Henry J. Schumacher said in a text message. -- Jessica Anne D. Hermosa It’s going to be a rainy summer; no dry season By Kristine L. Alave Philippine Daily Inquirer MANILA, Philippines—Summer is supposed to be the dry season in the country. Not this year. It’s going to be a wet summer that will have typhoons due to the La Niña phenomenon that has been spawning rains in the Philippines since December, the weather bureau said Wednesday. The Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) said large parts of the country would get above-normal rainfall in the summer months of March, April and May. Tropical cyclones “This means that we expect to have a rainy summer. We expect to have tropical cyclones,” Flaviana Hilario, chief of PAGASA’s climatology and agrometeorology division. She said weather models and advisories from various national meteorological centers forecast La Niña to last until May, with the peak occurring in February. The months from March to May are considered the height of summer in the country, when millions troop to the beaches. These months are usually the driest months, with typhoons making an appearance only in mid-May. Typhoons in March-May Citing meteorological models, Hilario said there was a “slim chance” that a typhoon would enter the Philippine area of responsibility next month. PAGASA expects one typhoon in March, two in April and another two in May. June, the start of the rainy season, is expected to have two to three typhoons, Hilario said. La Niña arrived in the Philippines last October. The phenomenon, the opposite of El Niño, occurs when the surface temperature in the Pacific Ocean gets colder. El Niño refers to the increase in the surface temperature in the Pacific Ocean. The Philippines will be under heavy cloud and will experience cooler temperatures in the next five days as a result of the combined effects of the tail end of the cold front and the northeast monsoon.

U.S. Stocks Retreat as S&P 500 Index Posts Biggest Decline Since November U.S. stocks fell, driving the Standard & Poor’s 500 Index to its biggest drop since November, after Goldman Sachs Group Inc. failed to beat profit estimates and housing starts slid more than forecast. Goldman Sachs slumped 4.7 percent, the most since April, after earnings tumbled 52 percent because of lower revenue from trading andinvestment banking. A gauge of homebuilders in S&P indexes retreated 2.9 percent. American Express Co. declined 2.4 percent following a lower-than-estimated profit forecast. International Business Machines Corp. rallied 3.4 percent after reporting earnings that topped analysts’ projections. The S&P 500 slumped 1 percent to 1,281.92 at 4 p.m. in New York after a two-day rally of 0.9 percent. The Dow Jones Industrial Averagedeclined 12.64 points, or 0.1 percent, to 11,825.29 as IBM’s advance limited losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 9.1 percent, the most since November, to 17.31. Treasuries Gain as Stocks Fall; 10-Year Yield Range Rises From 2-Month Low Treasuries rose, with 10-year note yields breaking out of the narrowest range in two months, as U.S. stocks fell after a report showed housing starts declined more than forecast in December. The extra yield 30-year bonds offer over two-year notes was near a record, indicating investors are demanding compensation for the risk that inflation will accelerate. The Federal Reserve purchased $7.7 billion in Treasuries. Volume in the U.S. debt market was the lowest in more than a week. “Given the backup in rates yesterday, lower stock prices and no news coming out of Europe, you get an environment where the buyers step in,” said Kevin Flanagan, Purchase, New York- based chief fixed-income strategist for Morgan Stanley Smith Barney. The benchmark 10-year note yield decreased three basis points, or 0.03 percentage point, to 3.34 percent at 5 p.m. in New York, according to BGCantor Market Data. It slid earlier to 3.32 percent and rose to 3.39 percent. It reached 3.41 percent yesterday, the highest level since Jan. 12. The 2.625 percent security due in November 2020 rose 7/32, or $2.19 per $1,000 face amount, to 94 2/32. Ten-year yields earlier traded in a 4.7 basis-point range between 3.39 percent and 3.34 percent, the narrowest gap since Nov. 11.

Oil Declines to Lowest Level in a Week on Drop in Housing Starts, Equities Oil fell to a one-week low as builders began work on fewer U.S. homes than projected in December, a signal that the economic recovery may be slowing. Futures decreased 0.6 percent as the housing starts slipped to the lowest level in 14 months and the Standard & Poor’s 500 Index retreated from a two-year high. Oil flows in the Trans Alaska Pipeline System increased to the highest rate since Jan. 7, the day before a leak shut the line. “It’s not a positive economic number, and I think the market is still keying on the economic factors,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We’re watching how the dollar and the equities move.” Oil for February delivery fell 52 cents to settle at $90.86 a barrel on the New York Mercantile Exchange, the lowest level since Jan. 10. Futures have risen 15 percent in the past year. Prices declined from the settlement after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles increased 3.53 million barrels to 340.6 million. February oil fell 61 cents, or 0.7 percent, to $90.77 a barrel in electronic trading at 4:31 p.m. Housing starts dropped 4.3 percent last month to a 529,000 annual rate, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 550,000 rate.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001