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

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key FTSE 100 metrics:
-    The FTSE 100 Price is currently 5,608 which is a large 6.6% above the 01 June 2012 Price of 5,260.
-    The FTSE 100 Dividend Yield is currently 3.78% having fallen back from 4.00% on the 01 June 2012.
-    The FTSE 100 Price to Earnings (P/E) Ratio is currently 10.08 which is up 7.7% since the 01 June 2012.
-    The Price and the P/E Ratio allows us to calculate the FTSE 100 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) as 556.

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.

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.

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

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.

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.

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.

The Lost Decade – History of Severe Real S&P 500 Stock Bear Markets – August 2010 Update

At my first post on this topic, back in January 2010, looking at severe real S&P 500 bear markets I postulated whether once the governments of the world stopped stimulating their economies through borrowing and quantitative easing whether we could see a real -60% bear market from the previous high within this economic cycle. Well as I highlighted here there still seems to be life in governments (or their agencies) yet with the recent QE Lite announcement.

Interest rates at 0% haven’t worked, QE hasn’t worked, will QE Lite - S&P 500 cyclically adjusted PE (PE10 or CAPE) – August 2010 Update

In an attempt to try and force a recovery in the US the Federal Reserve have decided that they will undertake “QE Lite” which will entail using the proceeds from maturing mortgage bonds, which were bought using Quantitative Easing (money printing in my books), to now buy long dated government debt. I guess they are hoping that this will force bond yields down further which will reduce borrowing costs across the board for the average punter. I’m thinking two things:

The market is climbing from its June low - Australian (ASX 200) stock market plus its PE10 – August 2010 Update

The Australian stock market index, the ASX200, closed on Friday at 4566. This means that since the June average low of 4302 the market has risen by 6% in a little over one month. As of Fridays close the cyclically adjusted PE ratio (ASX200 PE10 or CAPE) has risen from 16.51 in June to 17.36. This can all be clearly seen in my first chart today.

UK FTSE 100 CAPE or FTSE PE10 based on the Shiller cyclically adjusted price earnings ratio model

Update 13 July 2010: Chart 3 added following UKVI's comment below.

For many months now I have been showing the PE10 for the ASX200 and the S&P500 however what I have always been looking for is a cyclically adjusted PE ratio dataset for the UK FTSE100. In shorthand a FTSE100 CAPE or FTSE100 PE10 depending on your preference for acronyms. Unfortunately a complete dataset has been impossible to find. I have therefore spent many hours constructing one from pieces of data taken from Motley Fool Discussion Boards, the Financial Times marketdata and Yahoo Finance. I therefore can for the first time present a chart of the FTSE100 PE10 and for good measure I’ll throw in the Real (inflation adjusted) FTSE100.

A History of Severe Real S&P 500 Stock Bear Markets – June 2010 Update

I first started posting today’s charts back in January 2010. I ended that post with “My question is once the governments of the world are forced to stop stimulating the economies through borrowing (for example a bond market strike) or quantitative easing (for example excessive inflation) could we yet see that real -60% bear? History suggests there is still plenty of time for it to occur.” Well that day could be now be upon us. We know that many countries out there are today all but ‘bankrupt’ or in the very least are now talking about and implementing austerity measures. So that writes off stimulation via borrowing at least for the moment. I assume that some countries out there would have another go at borrowing if they really needed to although it would be interesting to see what sort of treatment the bond markets would give them this time around?

US (S&P 500) stock market including the cyclically adjusted price earnings ratio (PE10 or CAPE) – June 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on buy & hold and asset allocation I am using a Cyclically Adjusted Price / Average 10 Year Earnings (PE10 or CAPE) ratio for the S&P 500 to value the US (specifically the S&P 500) stock market. The method used is that developed by Yale Professor Robert Shiller however I also incorporate earnings estimates up to the PE10 month of interest. Background information here.

Australian (ASX 200) stock market including the cyclically adjusted price earnings ratio (PE10 or CAPE) – June 2010 Update

To try continue to try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a cyclically adjusted PE ratio (known as the PE10 or CAPE) for the ASX 200 to attempt to value the Australian Stock Market. The method used is based on that developed by Yale Professor Robert Shiller for the S&P 500. I will call it the ASX 200 PE10 and it is the ratio of Real (ie after inflation) Monthly Prices and the 10 Year Real (ie after inflation) Average Earnings. For my Australian Equities I will use a nominal ASX 200 PE10 value of 16 to equate to when I hold 21% Australian Equities. On a linear scale I will target 30% less stocks when the ASX 200 PE10 = 26 and will own 30% more stocks when the ASX 200 PE10 = 6.

My Current Low Charge Portfolio – June 2010

Buying (New money): Since my last post I have had a good month of savings and managed to save 72% of my after tax earnings and pension salary sacrifices. Total new money entering my Retirement Investing Low Charge Portfolio was around 0.8% of my total portfolio value. The allocation was as follows: 42.0% to cash, 8.7% to UK equities, 12.2% to international equities, 2.3% to index linked gilts and 34.8% to UK commercial property. This money was invested outside of tax wrappers and also within a pension.

Buying Emerging Markets Equities

Yesterday I rebalanced my Retirement Investing Today Low Charge Portfolio by moving 0.6% from cash into emerging markets equities (ie buying equities with cash). Emerging market equities are an important part of my portfolio as I explained here.

Investing mistakes I’ve made – not considering investment fund fees

When I first started investing in the stockmarket I was extremely naive. The first thing I did was a search for the share funds that had given the highest return over the past few years. (What is it they say as a warning on many investments – past performance is not necessarily a guide to future performance or similar – I really was naive). Of course that was an actively managed fund. I have now changed my opinion and where possible only buy passive index tracking investments in my retirement investing low charge portfolio in vehicles like Exchange Traded Funds (ETF’s). I won’t go into the justification for passive versus active in this post today as there is plenty of information out there on the web already. A Google search of ‘passive versus active investing’ or ‘Bogle investing’ would be a good start for those that are interested.