mind_the_gap

Let’s party like it’s 19,999.

Jan 9 • Mind The Gap • 283 Views • No Comments

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celebration At one stage, during the New York trading session on Friday 6th January, the DJIA reached its highest point historically, reaching 19,999, just one point shy of the critical psyche ‘handle’ of 20,000. The UK’s FTSE 100 printed several record highs during the week ending the 6th January, ending the week at 7,210.

Many economists when polled, suggest that the post-presidential, election bounce, will fade, after the inauguration takes place on January 20th. Many also predict that the UK’s recent equity markets’ rise will recede (with sterling), once plans for Brexit are finally released by the UK’s government. However, there are many analysts and economists who hold a contrarian view.

Despite many concerns, in terms of the traditional metrics of stock markets’ worth reaching alarming levels, there appears to be no major resistance level, or black swan event on the horizon, that may cause a sudden sell off. However, we should remain vigilant that black swan events (by their very nature) are rarely predicted in the mainstream.

The current P/E ratio of the UK’s FTSE 100 is circa 34, the historical average is 15. The P/E ratio is best described as a ratio of a company’s share price compared to its per share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS): P/E Ratio = Market Value per Share. Earnings per Share (EPS). Therefore the UK’s main index is technically valuing many companies at twice their historical level.

Many analysts use the “Case Schiller Ratio” to measure the USA Standard & Poor’s index (the SPX 500). Referred to as “CAPE” it stands for; the Cyclically-Adjusted Price-to-Earnings ratio covering the last 10 years. The current ratio is 28.16, the median level is 16.05. The highest point recorded was in December 1999 at 44.19, the lowest level recorded was 4.78 in December 1920. The inference could be drawn that that USA markets still have plenty of scope to rise to the upside; to peak at the extreme level witnessed before the dot com crash of 1999-2000. Alternatively, investors and analysts could deduce that SPX values are currently 42% overvalued, versus the median level.

One issue most analysts and economists are united on, is how these record highs have been reached; not through record company performance, but through extremely low finance rates, allowing large quoted corporations to engage in buying up their own stock, in order to raise the share price and increase dividends.

For example, USA companies have spent circa $2.5 trillion over the past six years engaged in such practices. Incidentally, such a procedure would have been classed as “insider trading” back in 1982. This changed when the Securities and Exchange Commission passed rule 10b-18, which opened the flood-gates for companies to begin to repurchase their own shares en masse. As to whether or not this practice can continue, if USA base rates reach a supposed ‘normalcy’ of 3% by the end of 2018, is highly unlikely.

The dollar, in tandem with USA equities markets, has enjoyed a substantial post presidential election boom, notably as a consequence of the December FOMC meeting, during which a 0.25% base rate rise was announced. The euro is close to parity with the dollar, whilst sterling has fallen by circa 20% versus USD, since the June 23rd Brexit referendum decision. And yen has fallen by circa 17% versus the dollar, since August 2016.

Economic calendar events of note for January 9th 2016, all times quoted are London times.

07:00, currency effected EUR. German Industrial Production. The prediction is for Germany’s industrial prediction rate to have risen to 1.9% for the month of November, from 1.2% previously.

07:00, currency effected EUR. German Trade Balance (euros) (NOV). Germany is fairly unique amongst the main industrial nations of the G10, in posting positive trade balances; they export more than they import. The prediction for November is €20.3b, from the €19.3b previously.

09:30, currency effected EUR. Euro-Zone Sentix Investor Confidence (JAN). The estimate from the economists polled is for a reading of 12.8, rising from the previous December reading of 10.

10:00, currency effected EUR. Euro-Zone Unemployment Rate (NOV). The expectation is that the headline Eurozone unemployment rate will have remained static at 9.8%.

20:00, currency effected USD. Consumer Credit. Estimates suggest that USA consumer credit will have risen, mainly as a consequence of seasonal factors, by $18.400b from the $16.018b rise in the previous month.

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