Some caveats on the ongoing rebound

The market last Friday closed on negative territory after four consecutive days of trading gains.  It closed for the week at 6,792.06, with a day’s loss of 58.81 points or 0.83 percent.

The market’s Friday loss, however, was not that critical enough to change the underlying trend the market has been trying to establish since four weeks ago.

For the week ending Jan. 22, the market was down to its lowest at 6,208.05 with a total loss of 744.03 points or 10.7 percent since its performance at the start of the year.  Since then, however, the market began to rebound.  The weekly gains were small but consistent.

The gains slowly nibbled at the market’s year-to-date losses that by the end of last week, they have been pared down by as much as 584.03 points, bringing total losses to only 160 points or 2.3 percent.

For the first time, all sectors of the market registered positive numbers.

Leading the pack last week was the holding firms sector.  Considering the sector’s high total value turnover of P7.89 billion and gain of 11.1 percent in the last four weeks, holding firms stocks may have truly become interesting and the market’s top choice.

Two things possibly explain this:  Buyers now outnumber sellers and there are now more buyers willing to chase the sector’s stocks even at higher prices.  Proof of this is that the holding firms sector has the highest pricing in the market at 20.12x price-earnings.

Second and third place on the leader board were the services and property sectors with 10.47 and 10.40 percent gain, respectively, for the last four weeks.  Total value turnover for the services sector also outpaced the property sector by almost 2 to 1.

Because of its good performance last week, the services sector was one of the three sectors that had a year-to-date positive standing.

In fourth and fifth position with a respective net gain of 7.51 and 6.71 percent in the last four weeks were the industrial and financial sectors.

Interestingly, the industrial sector remained to be the most traded sector with a total value turnover of P12.18 billion, equivalent to one third of total market value turnover.  However, while it was the most traded sector and fourth among the sectors with the biggest gain in the last four weeks, the industrial sector still stood -0.68 percent year-to-date.

One reason why the sector could not yet climb back to positive territory was that the sector’s average pricing continued to be high at 19.89x price-earnings.  This meant we have many more sellers on the wings.

In contrast, the financial sector has a pricing multiple of 14.30x.  This enabled the sector to have a year-to-date performance of 0.19 percent as of last week—with many more buyers waiting.

Actually, because of reported efforts currently being undertaken by oil-producing countries to shore up the price of oil in the international market along with promises from presidential candidates they would resurrect the mining sector, it was the mining and oil sector that had the highest recovery in the last four weeks with a total gain of 24.28 percent.

The mining and oil sector’s total value turnover, however, remained too small that its advance did not hold considerable influence to sway investors’ sentiments and the market’s overall direction.  Its value turnover was equivalent to only 4 percent of total market value turnover of P36.16 billion.

On holding firms

To some investors, the findings on the current performance of the holding firms sector, were surprising.  How could, or why should holding firms become an investment of choice?  All they know is that holding firms’ income are usually passive or indirectly derived.

You might be surprised to find out how solid they are and how strong their earnings are if you bother to look closely at how they structure their relationships with their subsidiaries or operating companies.

For one, the holding company is protected from losses.  If one of its operating companies goes bankrupt, “the holding company experiences a capital loss and a decline in net worth, but the bankrupt company’s debtors and creditors can’t pursue the holding company for remuneration.”

“Holding companies also allow individuals to protect their personal assets. Rather than owning assets personally and therefore being liable for their debts, potential lawsuits and other risks, holding companies can own the assets so that only the holding company’s assets and not the individual’s assets are at risk.”

Therefore, a holding company can own its subsidiary’s brand name and trademarks.  It can own its real estate.  It can as well own its equipment or franchise.

“This way, each of the subsidiary as well as the holding company itself has limited financial and legal liability.”

In the US, the structure of the relationship between the holding company and operating companies allows them to limit tax liabilities.  The holding company and its subsidiary or subsidiaries can strategically assign certain parts of the businesses in jurisdictions with lower tax rates.

Lastly, “a holding company’s operations consist of overseeing the companies it owns. It can hire and fire managers if necessary, but those companies’ managers are responsible for their own operations; the holding company is not.”

Bottom line spin

While the market’s rebound as of last week was encouraging, some caveats stand in the way to a total recovery.

Wiping out the year-to-date loss of as much as 78.5 percent in four weeks could prove to be too fast for the market.  This might lead to sell-offs that could prevent the market from doing a full recovery.

Coupled by the observed continued trading activities of foreign investors where they have, so far, ended as net sellers, the market’s bullish stance might fizzle out anytime.  The market’s daily trading value turnover continued to stay low at P6.05 billion year-to-date.  And with local market transactions being lifted by local punters, its advance is not as secure as when foreign investors were the net sellers.

(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com)