Saturday 9 June 2012

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

Thursday 7 June 2012

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

Tuesday 5 June 2012

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.

Thursday 31 May 2012

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.

Sunday 27 May 2012

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

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.