THE official Twitter account of the Philippine government made a point this past Friday to inform us that the Philippine Stock Exchange (PSE) had closed at an historic high, “the 93rd record high during the Aquino admin”.
While that is a fact, there is only a casual connection. The reason the PSE hit an historic high last Friday was because the Bangko Sentral ng Pilipinas took interest rates to an historic low in August 2007. Without that monetary-policy move, certainly there may have been 20, 30 or 60 new historic highs—who knows or cares—but, first and foremost, it is monetary policy that fueled the stock-market rally.
But none of that matters at all. We did hit a high this past week and now the question is, what will the market do now?
When a stock market reaches a new historic high, there is no “history” that will give us the rationale for whether the market will move higher or lower. At that point, we are in uncharted waters. One could make sound arguments calling for a temporary or even long-term retracement. You can also advise that a trend has been established and trends tend to go on for an extended time—at least until something comes along to change the trend.
The new financial and geopolitical catchphrase these past years is “black swan.” This sort of event is unpredictable for the most part, has relatively indefinable consequences and allows for little preparation.
Few events are true black swans, but are instead “hidden lions.”
Hidden lions describe a situation such as walking down a road with heavy brush on both sides, that on the African savannah usually holds a resting or waiting lion or two. The traveler knows that there is a strong possibility that the lion is there in the bush. Passing down the road is done with the hope that the lion will not attack. But unlike with the black swan, preparations can be made if one chooses to do so.
The recent terrorist attack in France was not a black swan event. It was a hidden lion. According to media reports, the French authorities had been tracking the assailants six months ago but stopped, deeming them “low risk”, a classic hidden lion.
The crash in the price of oil was not a black swan in that we could predict this was coming when global oil supply went higher than demand in 2013 for the first time in decades. That was when countries should have put on their “lion hunting” outfits.
The PSE rally is not going to be killed by a black swan; it will be a hidden lion.
A major earthquake hitting Metro Manila is probably as close as we will get to a local black swan event in that we cannot adequately prepare. It’s the hidden lion about which we need to be concerned.
Looking at the third-quarter 2014 financial statements of some large PSE-listed companies, many of them increased their debt load from the second quarter and over the same period in 2013. This is understandable both in that these firms are preparing cash for 2015 expansion and in anticipation of higher interest rates globally if not locally.
We must always be cautious of the debt lion, especially in these current times. While I see a favorable medium-term future for PSE-listed stocks, in the next weeks, 2014 financial numbers will be released and I will be looking very closely for any lions in the bush.
It is not likely that any of these companies will have over extended themselves as far as their debt goes. It is almost impossible that there would be any problems with servicing that debt. However, this is something that we must always be careful about.
Corporate profits are important but more so in the short term than in the long run, as a short-term profit problem can have a more negative impact on stock prices. Long-term profit problems usually show up in stock prices down the road.
But too much debt today is guaranteed to be a bigger problem tomorrow.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
1 comment
Gotta be careful!