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

Dear Tropo,

1. "Educated Decision"? Or "Educated" Guessimates?

2. Care to share with us how you actually go about making your own "educated decision" and further elaborate on the concept of "educated Decision" as opposed to the concept of "educated" guess.

3. What's exactly do you mean by an "educated" decision? "Educated" from/by who?

4. Do you distinguish the differences if any, between "educated decision" vis-a-vis a "calculated decision" as referred to/ used in the business world?

5. I look forward to hearing and learning from you further, please.

6. Thank you.

regards,
Kenneth KOH

 

Hi Michael,

I am aware of Shane Oliver, read some of his stuff in the past, but to be honest, I don't really put a whole lot of value on it, as like Kenneth suggested he has a bias and I feel, tends to up-sell whatever is going to make his bosses the most money.

But that's just my opinion. To be honest with you mate, I hope you aren't basing your views on one person's perspective.... I'd actually like to know what YOU think, I don't want to hear a tape recording (so to speak) of a biased economist. So come on, you're a sharp guy, tell me what you think.

While we're at it, I'm not really sure what to think myself. I'm prefering to take an each way bet at the moment, I don't really have any concrete idea of where the market is going to go in the short term. But then again, does it really matter? Only gamblers think about the short term.

 

Dear Kenneth,

Ad1. Always educated decision.
Ad2. If you do not know a difference, you should educate yourself.
Ad3. If you never educate yourself, you will never understand the difference.
Ad4. Yes I do. Do you?
Ad5. It may take a long long time.
Ad6. Thank you
PS - Good luck to you in your decisions whatever they are.
Regards,

 

Mark,

Spot on. And I guess, to summarise my thinking, I reckon the ASX will be held up for years to come on the back of China's growth and Japan's recovery. We're a resource exporter and they're two big markets on our doorstep. Factor in India and it gets even better.

I think the US will print its way out of problems and the Dow will hold up too. Even if it comes off, my only esposure there is really the NavTrade US fund and that will benefit from the volatility.

That's my macro thinking. I just reckon the ASX is still fair value and has a lot of potential long term upside.

Cheers,
Michael.

 

Interesting Michael. I went to the Perpetual briefing this morning and off the top of my head (didn't take notes) they showed a slide that said that around 40% of Aust equities were trading at P/E ratios above 25. Something like that.

Now, P/E ratios are merely one aspect of the whole and not the most reliable indicator at that, but when I see figures like that, I tend to think that the market may need to slow down a little, but hey that's just me.

Some questions: What happens if China doesn't grow so well? What happens if Japan doesn't recover as expected? These are possibilities that need to be taken into consideration. Relying entirely on the future of two economies for your returns from the market is like walking a tightrope above a pool full of sharks in my opinion.

Don't even get me started on the US. To me, it's a timebomb waiting to go off. Great for Navra, not so great for the world economies including ours. I read in Asset that the interest bill on their deficit is now greater than earnings. Yikes! It's all gonna come to a head sooner or later mate.

Man, do I sound like a bear or what!

Mark

 

Mark,

Do you propose a particular investment vehicle if not stock standard Australian and American shares?

 

Glebe,

I'm not anti-shares mate! I'm currently investing in the Aussie market and will be looking to put money into the American Fund as well at some stage, as well as watching the Platinum Asia fund for a while to see how that goes. I just personally don't share Michael's upbeat view over the next x years.

I actually want it to drop, in fact I hope it drops sooner rather than later, so I can get in cheap. I'm a cheerleader for a fall right now. I dearly want to see some outperformance!

Mark

 

"I just personally don't share Michael's upbeat view over the next x years"

Me either.
If XJO hit this year 5350-5400 we will be very lucky.

 

Damn right! Hahahaha.

Mark

 

Mate,

I reckon it will, but I reckon it will recover too because I put it at pretty fair value now with some decent upside potential. I don't see the market currently being over-valued, that's all. But each to their own. We'll see who's right at the end of 2006.

I reckon Tropo's numbers are actually a tad bullish. The market's at 5000 today, and we've only got 9 months to run this year. I'd give it about 5% over that period, so would put the index at around 5250 by the end of the year. And I reckon that doesn't make me too bullish. We've already had a really strong start to the year so we could get to Tropos numbers quite easily if we keep going at that pace. We could easily see more, but then that's just speculation. I reckon 6000 is the top end of current fair valuation and I'd get nervous if we raced to that point this year. I'd like to see that point sometime in 2007. The thing with current valuations is that they're propped up by high commodity prices. RIO and BHP between them accounted for half the ASX growth from 4000 to 5000. If anything happens to change commodity prices unfavourably, then the 6000 point I place on the market value comes into question. I just reckon commodity prices are likely to hold up due to Asian demand through 2006 and into 2007. This is all just speculation, which is why I watch the market daily and keep appraised of these indicators. Based on current commodity prices BHP is valued at around $42 and RIO at a similar markup to current price. BHP today is only $26, so if those two heavy hitters keep growing to their fair valuation based on current commodity prices then they alone will deliver us 6000. The rest of the market will just tag along for the ride. Most Aussies just can't get their head around the enormity of the Chinese resource demands that have exploded over the last few years and look set to continue to do so.

Remember, that we're in a bull market and these things typically run well past their fair value peaks before they come off the boil. We should all get some early warnings of it being overheated before anything serious happens. I picked the peak of the tech wreck months in advance and sold out of all my stock holdings at that time. I just don't reckon we're anywhere near that sort of bubble yet with the ASX.

Cheers,
Michael.

 

It's not about being right or wrong, opinions are never right nor wrong.

Mark

 

Mark, All,

For someone who has been much more involved with property (me) what is your opinion on the importance of P/E ratios?

In trying to learn more I have tried to find figures on the impact of superannuation companies, because all companies have to forward the superannuation contributions in the first 20 days after the end of every quarter - the super guarantee of the Aussie workforce is a lot of money. It appears that something like 2% of the value of the Australian Stockmarket gets ploughed in by super most quarters, and June/July is about 3% - I figure this must be a rush of voluntary super / SMSFs at the end of FY.

So currently, super is adding in the order of 9% a year of the value of the share market, into the share market, and perhaps much of this is in the ASX200. Essentially, unless the sharemarket went backward, then companies would need to grow their earnings by at least 9% just to maintain a steady P/E (ie the increased investment by super was reflected in the increased share price P so the E would need to match it). Hope that makes sense.

Is that sort of growth sustainable across the market, which would hold the PE ratios steady? Should we expect the PE ratios to increase because E can't keep pace with P in the long run (assuming P increased with the investment)? Or is my super fund going to loose money again ...

No criticism of opinions for up or down in the market, I'm just curious on how this might effect PE ratios in the long run.

Dave

 

Yes.......PE ratios can be used to tell whatever story people want depending on what is selected can't they.

See the following March Australian article:

http://origin.theaustralian.news.com.au/common/story_page/0,5744,18260547%255E5001942,00.html

Do we talk about current or forward PE ratios?

Do we take just a selection of companies?

Do we take just certain sectors?

What point does the article want to make?

For example in the above story this month they talk about average forward PE ratios of 14 but that a lot of the headline PE ratios are being kept low because of resources. Take the top resources out and the forward PE ratio immediately jumps another couple of points to 16!

I take your point about the US. You would think unless they do something about their current situation sooner rather than later then some type of correction is going to occur...........and the further you keep on stretching the rubber band .......well.......the bigger the correction!

The trouble is, I think we're talking about a country with about 40% of the world's market capitalisation. I guess if the 'rubber band' snaps back on them sharply, the reaction globally would be dramatic indeed.

 

Uh ... how about using a particular strategy that IGNORES fundamentals, market sentiment, forward indicators etc etc.

I could think of a real simple one.


All this talk of guessing where the ASX is headed, P/E values (dont even mention discounted forward NPV cashflow projections ... ugh) etc etc ... dont have the time of the day for all that rubbish, i got living to do!!!

T.

 

"Uh ... how about using a particular strategy that IGNORES fundamentals, market sentiment, forward indicators etc etc "

Congratulation
You are just about to make IT !!!!!!!!!
Good Luck To You

 

All Booms must end!

OK,

Never let it be said that I don't paint the "complete" picture. I am still bullish on the ASX, and on the region as a whole, but I do perceive that there will come a reckoning in the not too distant future. I personally believe this will be beyond 2006 and well into 2007, but that's speculative. I'm watching the US economy very carefully for signs of a collapse in consumer sentiment or a housing bubble collapse. If those things happen then the ripple effect on the Chinese and Australian economies will be significant.

Here's an article which nicely articulates the risks with the current share market booms we are experiencing globally:

http://finance.news.com.au/story/0,10166,18707034-521,00.html

Just trying to continue to paint the picture on the macro-economic fundamentals at play in the global markets.

Keep your eye on the lead indicators and be willing to move decisively should anything start to look precarious. The market is often slow to respond to risks as shown by the dotcom boom, but astute investors can see these as they materialise and act before the ensuing bust unfolds.

In the meantime, enjoy the ride!

Cheers,
Michael.

 

economies are awfully big ships, it takes them a while to turn around (either way) I reckon...a lag between stimulus and response...

Markets always overshoot as well (both ways)

 

Nigel,

Precisely! That's why I said: "The market is often slow to respond to risks as shown by the dotcom boom, but astute investors can see these as they materialise and act before the ensuing bust unfolds."

There's no need to try and get out because of fear of a bust alone. Wait for the catalysts to appear and act on them. Just make sure you're watching for them and not asleep at the wheel.

Cheers,
Michael.