090417pse1

Staying Ahead of the Markets

Outline

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Summary Technical Understanding Analysis 101 Financial Introduction Markets Trend Watching Fundamental Economic Picture Analysis

Trend Watching tips • Know why you are tracking trends – What is a trend?

• • • •

Have a point of view Build your arsenal of resources Fine tune your trend framework Embed and apply

Know why you are tracking trends • It makes you feel in the NOW and in the KNOW. Simply, the way we see it. • It should lead you to profitable opportunities.

What is a trend? How about: “A statistically significant CHANGE in performance of measured data which is unlikely to be due to a random variation in the process.” That won't get the creative juices going. So consider the following definition, which we came up with years ago and which still holds pretty well: A manifestation of something that has unlocked or newly serviced an existing (and hardly ever changing) consumer need,* desire, want, or value.

People have different

Points of View

Common Misperception • Gazing into a crystal ball – Trend watching is simply understanding what’s already happening, the Major and Minor movements.

Common Misperception • Declaring an emerging trend – Distinguishing the difference between trends and fads or in our case a Rally or Correction. – Example • A pizza cone, a fun product but won’t change dramatically the consumers.

Common Misperception • Applying all trends to people – Don’t’ fall for this one. – Never pretend that a certain trend will affect all. • Remember every trend has an anti-trend.

Common Misperception • Trend watchers have to posses a rare gift. – Definitely not TRUE, – You just need an open mind, if you want to spot trend, YOU Can.

Have a Point of View • Have your own view – Know the short-term and long-term trend

• Be curious (ask questions) and open minded – Markets seem to be more than meets the eye

• Look from Top – Bottom – Changes in market sentiments

• You don’t have to like every trend • Be Objective – Get rid of taboos, prejudices, dogmatism and negativity

Don’t hide: An open mind is a joy forever !

Have a Point of View • Make sure to have an view about the markets. The more trends you spot and track. The more skilled you are in putting these trends to use. • The more guidance, will eventually lead to a broad picture of the market and tiny observations will start to make sense. – Trend Reversals

Establish your ‘virtual research command center”

Build your arsenal of resources • Take advantage of FREE info on the web – Papers, websites, mags – TV, Movie, Radio – Seminars, Fairs, Trade Shows – Customers, Clients, Collegues, Friends, Family – Competitors – Other Trend Firms, Thinkers

Fine Tune your trend Framework • Macro trends( STEEP Approach) – Social – Technological – Economic – Environment – Political

• Industry/Category Trends • Individual Trends

Embed and apply • Every company should have its trend monitoring group. – It’s a state of mind.

• Get Senior backing – Its just a language and perception issue as the word ‘trend’ still evoke an image of a flamboyant fashion designer or a fortune teller.

• Make it visual – A picture paints a thousand words

One day, this could be you; -)

What is Economics? • A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: – macroeconomics, which concentrates on the behavior of the aggregate economy; – microeconomics, which focuses on individual consumers.

Demand and Supply • One of the fundamental concepts of economics and it is the backbone of the economy. – Scarcity perhaps is the main reason for this concept. – Water and Diamond Paradox

Measuring Economic Health • Just as doctors and nurses measure vital signs of a patient. Investors and its key plays must also keep watch of the state of the economy. The only difference is the vigil never stops. • Important Economic Indicators – GNP and GDP : The Holy Grail of Economics • reflects at what rate the economy is growing.

– CPI: What is your wallet really worth? • measures what people are paying for goods and services in comparison with the past. It often influence the BSP’s policy decisions.

Macroeconomic Framework Market

Indicator

Economic Activity

Gross Domestic Product (GDP)

Goods Market

Inflation Rate

Funding Market

Interest Rate

External Market

Foreign Exchange Rate

External Market (portfolio)

Stock Market

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The Circular Flow Household Income

Consumption Financial Institutions

Employment Production Production Sector

Controlling Money Flow • Keeping a country’s economy afloat requires a pilot whose main jobs is to keep it from stalling or overheating. • The controlling the amount of money in circulation, the process of injecting or withdrawing money reflects the monetary policy that the central bank adopts to stir the economy. – Example: rising its overnight rates

BSP Policy: Theory Versus Policy Bangko Sentral Ng Pilipinas

Economy, Inflation

This is the way people think monetary policy works.

Money Supply

Bank Reserves

BSP Policy: Theory Versus Policy Bangko Sentral Ng Pilipinas

This is HOW it Economy, Inflation

Consumer and Business Spending

really works.

Money Supply

Interest Rates

Bank Reserves

How Does the BSP put the Brakes on the economy ?

Economic Growth Too Rapid

Inflation Too High

Growth of Bank Reserves Decline

Stock Prices Decline

Interest Rate rise

If the economy is growing too rapidly and the inflation rate is too high, The BSP will tighten monetary policy by slowing down the growth rate of bank reserves, which will raise short-term interest rates.

GNP: Gross National Product Consumption + Investment + Government + Export - Import

• Is the sum of goods an services produced by the Philippines • For our purposes, it should be view as a measure of demand for Philippine Output. How the Markets React: Fixed Income: Equity : USD/PhP:

GNP

Market Reaction

Up

Down

Down

Up

Up

Up

Down

Down

Up

Up

Down

Down

CPI: Consumer Price Index (Inflation rate) • It measures what people are paying for goods and services in comparison with the past. It often influence the BSP’s policy decisions. – Indication of demand pressures? – Second round effects? How the Markets React: Fixed Income: Equity : USD/PhP:

Inflation Rate

Market Reaction

Up

Down

Down

Up

Up

Down

Down

Up

Up

Uncertain

Down

Uncertain

Inflation can Stem from any of Several Cause

Inflation

Oil Shocks

El Nino/La Nina

Labor Costs

Medical Care Costs

Second Round Effects Supply Shocks

Rising oil Prices

First round

Rising Oil, Transportation & Power Costs

Second Round Shift in CPI expectations Increase Minimum Wage

Interest Rates -Fixed Income Securities • 3M Treasury Bill : Benchmark for loan pricing – primarily influenced by inflation/currency

• Fixed income securities appeal to many investors as they promise to pay a set amount of interest on a regular basis and the issuer promises to pay the loan in full and on time. – Government : For its activities/pay debt – Corporate : Raise capital for expansion/takeover

How the Economy affects the Fixed income Market Interest Rates

ECONOMY Bond Market

Interest Rates

ECONOMY Bond Market

How Bond Yields and Gov’t Security prices are related? Suppose the Bureau of Treasury issues a bond at prevailing Interest rate of , say 8.00 percent….

8.00 %

PhP1,000 The bond holder will pay the par value of PhP1,000.00

re If inte

nt perce 0 0 . 6 to s fall st rate

PhP1,200 is eturn r s t i ause es bec s i r d bon ond of the e new b c i r a p f o e t h T ha than t higher The pric e of the bond fa lls beca Its 8.00 use p e r c e n t retur attractiv n is le e. ss

6.00 %

10.00 %

PhP800.00 But if in te

rest rate sr

ise to 10 percent… …

Impact on Bond Markets Positive Volatility in stock markets Interest rate increases Tax increases International conflicts Controlled inflation Tight money supply

Negative Interest rate cuts Tax cuts High inflation Loose money supply

Philippine Yield Curve 11 9 7 5 3 3M

6M

1YR

2YR

3YR

5YR

7YR

10YR

20YR

6/13/2006

9.095

9.386

9.377

10.161 10.654 11.039 11.739 12.114 12.777

4/24/2006

4.620

5.340

6.030

6.166

6.221

6.439

6.722

6.882

8.622

12/29/2006

5.144

5.527

5.598

5.692

5.796

5.987

6.079

6.380

8.017

3/30/2007

4.0946 4.4346 4.8211 5.3771 5.5918 6.0857 6.8104 7.1714 8.6789

1/7/2008

4.0885 4.8365 5.6481 5.8096 5.8981 6.0854 6.3077 6.6038 8.3731

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Foreign Exchange (Peso) • A country’s currency, like its language is closely linked to its national identity. • Factors affecting the currency –Relative prices (inflation: lower the stronger) –relative interest rates :considers opportunity –relative economic growth rates –Country’s current account

Spread Compression affects the Peso 18.5 18.0

When interest rates are higher in the ROP than in 10YM-10Y$UST (1.77360, 1.77360, 1.77360, 1.77360, +0.000), USD/PHP (48.9500, 48.9500, 48.9500, 48.9500, +0.11000) other countries ….

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The peso falls….

12.0

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10.0

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8.5

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. . . .the Peso tends to rise.

5.5

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5.0

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Legend:

4.5 4.0 3.5 3.0 2.5

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But when Peso interest rates are lower than other countries…..

Blue : USD/PhP Orange: % Spread between PhP-USD

2.0

27 26 25 24 23

1.5

22 1998

1999

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2007

Link between Interest Rates and Value of the Peso PhP Interest Rates Relative to Rates Overseas Rise

PhP Interest Rates Relative to Rates Overseas Decline

Demand for Dollar Investments Declines

Demand for Dollar Investments Rises

Demand for Fixed-Income Securities in the PhP rises

Demand for Fixed-Income Securities in the PhP Declines

PhP Value of the PESO rises

PhP Value of the PESO Declines

What determines Volatility? • Information considerations: – Evaluate the implications of the information.

• Hedging or Speculation: – an increase in activity by in a class of agents..forcing prices up/down

• Market liquidity: – ability to absorb orders with little price movement.

• Physical availability of the commodity – law of supply and demand

Stock Market • Know as a leading barometer of the economy – influenced by external factors, peso, interest rates domestic economy, political factors

• They exist for many of the same reasons wherever they are: – To raise investment capital – Centralize buying/selling of shares – Provide investors with financial incentive to put money into equity in some places to create a market for privatizing state assets.

Impact on Equity Markets Positive Economic expansion Interest rate cuts Tax cuts Rising corporate profits Political stability High employment rate Loose money supply

Negative Recession Interest rate increases Tax increases Declining or stagnant corporate profits International conflicts Pending elections High unemployment rate Tight money supply

Factors Affecting the Stock Market Management Changes

Technological Developments

Cost Control Procedures

MICROECONOMIC VARIABLES

Stock Prices/Corporate Profits

MACROECONOMIC VARIABLES

Economy

Inflation

Interest Rates

How the Macro economy Affects Corporate profits and Stock prices? In the ‘perfect world’, when economic growth is up, and inflation and interest rates are down, corporate profits and stock prices rise. Economic Growth Rises

Inflation Declines

Interest Rate Declines

Corporate Profits Rise

Stock Prices Rise

How the Macro economy Affects Corporate profits and Stock prices?

Economic Growth Declines

Inflation Rises

Interest Rate Rise

Corporate Profits Decline

Stock Prices Decline

In the ‘perfect world’, when economic growth is down, and inflation and interest rates are up, corporate profits and stock prices decline.

How to use financial statements

Why bother studying Financial Statements? • OWNERS need to understand them to get most of their investments • LENDERS need them to assess loan applications • MANAGERS use them to spot strengths and weakness of companies • EMPLOYEES use them to assess the financial condition of their employers. Jobs seekers now look at them whenever possible to help weigh job offers.

Whatever you situation, understanding financial statements will enrich your business life.

FS, tools to analyze a business. • They consist of three ( 3 ) separate-yetinterrelated reports: – BALANCE SHEET:(Statement of Financial Position). This provides a snapshot of a company’s financial strength at a point in time. It contains the list of assets, liabilities and capital – INCOME STATEMENT: This shows how profitable the organization has been over a specific time period – CASH FLOW STATEMENT: This tells how much cash the company generated over time and where it went. It’s a number that bears little resemblance to profit.

Balance Sheet Noble House Statement of Profit and Loss December 31, 2007 (In Million Pesos) 2006 Current Assets Cash Marketable Securities Accounts Receivable Inventory Prepaid Expenses Total Current Assests Investment in Affiiated Co. Property, plant & equipment Cost Acc. Depreciation Other assets Total Assets Liabilities: Account Payable Accured Expenses Curent portion, LT Debt Total current liabilities Long-term debt Owner's Equity: Capital Stock Retained Earnings Total Liabilities and Equity

2007 2,000 1,000 2,000 2,000 100 7,100 200

5,000 3,000

2,000 200 9,500

900 1,000 2,500 2,300 100 6,800 200 6,000 3,200

300 1,300 200 1,800 2,000 2,000 3,700

5,700 9,500

2,800 200 10,000

500 1,200 200 1,900 1,800 2,000 4,300

6,300 10,000

Changes (1,100) 500 300 (300)

800 500

200 (100) 100 (200)

600 500

Assets = Liabilities +Capital • Asset: is defined as something owned by a company that will be used to generate income. • Liability: is an obligation for which the firm has to pay money to others. • Equity: is what’s left over after the liabilities have been deducted from the assets.

Relationships Assets – Liabilities = Owner’s Equity (Also know as NET worth)

Assets = Liabilities + Owner’s Equity • This relationship explains why you need more than assets to run a business: To get those assets you have to pay for them with another asset (like cash), or with a proceeds of debt (a liability) or by contributed capital or retained earnings (equity)

Why “balance” sheet? • Both sections of the statement – Assets on one side – Liabilities and equity

• Always equal each other.

Income Statement Noble House Statement of Profit and Loss December 31, 2007 (In Million Pesos)

Net Sales Cost of Goods Sold Gross Profit Operating Expenses Selling, General and Administrative Depreciation Profit from Operations Interest Expense Income Before Taxes Income Tax Expense Net Income

10,000 7,000 3,000

1,600 200

1,800 1,200 200 1,000 400 600

How Profits affect the Balance Sheet Income Statement

Balance Sheet

Sales

Leads to

Increase in Accounts receivable or cash

- Cost of goods sold

Leads to

Decrease in inventory

Or

Increase in accrued expenses

Or

Increase in accounts payable

Or

Decrease in cash

Or

Decrease in prepaid expenses

Leads to

Increase retained earnings(owner's equity)

= Gross profit - operating expenses

= Net Profit

Cash Flow Statement Noble House Statement of Cash Flow December 31, 2007 (In Million Pesos)

Cashflow from Operations: Net Profit Depreciation

Changes to operating assests and liabilities: Accounts receivable (500) Inventory (300) Accounts payable 200 Accured expenses (100) Net cash provided by operations Cash flows from investing activities: Additions to property, plant and equipment Net cash from financing activities: Repayment of long-term debt Net cash provided (used)

600 200 800

(700) 100

(1000.00) (200.00) (1,100.00)

Together, these statements provide data that represent the financial strength and performance of a business. They can reveal opportunities and forewarn of pitfalls.

Accrual Concept • Your checkbook is an easy-to-understand cash-based accounting. You record the check you write and deposits you make. • Thus, revenue equals cash received and expenses equal cash paid. • But accrual accounting is something more than meets the eye.

The useful accrual accounting • It is revenue recognized when you make a sale or provide service not when you get paid. • Likewise, you incur(and record) an expense when you receive the benefit of a service or when you use an asset to produce a revenue – not when you pay for it.

Accrual Accounting • Focuses more on the economic substance of the event instead of the movement of cash. • It is a way of recognizing that revenue can be earned either before or after cash is received, and that expenses are incurred when you receive a benefit – like shipment of supplies – and before (or after) you pay for it. – An expense will sometime be accrued and reported even without an invoice. • A good example is interest due every six (6) months on a debt. Your books will show an accrued interest monthly or quarterly, even though you pay it every six (6) months.

Why show it? • The expense affects your organization (and your decisions) regardless of when you pay it.

Accruals and Depreciation • Purchases usually become expenses when materials are used/consumed in the process of generating revenue. • Accrual accounting is based on the matching of expenses and revenue they generate.

Example • You can deduct the cost of a printer ribbon immediately. But what about an expensive treasury Dealing phone System? If you deduct the full cost of a large asset say US$650,000 immediately after purchase, you would distort your income. – There will be a mismatch, your expense would not match the number of years the machinery would generate revenue for you.

Solution • Depreciation – You depreciate a portion of that expense at the end of the accounting period, – This will give you a better view of an item’s contribution to your operation.

Trouble with Cash Accounting • It can be MISLEADING – You can earn revenue and pay the expenses it took to generate that revenue, long before you see any money. – Thus you can show a loss when you are making money. – You can misrepresent expenses and income by the way you time payments. It is easy to inflate income (by simply delaying payment of bills.)

A look at Leverage • Leverage is the level of a company’s debt in relation of owners equity. – Those with lots of debt over equity are RISKIER than those with lots of equity and little debt – Highly leveraged firms do not have a cushion to protect them from trouble like operating losses or reduction in asset values. – Noble House has PhP6,300 in equity and PhP3,700 in liabilities – modest, low-risk leverage

Are we making money yet? • Gross Profit/Net Sales: – Revenue- Cost of goods sold(COGS)

• Cost of Good Sold (COGS) – Beginning inventory+Production-ending inventory

• Operating expenses: – Includes selling expenses, salaries, utilities

• Income from Operation – Gross Profit – Operating expenses

• Net Income – ‘The bottom line” is amount left after deducting all expenses from revenue.

Now that you know the principal elements of a financial statements, Your ready to learn a few tools that can help you understand a company’s SWOT

What can ratio’s tell us? • To grasp a firm’s financial health, it is important to understand the relationship between the key items in the financial statement. • You want to track this relationship over time and compare them with averages of the industry.

Quick Example • Which company is stronger? – Company A has a net worth of PhP100mio – Company B has a net worth of PhP10mio – Company A has PhP600mio in assets – Company B has PhP20mio in assets – Assets = Liabilities + Net Worth

Useful Ratios • Quick Ratio: – Current Assets/Current Liabilities – This is quick way to see if its liquid

• Debt Cover Ratio – Net Income +Non cash Charges/Current maturities of long term debt. – This shows if company is sufficient in meeting its obligations

Useful ratios • Return On Assets – Net Income/Total assets – The resulting number should at least equal a risk-free asset rate. (Treasury Bills rates)

• Return on Equity – Net Income/ Shareholders equity – Tells whether the investor is getting a worthwhile on their investment

What’s Next • Gathering the numbers is just one thing. • Numbers alone cannot predict anything with certainty. The future holds a lot of variables. • However, the values you gather when related and extrapolated outward should begin to show a TREND that point to the likelihood of a possible outcome.

Ratios: Converting numbers into Trends • The Financial ratios help you see the trend – The Uptrend: Everybody’s favorite – The Down Trend: Though negative helps identify potential problems. – Stable Trends: Can be reassuring or hard to interpret. (like profit margins remains at 15 %) – Random Trends: Hopefully you get to see a trend – Changing Trends: when a reversal happens.

Niccolo Machiavelli (1469-1527) • "Wise men say, and not without reason, that whoever wishes to foresee the future must consult the past; for human events ever resemble those of receding times. This arises from the fact that they are produced by men who have been, and ever will be, animated by the same passions, and thus they must necessarily have the same results."

What is Fundamental Analysis? • Fundamental Analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument.

What is Technical Analysis? • Technical Analysis is a method of predicting price movements and future market trends by studying statistics of past market action which takes into account price of instruments, volume of trading, and when applicable open interest. “Like all other arts, the Science of Deduction and Analysis is one which can only be acquired by long and patient study, nor is life long enough to allow any mortal to attain the highest possible perfection in it.” ---Sherlock Homes, A Study in Scarlet

Fundamental Vs. Technical Fundamental Technical Focuses on what ‘ought’ Focuses on what to happen in a market ‘actually’ happens in a market Factors involved in price Charts are based on market analysis include: action involving: -supply and demand -Price -Seasonal cycles -Volume – All Markets -Weather -Open Interest (Futures market) -Government

Underlying Principles of Technical Analysis • Market action discounts everything • Price movements are not totally random • History repeats itself

Advantages of TA • Portability • Focus on Price – Help you create a trade plan

• Analysis of Price action – Prices(OHLC) reflect forces of supply and demand. – Identification of Support/Resistance • SUPPORT - buyer’s market • RESISTANCE - seller’s market

Advantages of TA • Pictorial Price History – Reactions prior to and after important events. – Past and present volatility. – Historical volume or trading levels. – Relative strength of a stock versus the overall market.

Disadvantages of TA • You cannot use the past to predict the future • Price movements are random • Technical Analysis creates a self-fulfilling prophecy • Analyst Bias - Open to Interpretation • Always another level, always need a confirmation

Chart Analysis: What You Need to Know? • • • •

Strength of the current trend. Maturity or stage of current trend. Reward to risk ratio of a new position. Potential entry levels for new long position.

General Steps to Chart Reading TOP DOWN APPROACH • Broad Market Analysis – (DJIA, NASDAQ,PHISIX,DXY)

• Sector Analysis – Identify the strongest and weakest groups in the market

• Individual Security Analysis – Identify the strongest and weakest security in the group

Types of Charts Used • Bar Chart, depicting the open, close, high and low prices on a day-to-day basis. • Line Chart, for moving averages and oscillators • Point and Figure charts, highlights the reversals and swings in the market

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Bar Chart Line Chart PF Chart

91-Day T-BILLS (6.4350, 6.5000, 6.3490, 6.4350 +0.2190)

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91-Day T-BILLS (6.4350, 6.5000, 6.3490, 6.4350 +0.2190)

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91-Day T-BILLS (1.280x3.840-H/L) (6.2160, 6.5000, 6.1500, 6.4350 +0.2750)

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1986 1988 1989 1990 1991 1992 1993 1994 199519961997 19981999 2000 2001 2002 2003

1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1986 1987 Mar1989 1990 JulAug Nov Dec 1991 Aug 1992 1993 1994 1995 Jul1996 1998 2000 2001 2004 AprMay JunJulAug Sep OctNov Dec

Types of Technical Analysis • General Charting Techniques or Pattern Recognition. • Mathematically Derived Indicators

General Charting Techniques • Dow Theory, developed by Charles Dow. This is considered the forefather of Technical Analysis. • Elliott Wave Principle, discovered by Ralph Nelson Elliott in the wake of the Great Depression which caused the US. Stock Market crash of 1929.

Dow Theory • • • • • •

The averages discount everything. The market moves in trends The major trend has three phases Averages must confirm each other Volume must confirm trend A trend is in effect until it gives a definite signal that it has reversed

Criticism against Dow Theory • The signals are too late. • A person cannot buy or sell the averages.

Conclusion • The Dow Theory provides a strong foundation for the study of Technical Analysis.

Market Observations • (Let’s begin with a few observations) • Support or Resistance, when revisited, will provide support or resistance again. • In reaction to events, market behavior tends to repeat itself. • Price Behaves in two ways – it forms trends (up/down) or it consolidates. • These logical observations form some of the basic tenets of technical analysis. The market tends to “remember” where profits or losses are made, and these are frequently at support and resistance levels where a break has occurred.

Principal Charting Tools • • • • •

Support and Resistance Trend lines Channel lines Gaps Pattern Recognition

Support & Resistance • Support is defined as an area below current market price where buying pressure prevents the market price from falling. • Resistance, on the other hand is defined as an area above current market price where selling pressure prevents the market from going any higher.

1M MART1 21.0 20.5 20.0 19.5

21.0 20.5 20.0 19.5

MART Tenor Fixing Rate 1M (5.37920, 5.37920, 5.28850, 5.30960, -0.02120)

Spike

19.0 18.5

19.0 18.5

18.0 17.5 17.0 16.5 16.0 15.5 15.0 14.5

18.0 17.5 17.0 16.5 16.0 15.5 15.0 14.5

14.0 13.5

14.0 13.5

13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5

13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5

Resistance

Resistance

9.0 8.5

9.0 8.5

8.0 7.5 7.0

8.0 7.5 7.0

8.50 Resistance

6.5 6.0

6.5 6.0

5.5 5.0 4.5 4.0 3.5

5.5 5.0 4.5 4.0 3.5

Support

1.5 1.0 0.5 0.0 -0.5 -1.0

Relative Strength Index (34.0178), Volume (0) 50

1998

D

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M

A

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Characteristics of Support and Resistance • Formed from past price actions • Establishment or Penetration has psychological consequences – The longer it takes to break support or resistance the more significant it becomes. – The greater the number of times the market tries to break the chart point and fails the stronger the price barrier.

3M T-Bill Rate 91-Day T-BILLS (7.86500, 7.95000, 7.75000, 7.86500, -0.00400)

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Support

3

C

2 1986

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

3

4.00 2003

2 2004

2005

2006

2007

2008

2009

3M Phibor Rate 3M PHIBOR (9.5000, 9.1875, 9.1875 -0.3750)

33 32

33 32

32.8125

31 30

31 30

29

29

28

28

27

27

26 25

26 25

24

24

23

23

22

22

21

21

20 19

Double Top

18 17

20 19

17.625

18 17

16 15

16 15

14

14

Resistance

13

13

12

12

11

11

10 9

Double Bottom

10 9

9.6875

8

8

7

7

6

6

Support

5 4

5 4

5.0000 Relative Strength Index (66.1965)

100 90 80 70 60 50 40 30 20 10 A

S

O

N D

2001

M

A

M

J

J

A

S

O

N

D

2002

M

A

M

J

J

A

S

100 90 80 70 60 50 40 30 20 10 O

N

D

2003

M

A

M

J

J

A

S

O

N

D

2004

M

A

M

Trend lines • Trend is simply the direction of the market. • Trend lines are moving support points or resistance points – Newton’s 1st law of motion: A body remains at rest, or if in motion, it remains in uniform motion with constant speed in a straight line unless acted upon by an unbalanced external force (in our case: traders and investors)

Philippine Peso USD/PHP (51.3100, 51.3400, 51.2700, 51.2800 -0.0250)

56.5

56.5

55.75 ( 3 )

56.0

56.0

55.5

55.5

54.335 3

55.0

55.0

54.5

54.5

54.0

54.0

53.5

53.5

53.0

53.0

52.5

52.5

52.0

52.0

51.5

51.5 50.10 1

51.0

51.0

50.5

50.5

4 50.60

50.0

50.0

49.5

49.5

49.0

49.0

48.5

48.5

48.0

48.0

47.5

47.5

47.0

47.0

2 47.35

46.5

46.5

46.0

46.0

( 4 ) 46.00

45.5

45.5

45.0

45.0

44.5

44.5

44.0

44.0 Relative Strength Index (50.1636), Volume (106,500,000)

90 80 70 60 50 40 30 20 10

25000 20000 15000 10000 5000

x10000

September

November

2001

February

March

April

May

June

July

August

September

November

2002

February

March

April

May

Characteristics of Rising Trend lines • Successive higher highs and lows. • Market psychology is bullish; since players are willing to buy at higher prices along the support while sellers are willing to unload at higher prices. • to construct a rising trend line; draw a tangent connecting two (2) successive higher reaction lows.

Characteristics of Falling Trend lines • Successive lower highs and lows • Market psychology is ultimately bearish; sellers are willing to unload at lower prices while buyers will only accumulate at lower prices. • To construct a falling trend line, draw a tangent to lower successive reaction highs.

Historical 3M T-bill rate 91-Day T-BILLS (7.86500, 7.95000, 7.75000, 7.86500, -0.00400)

35.15

38 37

38 37

36

36

35

35

34

34

33

33

32

32

Down Trendline

31

31

30

30

29

29

28

28

27

27

Resistance

26

26

25

25

24

24

21.00

23 22

23 22

21

21

20

20

19

19

Resistance

18

18

17

17

16

16

15

15

14

14

13

13

12

12

Trend line

11

11

10

10

9

9

8 7 6

Support

8

8.60

6

7

5

5

4

4

Support

3

3

4.00

2 1986

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2 2003

2004

2005

2006

2007

2008

2009

Last notes on trend lines • The longer it takes to penetrate the trend line the more significant • The more times the price touch the trend line the more significant it is. • The stronger the trend line, the more probability exists for trading in the direction of the trend in force.

Still on trend lines • The stronger the trend line the more important is its penetration. • Implication of the trend penetration, a change in slope but trend is maintained, market consolidation is to be expected , a trend reversal is in effect.

Channel Lines • Newton’s Law of Motion states that for every action there is an equal opposite reaction. Channel lines are drawn opposite trend lines. • Trend lines are used to lighten up positions or to aggressively add positions against the trend. • Penetrations of channel lines indicate an acceleration of trend. • Lack of attempts on channel lines may mean the weakening of trend.

3M T-Bills 91-Day T-BILLS (7.86500, 7.95000, 7.75000, 7.86500, -0.00400)

35.15

38 37

38 37

36

36

35

35

34

34

33

33

32

32

Down Trendline

31

31

30

30

29

29

28

28

27

27

Resistance

26

26

25

25

24

24

21.00

23 22

23 22

21

21

20

20

19

19

Resistance

18

18

17

17

16

16

15

15

14

14

13

13

12

12

Trend line

11

11

10

10

9

9

8 7 6

Support

8

8.60

6

7

5

5

4

4

Support

3

3

4.00

2 1986

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2 2003

2004

2005

2006

2007

2008

2009

USD/PhP Philippine Peso (Monthly) (56.2300, 56.4500, 56.2300, 56.3250, +0.04500)

65

56.45

III 55.75

60

65

V

V

60

55

55

50

50

46.50 III

IV

45

45

50.17

40

30.58 I

35

40

IV 37.52

35

I

28.00 30

30

25

25

II 23.55

II

20

20

22.65

15

15

10

10

5 0

5

2.00

0 Relative Strength Index (67.6990)

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30 62 63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

Gaps • Are holes in the market where no trading took place, the market just accelerated beyond these points. • Gaps are formed because of extreme in supply and demand • Four (4) possibilities exist for gaps: consolidation, a new trend, continuation of the trend and lastly a trend reversal.

Gaps • CONSOLIDATION GAP; market is locked in a range. • BREAK AWAY GAP; usually occur after a continuation pattern, marks the beginning of a significant move. • RUN AWAY GAP; occurs during the middle of the strong price move. • EXHAUSTION GAP; occurs near the end of a market move; connoted as the last breath of a dying trend. A typical example is a island reversal gap.

3M T-bill 91-Day T-BILLS (7.86500, 7.95000, 7.62500, 7.87800, +0.00900) 38

38

37

37

36

36

35

35

34

34

33

33

32

32

31

31

30

30

29

29

28

28

27

27

26

26

25

25

Break Away Gap

24

24

23

23

22

22

21

21

Run Away Gap

20

20

19

19

18

18

17

17

16

16

Exhaustion Gap

15

15

14

14

13

13

12

12

11

11

10

10

9

9

8

8

7

7

Consolidation/ Sideways

6 5

6

Consolidation Gap

5

4

4

3

3

2

2 1986

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Triangles • Area continuation patterns which occurs as intermissions in the direction of the trend. • There are three (3) types; Symmetrical, Ascending and Descending triangles

DJIA

Symmetrical Triangles • Minimum requirements is four (4) reversal points, marked by two (2) converging trend lines which meet at the apex. • Volume should diminish as the triangle matures. • Characterized by the narrowing price movements.

Ascending Triangles • Almost horizontal boundary while the lower boundary slopes upward. • Has bullish implications, as buyers are more aggressive. • Note that upper trend line becomes a future support in the future.

Descending Triangle • Considered as bearish pattern. • Marked by a descending upper boundary and a flat lower boundary. • Sellers considered to be more aggressive than buyers. • Break out on the down side occurs on heavy volume, lower boundary becomes a future resistance area.

Characteristics of Triangles • Consolidation Phase • Minimum of four (4) reversal or touch points within the triangle. Typically six touches within the triangle • Measure objective equals width of the widest part of the triangle

Wedges • Are similar to symmetrical triangles in terms of shape and the time required. • Wedges have clear trend implications, depending on the type. • Two (2) type of Wedges – Rising Wedge – Falling Wedge

Rising Wedge • Volume contracts as wedge matures but expands upon break out. • Has bearish implications. • Formed by two upward sloping boundary lines which meet at the apex

Falling Wedge • Volume contracts as the wedge matures • Formed by two downward sloping boundary lines which meet at the apex • Has bullish implications • Falling wedges take less time to form than rising wedges

USD/SGD USD/SGD (1.65140, 1.65660, 1.64370, 1.65160, -0.00190)

2.35

2.35

2.30

2.30

2.25

2.25

2.20

2.20

2.15

2.15

2.10

2.10

2.05

2.05

2.00

2.00

1.95

1.95

1.90

1.90

1.85

1.85

1.80

1.80

1.75

1.75

1.70

1.70

1.65

1.65

1.60

1.60

1.55

1.55

1.50

1.50

1.45

1.45

1.40

1.40

1.35

1.35

Relative Strength Index (26.8238) 50

50

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Reversal Patterns • Signals when a trend is about to reverse. • Common traits for reversal patterns; existence of the previous trend; Important trend line broken, The larger the previous trend the larger the following reaction. • Top forming last shorter and volatile while bottom forming have tighter price movement and longer time to form.

Head and Shoulders • Creation of a left shoulder with heavy volume followed by a dip. A rally higher with lighter volume. A dip below the left shoulder which crates the neck line. A third rally which forms the right shoulder. A dip below and a close below the neck line. A return move met by a resistance at the neck line. An inverse head and shoulder would come.

USD/KRW

USD/KRW (1,066.15, 1,074.50, 1,065.30, 1,068.80, +3.15002) 1400

1400

H S

1350

1350

S

1300

1300

1250

1250

1200

1200

1150

1150

1100

1100

1050

1050 Relative Strength Index (16.3777)

50

50

2000

2001

2002

2003

2004

Double/Triple Top Formation • Characteristics are similar to H & S but only has two (2) peaks • Similar to H & S but the assumed head is the same level as the shoulder • Volume tends to decline with creation of each peak. • Formation is not complete until the support levels of the formation is broken. • Volume on any rallies form a triple bottom is important.

Philippine Composite Index PHILIPPINES (1,743.60, 1,822.99, 1,743.60, 1,795.59, +52.7799)

3700 3600 3500 3400

3700 3600 3500 3400

Triple Top

3300 3200

3300 3200

3100

3100

3000 2900

3000 2900

H

2800 2700

2800 2700

2600

2600

2500 2400

2500 2400

S

2300 2200

2300 2200

S

2100 2000

2100 2000

1900

1900

1800 1700

1800 1700

1600 1500

1600 1500

1400 1300

1400 1300

1200 1100 1000

1200 1100 1000

900 800

900 800

Double Bottom

700 600

700 600

500 400

500 400

300

300

200 100

200 100

0 -100

0 -100

-200

-200 1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Rounding formations • Represent slow and very gradual change in trend • Saucers bottoms are more common than saucer tops • Significant increase in volume must accompany a rally from a saucer bottom

Spike Formation • Occurs when the previous trend is a run away trend. The market is emotional and out of control. • Characterized by a key reversal pattern usually an island reversal. (Whipsaw pattern) • Subsequent reaction might correct at least 30% to 50% of the previous advance.

3M T-Bill rate (Spike, DB/DT/RB) 3M PHIBOR (7.50000, 7.25000, 7.25000, -0.18750) 31

31

30

30

Spike

29 28

29

32.8125

Q

27

28 27

26

26

25

25

24

24

23

23

22

22

21

21

20

20

17.625

19

Double Top

18 17

18 17

k

16

19

Spike

16

Q

15

15 14

14

Resistance

13

13

12

12

11

11

10 9

10

Double Bottom

9

9.6875

8

8

7

7

6

5.0000

5

5

Rounding Bottom Relative Strength Index (20.7268)

90 80 70 60 50 40 30 20 Oct

6

Support

Nov

2001

Mar

Apr

May Jun

Jul

Aug

Sep

Nov Dec 2002

Mar

Apr

May

Jun

Jul

Aug

90 80 70 60 50 40 30 20 Oct

Nov

2003

Mar Apr

May Jun

Jul

Aug

Sep

Nov Dec

2004

Mar Apr

Beating the Street • Don’t invest in companies you don’t understand. • Learn as much as you can about the companies you invest in. • Don’t get scared out of the market by rumors and general gloom and doom. • Hang out at shopping malls to uncover investment opportunities. • Be patient for a stock fulfill its potential. • Don’t let the HERD influence you into buying the same stock everyone else is buying. • Enjoy the DOWNTURNS in a market for what they are – a bargain hunter’s delight.

Stock picking • Stick to what you understand • Do your homework – Use the same methods of investigative reports

• You have an advantage: Use it – Use your connection and network for information.

Prepared By: Jonathan L. Ravelas, Banco De Oro Tel: (632) 858-3145 Email: [email protected] --------------------------------------------------------------DISCLAIMER------------------------------------------------------------This document is based on information obtained from sources believed to be reliable, but we do not make any representations as to its accuracy, completeness or correctness. Opinion expressed are subject to change without prior notice. Any recommendation contained in this document does not have regard to specific investment objectives, financial situation and the particular needs of any addressee. This document is for the information of the addressees only and is not to be taken on substitution for the exercise of judgement by the addressees. Banco De Oro accepts no liability whatsoever for and direct or consequential loss arising from any use of this publication. This document is not be construed as an offer or solicitation of an offer to buy or sell securities. In the course of our regular business, we may have a position in the securities mentioned and may make purchases and/or sales of them from time to time in the open market. ------------------------------------------------------------------------------------------------------------------------------------------