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Is the market over-valued? Macro-economic analysis tools.

Discussion in 'Investor Resources & Tools' started by MichaelWhyte, 21st Mar, 2006.

  1. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Hi,

    In a separate thread on the ASX200 hitting 5000, the following question was posed which I thought justified a new thread about the macro-economic environment at the moment and what markets still represent good value, and which are overvalued.

    My response would be "Nah, she's got HEAPS left in her yet. Are we in a bubble?...don't think so."

    And here's a link to some interesting information which helps form that view:

    Check this article out by Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP. This might help paint the picture a bit clearer for you, and also shows quite clearly why investment properties are set to stagnate for years to come. In fact there's another specific article on that, if you're interested too.

    In fact, most of Oliver's Insights make excellent reading. Here's a link to all of the past issues. I strongly recommend:

    House Prices - Possible bounce but in the context of long term stagnation
    The return of volatility
    Great diversified fund returns but why bother with diversification
    Are Australian shares overvalued relative to global shares
    Are Australian shares in a bubble
    The sun really is rising in Japan
    Australian house prices: overvalued, overowned and set for stagnation

    That should get you started in your "contextual" macro-economic education. Every good investor should understand the "environment" they are investing in...

    Cheers,
    Michael.
     
  2. Tropo

    Tropo Well-Known Member

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    Nice links....Do not forget that S.Oliver represent only his own opinion!!.

    Long time ago Voltaire said: "if all economists were laid end to end they would not reach a conclusion" :rolleyes:
    :cool:
     
  3. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Tropo,

    Agree, but its not his specific conclusions in isolation that I rely on, its the economic indicators he uses in reaching these conclusions. Those graphs paint a picture of a thousand words. Its hard to argue the economic fundamentals at play. e.g. ASX share price versus corporate profits graph. We've got a long way to go until we catch up with profits and shares represent fair value based on expectation of future cash flows.

    Having said that, I do agree with the conclusions he's formed based on the information presented.

    Cheers,
    Michael.
     
  4. Tropo

    Tropo Well-Known Member

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    Michael,

    We may have long way to go, but I would take corporate profits (do you remember Enron :eek: ) versus economic indicators with a bit of salt ;)
    As always ......time will tell.
    :cool:
     
  5. Tom&Don

    Tom&Don Active Member

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    The herd doesnt care about indicators. Spook them with something and it could fall in a heap despite the rosiest outlook.

    Which is why I like certain investment styles that do NOT rely on indicators or peoplpes interpretation thereof. Saves alot of reading. And theorising.

    T.
     
  6. Tropo

    Tropo Well-Known Member

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    " The herd doesnt care about indicators".

    Fully agree with that !
    :cool:
     
  7. D&K

    D&K Well-Known Member

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    I've read through some, but I think comparing the current downturn in the property cycle with the period of the Great Depression (only referred to as the '30s) seems a little bit on the extreme side. Am I alone here? :(

    I'm not big on history but I seem to recall something about shares doing badly during the Great Depression also, masses of people out of work - I don't think that's about to happen.

    The relation to the Japanese market is similarly remarkable; of all places.

    I don't think the property market is going anywhere in a hurry, but if I didn't know better I'd think that someone was trying to market an AMP share investment with these articles :rolleyes:

    Dave
     
  8. Mark Leo

    Mark Leo Well-Known Member

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    Not sure about Voltaire but I like the one by the guy who said, 'if all economists were laid end to end, that would be a good start'.

    Mark.
     
  9. Tropo

    Tropo Well-Known Member

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    ''if all economists were laid end to end, that would be a good start'.
    Good one :D
    :cool:
     
  10. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hi Michael,

    Just wondering why you say that? Three years of almost straight line growth, how much more do you think the market can sustain this? Curious to know why you think we're not in a bubble.

    Mark
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Bubbles are usually associated with unrealistic P/E ratios ... but right now, the market P/E ratios are lower than the long term average (according to some charts I saw Alan Kohler show recently) ... the increase in share prices has not even kept pace with the increase in company profits. The share prices are quite justified at the moment.

    Of course this can change - and probably will! Most likely I'd suggest we'll see a fall in company profits (perhaps caused by a slowing economy), which will lead the sharemarket lower.

    Just some thoughts.
     
  12. Tropo

    Tropo Well-Known Member

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    If you belive in relation between PE and company profits, let me remind you the Enron saga (I posted on 24.10.05)

    As you know ENRON collapsed some time ago...
    Its auditor Arthur Anderson had approved the use of accounting tricks that resulted in financial statements that were misleading and incomplete and possibly fraudulent.
    Enron started out in 1985 as a natural gas pipline company, but tried to transform itself into a global trading company. It borrowed heavily to finance an aggressive expansion, but didn't want a big depth to reduce its credit rating or depress the share value.
    So instead of listing debt on the balance sheet, Enron formed hundreds of off-the-books partnerships.
    Enron's chief financial officer ran some of the partnerships, with obvious conflict of interest, but this was approved by Enron board.
    The partnership called " Special Purpose Entities " ( in accounting jargon ), allowed the company to take in capital from outside investors or lenders, ( pension funds, insurance company ) to finance its many ventures.
    Accounting rules allowed Enron to keep a partnership off its books as long as the equity od SPE couldn't borrow more than 97 % of its capital and Enron as the sponsoring company did not contribute any of that equity. Because of strong business lobbying, The Financial Accounting Standards Board was unable to reach a consensus on a new standard.
    So - the SPEs let Enron manipulate its account by increase earnings and hidding losses, especially on overseas acquisitions and investments in tech. companies. The SPEs also helped Enron keep investors in the dark on total debt level, artificially improve its credit rating, and pay well several top managers who participated in the partnerships.
    When the ' partnerships ' asset values fell, ( or they were unable to make a loan payment ), Enron had to fork its own shares.
    Enron's " empire " collapsed with the stock market's decline. For 2001 ( 3 quater ) Enron had to report a $ 618 million loss because of the partnership losses. Few weeks later Enron restated net income back to 1997 by cutting ( trimming ) it by $ 586 million and later on, it announced that it had to repay $ 690 million in partnership debt.
    All this caused Enron stock to plummete from a high of $ 90 in the fall of 2000 to under $ 1 in Dec. 2001.
    The company filed for bankruptcy on Dec. 2.

    Before this happened Enron shareholders thought they were $ 1 billion richer than they really were. Arthur Andersen forced Enron to comply with SEC rules that prohibit a company from counting as equity in its balance sheet, any issues of stock that have not been paid for ( one example involves Enron's issuance of $ 1 billion of its own stock to the Raptor SPEs in returne Enron accepted IOUs worth $ 1 billion - but never received any cash for them ).
    Enron's finances (especially its many off-balance sheet partnerships) were incomprehesible even to the smartes anaysts on Wall Street, who recomended Enron's stock because it delivered results : revenues in 2000 came to $ 101 billion and it's stock market value topped $ 75 billion.

    The biggest blow resulted from Enron's use of accounting tricks, which auditors at Artur Andersen and the board of directors should have known about and stopped. At that time the board of directors appear not to have asked the right questions and accepted Enron's financial statement without really understand it.
    One of the Enron's biggest sharholders was Californian Pension Fund ( CalPERS ) whose $ 146 billion in assets - now includes 3.5 million nearly worthless Enron shares.
    Special investigative of the Enron board said that the entire board, despite its financial sophistication, had failed in its oversight duties.

    The above brief story makes you wonder how sophisticated the board of directors of many big companies in Australia might be, and what is the real value of the stock they represent.
    :cool:
     
  13. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Tropo,

    Yeah, we get Enron, but its the exception to the norm. Modern accounting standards that were tightened significantly post-Enron also ensure that sort of thing is much less likely to happen again. (e.g. Sarbanes Oxly)

    Picking one company out of a pool of thousands and saying "see, you can't trust PE Ratios" is a bit of a stretch IMHO. There will always be people out there that will find reasons for why a market is not good value, despite all the financial fundamentals showing it to be. I'd caution against picking the exception to make a case against investing in any market.

    Cheers mate,
    Michael.
     
  14. Tropo

    Tropo Well-Known Member

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    Michael,

    "Modern accounting standards that were tightened significantly post-Enron also ensure that sort of thing is much less likely to happen again".

    Well....just wait. You may be well surprised in the future !

    "Picking one company out of a pool of thousands and saying "see, you can't trust PE Ratios" is a bit of a stretch IMHO. There will always be people out there that will find reasons for why a market is not good value, despite all the financial fundamentals showing it to be. I'd caution against picking the exception to make a case against investing in any market."

    Do not get me wrong!
    I do not say that each company has bad fundamentals.
    Some time ago Enron, HIH, One Tel were very good companies....so I picked Enron in this case.
    I could pick HIH or One Tel etc...
    It makes no difference which company you are picking to demonstrate that there are exceptions to the rule.
    I am not saying that there is something wrong with indicator such as PE, which I picked coincidentally (I could pick any other), but I would take them all with a bit of salt and .... pepper ;)
    :cool:
     
  15. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Mark,

    6000 and we might be looking at around middle of fair value on current earnings projections. We're still in catch up mode. Read the links in my original post, particularly the one that specifically addresses your question. "Are Australian shares in a bubble?".

    Cheers,
    Michael.
     
  16. kennethkohsg

    kennethkohsg Well-Known Member

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    Is the market over-valued? Macro-economic analysis tools.

    ************************************************
    Dear Michael,

    1. I disagree with your views.

    2. It all depends on the country's general investing climate and how strict t is the present Govt' proper enforcement of its own financial policies/regulations. In Australia, you would probably read and are familiar with Alan Bond's case in the past. Today's we are reading about the Henry Kaye's NII, HIH and the Westpoint's collapse cases.

    3. So, what are the lessons that we can truly learn from these recurrences?

    4. Even in Singapore whose Govt is well-known for its prudency and public goverence worldwide, we still have the financial lapses which triggered off the collapse of the century-old Baring Bank in UK as well as present China Aviation Oil, a newly public-listed company in Singapore, whose managing director has just been fined and jailed for "de-frauding"/misleading the public.

    5. The bottomeline issue at hand is how much we can afford to "lose" as a result of trusting others/organisations instead of ourselves and the simple answer is to do our own required due diligence before we invest each time.

    6. If you think you know a market well and can believe what you can see from the outside, come and try investing into the Singapore stock market today and I have no doubt that in the longer term you will definitely regret it if you fail to exit out fast enough after making some initial/immediate short term gains.

    7. After all, it is just a "game" only so as to truly learn about the Nature of Man, if we fail to truly understand and learn it from ourselves.

    8. For your kind update and considerations, please.

    9. Thank you.


    regards,
    Kenneth KOH
     
  17. kennethkohsg

    kennethkohsg Well-Known Member

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    Dear Sim and Steve,

    Care to share with us, your own views with respect to Dr. Shane Oliver's assessment of the Australian property markets over this coming decade?

    Looking forward to learning from each one of you and from the other members, please.

    Thank you.

    regards,
    Kenneth KOH
     
  18. kennethkohsg

    kennethkohsg Well-Known Member

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    Is the market over-valued? Macro-economic analysis tools.

    **********************************************
    Dear Michael,

    1. Are Dr Shane's stated indicators sufficiently comprehensive, accurate and reliable enough for us to make a proper decision?

    2. As a devil advocate, to me, I think this is in effect some form of "selective" facts 'slanting"/presentation to suit a particular line of personal belief/perspective/argument, rather than a truly "objective" and factual presentation.

    3. How, then, do we know the truth? Not from history I suppose, though I do acknowledge that historical trends does provide some sort of useful guide as to its recurring theme/trends for the future development. Strictly speaking, as far as I am concerned, Only TIME will tell (in the future).

    4. For your kind update and further discussion, please.

    5. Thank you.

    regards,
    Kenneth KOH
     
  19. kennethkohsg

    kennethkohsg Well-Known Member

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    Is the market over-valued? Macro-economic analysis tools.

    *********************************
    Dear Tropo,

    1. The herd doesn't but we do if we want to be a wise/smart investor and to succeed in life.

    2. Thanks.

    regards,
    Kenneth KOH
     
  20. Tropo

    Tropo Well-Known Member

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    Dear Kenneth,

    We should always make educated decisions, which does not mean that we should follow every available indicator.
    After all indicators are what they are. Just indicators.
    :cool: