Every Action Has A Consequence; An Equal And Opposing Force

``If you know yourself and your enemy, you will not fear battle. If you know yourself but not your enemy, you will lose a battle for every one that you win. If you do not know yourself and do not know your enemy, you will never see victory."-Sun Tzu, The Art of War

I’d like to show you how the US economy has performed of late.

Figure 4: Northern Trust: US GDP

Consider this: the US markets have performed remarkably (Dow Jones up 7.6% and S&P 6% year-to-date) even as their GDP has been growing on a sub-par basis as shown in Figure 4, profits coming from record highs as well as the decline in the housing industry which is said to contribute to about 23% of its economy.

If one were to believe that financial markets reflect economic conditions then obviously this contravenes such expectations.

Our observation has been that of the explosion of credit in the financial sector which has paved way for the boom in mergers and acquisitions, private equity ventures, structured products and derivatives, as well as, from the current account surpluses of Oil producing and Asian exporting countries which have similarly led to a global financial markets boom.

With the tightening of lending standards, escalating subprime woes, losses spreading to hedge funds and other institutions, increasing signs of investor aversion, potential impact of taxes on US investors, the risks a volatility jump in the Japanese Yen, widening credit spreads and the trend of rising interest rates worldwide, all this could be extrapolated as a potential reduction in liquidity and should spell for a slowdown in the price appreciation of the financial markets in general.

Although barring the specter of a disorderly unwind; I think there will be selective market opportunities.

As to the Philippine setting, last week’s action likewise manifested of a sudden decline of market internals reflective of souring sentiment, albeit the end of the week recovered some of this lost footing.

While I think the falling US dollar and the rising Chinese yuan could imply for continued strength in most Asian currencies (ex-Japan), this should provide for a floor to any interim stress-testing arising from any volatility spikes in the US.

As gyrations in the US markets have shown more influence to our market, it would be best to remain defensive under current conditions and to avoid from chasing speculative issues from which could wither under continued pressure.

Last week was a lesson for punters, as fast as fancy stories can bid up share prices so is with its decline. As a saying goes, every action has a consequence, an equal and opposing force.

Nonetheless, I expect the Asian markets to decouple from the US markets in the future but this has yet to become evident.

Until then, MIND your stops!