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.

The FTSE 100 cyclically adjusted PE ratio (FTSE 100 CAPE or PE10) – June 2011

While we all sit back and watch the train wreck that is Greece prepare to default (or whatever posh name they will come up with in due course) the UK goes on happily borrowing money at the rate of £17.4 billion for the month.  That’s £17,400,000,000 in a month.  What’s concerning me is that servicing our debt now takes 8.5% of government spending.  That’s more than the complete tax take from corporation tax (page 6 here).  All I can say is that the future generations will not be pleased.  I’m just a simple Average Joe but it really just doesn’t seem right asking children who are not yet born to pay for our lifestyle today.    

As this all unfolds we’ve seen stock markets around the world decrease in price in recent times.  I actually have no idea what moves prices (that’s why I don’t trade) but I can’t help feel that Greece is having a good impact but also we shouldn’t forget good news like this from China.

Is the Australian stock market cheap? - ASX 200 cyclically adjusted PE ratio (ASX 200 CAPE or ASX200 PE10) – June 2011 Update

As shown in my first chart the ASX200 cyclically adjusted PE (ASX200 PE10 or CAPE) has been steadily declining since February.  Today with the ASX200 closing at a price of 4567 the PE10 is 15.8 compared to the long run average since 1993 of 22.4.  A quick look at these two values would suggest that the ASX200 is undervalued however I’m not so sure.  The problem for me is that the data set that I have is a short period of time.  Comparing the ASX200 to the S&P500 where I have S&P500 PE10 data going back to 1881 allows for a very crude extrapolation though.  The long run average S&P500 PE10 is 16.4 however the average PE10 for the same period as my ASX200 dataset is 26.9.  Extrapolating this to a long run average ASX200 PE10 reveals (22.4/26.9)x16.4=13.7 which would imply that the ASX200 is in fact not undervalued but overvalued to the tune of about 15%.  To put this value in to perspective the PE10 low during the Global Financial Crisis (GFC) was 13.8 in February of 2009. 

The Importance of Reinvesting Dividends

The S&P500 is today yielding somewhere around 1.8% per annum.  This doesn’t sound like a lot and indeed it isn’t if the investment amount is small. To demonstrate this let’s say an Average Joe had an index tracking (to keep fund fees down) S&P 500 fund/ETF with £1,000 in it today.  Having bought a year ago he would have accrued somewhere around £18 (ignoring fees and taxes) in dividends by now.  If he didn’t know any better he could assume that amount will make no difference to his Retirement Investing Today portfolio and instead ‘blow’ it on a few beers.  What I’m going to show today with some charts is just how much damage that would do to his portfolio in the longer term.

Gold Priced in British Pounds (GBP) – June 2011 Update

It’s all very well for me to review the price of gold in USD’s however at the end of the day for a UK investor who will be living in the UK for the foreseeable future it is the price in GBP’s that is really important.  So today let’s review gold when priced in GBP’s.

I have my Index inked Savings Certificates. Do you? – UK savings interest rates – June 2011 Update

It has been a little bit of a faff and my recent adventure didn’t help but as with Salis Grano and Ermine I now have in my possession Issue 48 NS&I Index Linked Savings Certificates which offer index-linking to RPI plus 0.5% pa compound if held for 5 years.  Unfortunately I wasn’t able to buy them on the day they were re-issued for 2 reasons:

-          Following my overseas adventure I had to update my address details with NS&I.  This is quite a clunky process and takes a few days as it can’t be done via internet or telephone.  Instead I had to send off a signed letter requesting my details be changed which took a few days for them to process.

-          I had to transfer the funds from my online savings account into my current account which takes the usual 3 days.  I still can’t believe that in 2011 it takes 3 days to move money electronically.  In fact, yes I can, because we all know that this limbo period is where the banks hold on to your money and not pay you interest on it.  A nice little earner I’m sure.  What was also interesting was that my online savings account provider very quickly sent me a survey saying that I had recently moved a large sum of money from my account and they would like to understand why.  I’m amazed that they have gone to the trouble of paying somebody to set up a survey.  Surely the answer is always going to be because “I want to buy something” or “your rates are uncompetitive”.  Funnily enough they didn’t have an option that said “moving money from poor insulting interest rate to NS&I”.

When will the haircut and pain occur – Aus, UK, US and the PIGS government 10 year bond yields – June 2011 update

It’s been many months since I looked at the 10 year bond yields of Australia, the UK, the US and the PIGS.  These can be seen in today’s charts.  When I last posted in August of 2010 Greek 10 year debt was yielding 10.31%, as of the end of May 2011 that is now 16.29%.  Mish’s post yesterday raised some great points and gave plenty of food for thought prompting this post.

Is Gold in a Bubble? - Gold Priced in US Dollars (USD) – May 2011 Update

I currently hold 5% of my Retirement Investing Today portfolio in gold.  This is in the form of physical ETC’s “which are intended to provide investors with a return equivalent to movements in the gold spot price less fees” available from the likes of ETF Securities.  This is the commodities portion of my portfolio.  I hold no other commodity types as the vast majority seem to be futures based and previous experience has taught me that issues like contango can really affect the available returns for the Average Joe.

Irrational Exuberance and LinkedIn – History of Severe Real S&P 500 Stock Bear Markets – May 2011 Update

I couldn’t believe my eyes yesterday when LinkedIn (LNKD) had its flotation on the stock market.  All that I could think of during the day was irrational exuberance, the market can remain irrational longer than you can remain solvent and how quickly people forget.  For those that missed it LinkedIn floated at $45 per share which valued the company at $4.25B.  With earnings last year of $15.4M I calculate that as a Price Earnings (PE) ratio of 276.  That was shocking enough when you think that the long run cyclically adjusted PE (CAPE or PE10) for the S&P500 is 16.4.  However what I couldn’t believe was that during the days trading somebody or something (High Frequency Trading?) paid $122.70 a share for a PE ratio of 752 which is 46X the S&P500 PE10 long run average.  To me as an Average Joe this sounds like the dotcom days all over again.  The amazing thing is that it looks like plenty of others have already forgotten about the dotcom boom and its after affects in around 11 years and what’s even more amazing is that as I show today in Real (inflation adjusted terms) the market is still some 31.4% below the S&P500 real high of August 2000.  So we haven’t even recovered from the last lot of irrational exuberance.

“...it is likely that had they not occurred, inflation would have been substantially lower...” – UK Inflation - May 2011 Update

So we now have the UK CPI at 4.5% and the RPI at 5.2%.  I haven’t blogged about the UK Inflation situation since my post back in August of 2010.  Why?  Well as I wrote back then I had accepted that the Bank of England was going to steal from me and all the other savers out there by inflating away the value of my savings.  Also, while ever Mervyn and his mates (I think I’ll just call them the M&M’s from here in) keep interest rates at record lows of 0.5% this is going to continue so I really have nothing more I can add.  All I could do was protect myself as best as possible by ensuring I had my target allocation of 5% in gold and also that I held onto my NS&I Index Linked Savings Certificates (reinvesting as they came up for renewal) while I waited out the current theft that is occurring.

The S&P 500 cyclically adjusted PE (S&P500 PE10 or S&P500 CAPE) – May 2011 Update

Today I update the last May 2011 period cyclically adjusted PE ratio that I track – the S&P500 CAPE.   As I say every time I post on this index I am using this ratio to try and squeeze some extra performance out of my portfolio.  This method is used by Professor Robert Shiller however I modify it slightly by incorporating forecast earnings up to the month of interest. For new readers some background information on the CAPE is available here and if you’d like some information on why I use the CAPE then that is available here.

The ASX 200 cyclically adjusted PE ratio (ASX 200 CAPE or ASX200 PE10) – May 2011 Update

Since simultaneously getting back into the blogging world and sorting my Retirement Investing Today strategy I have already looked at the valuation of the UK Equities market (proxy FTSE100 CAPE) where I personally hold 16.8% of my net worth.  Today it’s time to value the Australian Equities market (proxy ASX200 CAPE) where I currently hold 18.9% of my net worth.

NS&I Index Linked Savings Certificates Are Back

It’s been 297 days since NS&I Index Linked Savings Certificates were withdrawn from the market and I’m happy to say that today I received an email saying there back.

The FTSE 100 cyclically adjusted PE ratio (FTSE 100 CAPE or PE10) – May 2011

Now that I’m back in the blogging world I’ve been catching up on all the great posts that I’ve missed over the past few months from My Blog List (full list in the right hand sidebar of the page).  Great UK based blogs such as Monevator, A Grain of Salt, Simple Living in Suffolk and UK Value Investor.  This post from ermine at Simple Living has however made me think about my cyclically adjusted PE (PE10 or CAPE) strategy and whether it is the right thing to be doing.  I am a big believer in the Keep It Simple Stupid (KISS) principle and if somebody like ermine can’t understand what I’m up to then have I made it all too complicated?

My Retirement Investing Today Strategy Works – And I’m Still Yet to Retire

I must first apologise to all the regular readers of Retirement Investing Today for the big gap in posts.  My life has been somewhat turned upside down over the past few months meaning I’ve had to focus my attentions elsewhere for a period.  What the past few months has taught me however is that my Retirement Investing Today strategy has worked even with me being still some 5 years or so from retirement.  How so I hear you ask.