Compound Income
  • Blog
  • Scores
    • Subscribers Scores Access
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact



Taking the markets temperature

17/3/2014

0 Comments

 
I promised a few posts ago to have a look at market valuation indicators. So I propose to do that today and also look at some other anecdotal evidence to check on the health of the current bull run. I think this is a good time to do this because the bull run is getting on a bit at around five years now and indices being either at or close to all time highs, with share prices having nearly doubled in the UK and more elsewhere, like the US. So with out further delay I'll break these down into Anecdotal, Valuations and Worries as bull markets are said to climb a wall of worry.

Anecdotal
1) Was the report about sales of retail funds last year, the fifth year of the bull market. This showed, wait for it, UK funds under management hit a record high in 2013, while sales of equity funds tripled from 2012. Overall, net retail sales soared 43% from £14.3 billion in 2012 to £20.4 billion in 2013 with the highest net retail sales since 2000 at £11.4 billion. There have been similar figures reported in the US. So the small investor piled back in last year in a big way, they are often late to the party.
Picture
2) Initial Public offerings or (IPO's) picking up see E-commerce revolution drives European retail IPO rush.
This was helped by last years Royal Mail privatisation and now continuing with a stampede of Venture Capitalist bringing their hyped up and geared up Theme parks, Pet and Pound shops to market. In addition to this canny entrepreneurs are also cashing in some of their chips in an echo of the dot com boom with the floats of AO and Boohoo the on line retailers in the UK and King the computer game developer behind Candy Crush Saga in the US. IPO's usually pick up when business owners see it as a good time to sell their business.
3) Stock Margin Debt Reaches Record-High,Surpassing 2007 Pre-Crash Level - this is a US centric report / measure but it also highlights insider selling exceeding buying by a 20 to 1 ratio in February 2014. To finish this section there was another report entitled 10 Warnings Signs Of Stock Market Exuberance which also touched on some of the above with observations like "Margin debt/gdp (March 2000: 2.7%, July 2007: 2.6%, Jan 2014: 2.6%) & Margin debt/market cap (March 2000: 1.8%, July 2007: 2.3%, Jan 2014: 2.0%)" It also touched on parabolic price moves in the likes of Biotech (the latest bubble perhaps) and the extreme valuation on some technology acquisitions like Facebook and What's App that I wrote about recently. It also explores various valuation metrics which I'll come onto in the next section.
4) Profit margins at record levels - these tend to mean revert eventually, so is this as good as it gets for businesses? See point 2) above on IPO's.

Valuation
On this rather than reinventing the wheel I'll refer you to some others who do some good work on this starting with the chart below from Doug Short (who I've mentioned before and that's his name not his positioning). You can read his post if you want that explains each measure in greater detail, but as they say a picture is worth a thousand words. Note he says:
 "the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I'm using as a surrogate for fair value."
Picture
So while it is not as extreme as the 2000 peak this combination of valuation measures is now at similar levels to those achieved just before the downturn in 2007/8. In the UK according to Stockopedia the FTSE has a median Trailing P/E of 16.9x and a mean of 20.9x with yields of 2.9% and 3.2% while the FTSE Mid 250 is trading on 19.7x and 22.4x and yields 2.3% and 2.6% on the same basis. None of which strike me as bargain basement and certainly towards the upper end of generally accepted valuation ranges, although good growth is forecast given the current recovery of a sort in economies. 

This is important because the price you pay for an investment will influence the future returns. Around 14 to 15x PE is average and will likely give you the long term suggested returns of around 5% real if you buy into a market at that price. At 20x and above returns going forward tend to be poor. While at 10x or less future returns from a market priced at that level tend to be above average. Obviously for individual stocks this can vary as the growth rates, earnings and dividends reported by individual stocks can vary widely, but again the same general rules apply as highly rated growth stocks fall heavily if they disappoint and the de-rating hits returns. This tends to work in a reverse more positive fashion for value stocks if they surprise on the upside.

Since P/E10  and Q are mentioned above I'll finish off with some references to these metrics. In the UK another site / author I have mentioned recently is John Kingham of UK Value Investor who does periodic updates on the CAPE or PE10 in the UK. His last one from February can be read here and unusually this shows the CAPE as being cheaper than current trailing figures - again perhaps bearing out the fact that current values are somewhat high compared to the last 10 years.

However I also discovered a recent new blog on FT.com by Andrew Smithers who I think invented the Q ratio and also talks about CAPE in relation to the US which he thinks is overvalued but he also talks about more buyers than sellers and Quantitative easing and share prices, although I think he has been bearish for a long time. Which brings me nicely onto to talk about:

The Wall of Worries
1) Withdrawal or curtailing of Quantitative easing. This is a big worry for investors in equities as big moves up seem to coincide with the implementations of this. So it seems logical to worry about its withdrawal, but impact limited - so far.
2) China Crisis oh no sorry they were a band - I mean slow down, debt concerns mounting?
3) Ukraine Crisis - that's the one - on going.
4) I worry that I can't find much to buy that's good value and many of the stocks I own have been re-rated so much that they themselves no longer look that compelling.

So in conclusion, I'm not saying I'm outright bearish - I'm just saying we are probably overdue some sort of correction as we have not had one for quite a while now. That would probably be a healthy development and hopefully afford a few more opportunities. However as Keynes said: "the market can remain irrational for longer than you can remain solvent" - but then I'm not short the market, so if it does all well and good, but any way just be careful out there.

0 Comments



Leave a Reply.

    RSS Feed

    Archives

    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    August 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014

    Categories

    All
    32Red
    Aberdeen Am
    Admin
    A G Barr
    Airtel Africa
    Alliance Pharma
    Alternative Telecoms
    AMEC
    Amino Technologies
    Amlin
    Anglo Pacific
    Ashtead
    Asset Allocation
    Auto Trader Group
    Barclays
    BA Systems
    BATS
    Behavioural Finance
    Bellway
    Berendsen
    BHP Billiton
    Bloomsbury Publishing
    Bodycote
    Books
    Bovis Homes
    BREXIT
    Britvic
    Caledonia Mining
    Capital Ltd.
    Catlin-group
    Central Asia Metals
    Centrica
    Character Group
    Churchill China
    Cineworld
    City Of London Investment Group
    Clarkson
    CMC Markets
    Commercial Property
    Compound
    Computacenter
    Connect Group
    Croda
    Currencies
    Demographics
    Diageo
    Diploma
    Directors Dealings
    Dividends
    DotDigital
    Easyjet
    Economics
    Emerging Markets
    Emis
    Empiric Student Property
    Etfs
    Fairpoint
    Ferguson
    Ferrexpo
    Finsbury Foods
    Food Retailers
    Forterra
    Games Workshop
    Gateley
    Go Compare
    Goid
    Greene King
    GSK
    Hargreaves Services
    Hays
    Headlam
    Hedge Funds
    Hikma Pharmaceuticals
    Hill & Smith
    House Builders
    Howden
    HSBC
    IG Group
    IMI
    Imperial Tobacco
    Indivor
    Inflation
    Insurance
    Intermediate Capital
    Interserve
    Investec
    Investment Trusts
    It
    ITV
    James Halstead
    Jarvis Investment Management
    JLT
    Jupiter Fund Management
    KCOM
    Kingfisher
    Legal & General
    Lloyds Bank
    Luceco
    Macfarlane
    Maintel
    Man Group
    Market Timing Indicator
    Market Valuation
    Marston's
    Matchtec
    Media
    Merlin Entertainment
    Micro Focus
    Mining
    Mitie
    Miton Group
    Moenysupermarket
    Mondi
    Moneysupermaket.com
    Morgan Sindall
    Music
    National Grid
    N.Brown
    News
    Next
    Nichols
    Norcros
    Oil
    Page Group
    Paypoint
    Pennon
    Persimmon
    Personal Finance
    Pharmaceuticals
    Phoenix Group
    Photo Me
    Photo-Me
    Plus500
    Podcasts
    Polar Capital
    Politics
    Polymetal
    Portfolio
    Portmeirion
    Provident Financial
    PZC
    Qinetiq
    Ramsdens Holdings
    Rank Group
    Reckitt Benckiser
    Renewable Energy
    Renew Holdings
    Renishaw
    Research Papers
    Restaurant Group
    Retailers
    RIO
    RM Group
    Rolls Royce
    RPC
    RPS
    Safestore
    Sage
    Sainsburys
    Savills
    Schroders
    Scores
    SCS Group
    Sell Discipline
    Shareholder Yield
    Share Picks
    Short Interest
    Somero
    Spectris
    Sprue Aegis
    SSE
    Stock Spirits
    Strix Group
    S & U Plc
    Sureserve
    Sylvania Platinum
    TalkTalk
    Taptica
    Tax
    Technology
    Telecoms
    Tobacco
    Trading Ideas
    TSB
    TUI
    UK Market Update
    Ultra Electronics
    Unilever
    Utilitywise
    Value
    Victrex
    Vodafone
    VP.
    Water Utilities
    Watkins Jones
    WH Smiths
    William Hill
    Wynstay
    XL Media
    XP Power
    Yield
    Zytronic

    googleda4a17cac6d02bb9.html
    File Size: 0 kb
    File Type: html
    Download File

Powered by Create your own unique website with customizable templates.
  • Blog
  • Scores
    • Subscribers Scores Access
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact