The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – July 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:
-    The S&P 500 Price is currently 1,341 which is 1.3% above last month’s Price of 1,328.
-    The S&P 500 Dividend Yield is currently 2.11%.
-    The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $93.25.
-    The S&P 500 P/E Ratio is currently 14.4 which is up slightly from last month’s 14.3.

GDP per capita – BRIC vs PIGS vs the UK, USA and Germany

Warning: Before you start reading be aware that this is a bit of an exploratory post and so wanders a little.  It is certainly making me think and I hope it will have the same effect on you.

We regularly hear about the gross domestic product (or GDP) of the UK.  Actually, what the press mostly reports is the net GDP growth in percentage terms.  This is the GDP growth already inflation adjusted.  If this number is negative for at least 2 quarters (like the UK today) then you hear we are in recession and you are getting growth if your GDP is positive.  For the Average Joe on the street though I think this number may be a little meaningless and certainly isn’t as important as GDP per capita which just doesn’t seem to ever be discussed in the media or by government. 

The rationale behind this thought is that GDP does not take into account the change in a countries population nor the size of the population generating that GDP. 

Retirement Investing Today on Monevator

If you are a regular reader of Monevator you will have noticed that I have just had what I hope is the first of a regular series of quarterly Private Investor Market Roundups published.  If you are not a regular reader then it could be worth a look.  While it follows the usual Retirement Investing Today format of non emotional fact based analysis it introduces a number of new data sets which aren’t seen on this blog including a look at:
-    The stock markets of the top 10 countries by GDP including pricing (both nominal and real), P/E and Dividend Yield.  The countries are the US, China, Japan, Germany, France, Brazil, UK, Italy, Russia and Canada.
-    The nominal and real HaliWide Index which is the average of both the Halifax and Nationwide House Prices Indices.
-    The nominal and real performance of commodities including Gold, WTI Spot Crude, Soyabeans, Copper and Natural Gas.

Introducing the Greater Fool UK House Price Index

I now track 4 UK house price data sets.  These are:
-    The Rightmove House Price Index.  This index tracks asking prices of properties as they come onto the market.  Rightmove claims their dataset covers over 90% of the market so you would expect it to be pretty accurate in terms of seller’s first expectations of what they will achieve for their property.  The dataset is not seasonally adjusted.
-    The Halifax House Price Index.  This index is based on loan approvals agreed by Halifax Bank of Scotland.  The dataset that I use is the not seasonally adjusted, All Houses, All Buyers set.
-    The Nationwide House Price Index.  This index is based on loan approvals agreed by Nationwide Building Society.  I use the actual Average House Prices presented and so am using a not seasonally adjusted dataset.
-    The Land Registry House Price Index.  This contains the house prices for all transactions in England and Wales.  This includes both mortgages (which the Halifax and Nationwide would be included within) and non-mortgages (cash transactions).

UK Average Weekly Earnings – June 2012 Update

The Office for National Statistics reports that the Average Weekly Earnings for the Whole Economy including bonuses and allowing for seasonal adjustment is now £467.  This is £1 more than the previous month and annualised is £24,284.  Breaking this figure down between the Public Sector and the Private Sector reveals the Public Sector to be still coming out on top by some 3%.  The Average Public Sector employee earns £479 per week compared to that of the Private Sector which funds those earnings (of course in conjunction with a lot of government borrowing) at £465.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – June 2012 Update

The S&P 500 closed on Friday at 1,335.  By my calculations I also have as Reported Earnings (using a combination of actual and estimated earnings) at $92.33.  Combining these two pieces of data gives us an S&P 500 P/E Ratio of 14.5. 

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.

UK Inflation - May 2012

Today’s post looks at UK Inflation and specifically the Retail Prices Index (RPI) and the Consumer Prices Index (CPI).  It is not the most exciting post that I write, however it is an important piece of data for us to look at as it is needed to run a lot of the analysis that you see on Retirement Investing Today.  At this point in time the RPI is changing year on year at the rate of 3.1% with the index itself shown in my first chart.  This chart clearly shows the index still trending away from the long run trendline.

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%. 

Average UK Savings Account Interest Rates – June 2012 Update

The interest paid on savings accounts is important to a lot of UK investors.  A quick look at Money Saving Expert shows us that if today you were in the market for an instant access account and were prepared to accept a little account complexity, including a big reduction in interest paid within a year or so, you could get savings interest of: 
-    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%. 

Severe Real S&P500 Bear Markets – June 2012 Update

As I write this post the S&P 500 is trading at 1,322.  If I correct for the devaluation of the US Dollar over the years (ie correct for inflation) we were at this value back in July 1997.  So in 15 years the value of companies in the S&P 500 have gone precisely nowhere.  Sure, as a private investor you would have been paid dividends over this period, but they have only averaged around 1.8% annually, making it pretty difficult to try and save for retirement.

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?

The ASX 200 Cyclically Adjusted PE (aka ASX 200 PE10 or ASX200 CAPE) – June 2012 Update

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

UK House Affordability

For a long time I’ve been saying that houses are overpriced.  This statement keeps my family in rented accommodation as I refuse to buy at these prices.  So while in recent years there has been some nominal reduction in prices, reversion to a sensible mean value stalled in 2009.  This was further reinforced last week when the Nationwide informed us that month on month house prices had increased by 1.1% and year on year had fallen by a negligible 0.7%.

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

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – June 2012 Update

It’s been a year almost to the day since I last posted data on the FTSE 100 Cyclically Adjusted PE ratio.  It’s therefore worth taking a little more time on this post to spell out how exactly I’m calculating this metric.  To my knowledge I am the only person on the internet who is freely making this data available however I have had to make some assumptions to build this dataset.

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.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – May 2012 Update

As I write this post the S&P 500 is priced at 1,310.  By my calculations I have current earnings at $91.4 for an S&P 500 P/E Ratio of 14.3.  The earnings I use are as Reported Earnings, as opposed to the much more ambitious Operating Earnings, as I believe these are a much more appropriate (and conservative) measure.  As a quick reminder Reported Earnings will typically always be lower than Operating Earnings as they include the cost of non-recurring items such litigation charges, costs of shutting a factory and good will write downs to name but three.  Now it’s only my humble opinion, but I believe these are real and true costs incurred by the business, even if they are non-recurring and so badly want to be excluded by the “Company Bean Counters”. 

Let me also be clear on how I calculate the Reported Earnings.  I am using the Earnings as published by Standard and Poors.  At the time of writing they have published:

• Actuals for quarter end 30 June 2011, 30 September 2011 and 31 December 2011;
• A hybrid of 98.7% actual with the remaining as estimates for quarter end 31 March 2012; and
• An estimate for quarter end 30 June 2012

I then extrapolate these figures to cover a year to the end of May 2012.

Gold Priced in British Pounds (GBP) – May 2012 Update

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I haven’t written about gold priced in Sterling since June 2011.  Since that time it reached a new all time nominal Monthly Gold Price high of £1,121 in September 2011 and has since fallen back to £1,003 as of Friday.  All of this action can be seen in my first chart.

For me though, it’s my second chart which corrects for the devaluation of sterling through inflation, that is the important one.  This chart, which shows the Real (inflation adjusted) Monthly Gold Price, reveals to us that the peak in September came within 2% (£1,170 vs £1,151) of the January 1980 real peak before the fallback. 

Real gold today is still well above its long run average of £515 still indicating large overvaluation and if it was to follow the history of 1980 has a long way to fall before a bounce.