Thursday, 28 June 2012
Sunday, 24 June 2012
While interesting, for my own investment purposes, I do not use the P/E ratio. Instead I use what I have called the Shiller PE10 which is shown in my first chart (effectively an S&P 500 cyclically adjusted PE or CAPE for short). This method is used and was made famous by Professor Robert Shiller. It is simply the ratio of Real (ie after inflation) S&P 500 Monthly Prices to 10 Year Real (ie after inflation) Average Earnings.
Tuesday, 19 June 2012
My second chart shows the annualised change in the RPI on a quarterly, six monthly and annual basis. On an annualised quarterly basis we are seeing inflation still high at 4.2%.
Sunday, 17 June 2012
- 3.2% AER variable with Santander. Forget to switch in 12 months to the new highest rate bank and this becomes 0.5%.
- 3.17% AER with the Post Office. Forget about this one and in 12 months you’re at 1.65%.
- 3.1% AER with the Nottingham Building Society. This one works a bit differently. If you close the account before the 30 September 2013 you only get 1% and after this date you also only get 1%.
Of course banks like Santander, rely on the vast majority of the Average Joe’s and Jane’s out there forgetting to switch after 12 months, at which point you’re quickly penalised. Let’s say you start one of these savings accounts but then get distracted and only remember to switch to the new best offering in 15 months. That 3.2% which looked ok has now become effectively 2.7%. Leave it 18 months and you’re now at an effective rate of 2.3%.
Thursday, 14 June 2012
My first chart today shows 3 periods in the US stock market since 1881 when similar conditions have prevailed. I call these the historic severe bear markets and they are periods in time where from the stock market reaching a new high it then proceeded to lose in excess of 60% of its real (inflation adjusted) value. The percentage change in value from the peak for each of these periods in time are shown in my second chart. So what were these bear markets?
Saturday, 9 June 2012
The ASX 200 closed on Friday priced at 4,063 which is a 12% fall from 1 year ago. At this price I have earnings (which are 12-month trailing underlying profits) at 337 which results in a price earnings ratio (P/E Ratio) of 12.1. In comparison I have calculated the S&P 500 P/E Ratio at 14.3 and the FTSE 100 P/E Ratio at 9.4 this month.
The history of the ASX 200 P/E Ratio since 1993 can be seen in my first chart today along with the Ratio I am personally far more interested in which is the ASX 200 PE10 (effectively an ASX 200 cyclically adjusted PE or ASX 200 CAPE for short). The method is based on that made famous by Professor Robert Shiller and in this instance it is simply the ratio of Inflation Adjusted Monthly ASX 200 Monthly Prices to Inflation Adjusted Average Earnings. Today the ASX 200 PE10 sits at 13.9. A full summary of relevant ASX 200 PE10 data follows:
- ASX 200 PE10 = 13.9
- Dataset Average PE10 = 22.1. If this average was “fair value” then it indicates that today the ASX200 is 37% undervalued. I’m not convinced of this though and think it is a result of a relatively short dataset but I’ll talk more of that later in this post.
- Dataset Median PE10 = also at 22.1
- Dataset 20th Percentile = 16.9
- Dataset 80th Percentile = 27.5
Thursday, 7 June 2012
So about now I would normally start to correct the Nationwide House Price Index to account for the devaluation of money through inflation and ratio this with average persons earnings. I would then come to the same conclusion that I always do. House prices are overvalued when compared to the long run average. I’m now starting to think that I am going about this the wrong way. The average person on the street does not analyse data and look at what house prices should be. The average person on the street instead knows the price of everything and the value of nothing. Instead, I’m starting to come to the realisation that what is driving this market is not house prices but simply house affordability. Not how much is this house worth, but instead can I today (no thinking of future interest rates) borrow enough money to buy this over priced piece of bricks and mortar.
So what drives affordability? I believe the major drivers are two things:
- How much a person earns, and
- How much of these earnings have to go to make interest payments today
Tuesday, 5 June 2012
As I write this post the UK stock market is closed. The last trading day was Friday 01 June 2012 at which point the FTSE 100 closed at 5,260. At this price the FTSE Actuaries Share Indices provides us with a FTSE 100 P/E Ratio of 9.4 which allows us to calculate Earnings as 562. These Earnings are as Reported Earnings, which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings. This will differ from a lot of calculated earnings presented online, which will be on an ‘as earned’ (which is the current forecast earnings) basis, resulting in differences, particularly when there are large upward or downward adjustments in earnings.
As of Friday the dividend yield has crept up to 4%. The last time we were over 4% was July 2009.