This is another one of those once-in-a-blue-moon updates I get to do in this blog. Probably nothing substantial, just an attempt to get me worked up into doing this again after a long hiatus.
So the issue involving the two Koreas have now subsided. The South has already enacted on the attack, by means of halting shipments to the North – including cements and medicines – and is believed to be looking for other potential penalties for what has transpired Tuesday afternoon. For a while, the whole world feared this would turn into another Korean war but the different world leaders were quick to respond, albeit only verbally. Still effects were felt on the markets as global markets closed sharply lower on the day it happened. While not completely gone, some releases from the US yesterday already took the markets’ attention away from Korea and to what seemingly are glimmers of hope for recovery.
As the only ally of North Korea, China today addressed the issue when Premier Wen Jiabao denounced any provocative military action on the Korean peninsula, though did not point fingers on either of the two countries.
Over here in the Philippines, GDP growth for Q3 was slightly lower than expected, standing at 6.5% when somewhere between 6.7% and 7.7% was expected. However, that still brings average for the 9 months to 7.5%, much higher than 5-6% target for the whole year. The Q3 GDP figure is much lower than the reported growth for Q2 and Q1. Services, industry and manufacturing continued to strengthen but it was El Nino-induced drought that caused contraction in the agricultural sector.
Meanwhile, tomorrow is the day new Peso bills containing Noynoy’s signature come out while next month is the projected launch of new bills with improved security features. Both old and new monies will coexist but the BSP (Banko Sentral ng Pilipinas) is giving the old version 4 years to demonetize.
Next month, preparations for the budget for 2012 are also poised to begin that would give the administration and the budget office sufficient time to consult with the relevant groups and open it for scrutiny by Congress, in order to avoid reenacted budgets just like what happened in Arroyo’s administration. Two budget calls are said to be issued – one in order to set a schedule for the preparation. Budget calls are documents that set out guideline and procedures for budget proposals.
Indeed. He has joined the camp of believers who thinks recovery would be in the form of the letter V. He came out today with a special report on this. By the way, V is not simply a reference to the direction by which recovery would happen. Instead V stands for valuation. And in the report, he did gave quite some fantastic numbers with regard to valuation. One can choose from three options – be it trailing P/E, forward P/E or P/BV.
On trailing P/E:
On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions – we have more on the historical comparisons below).
On forward P/E:
Bullish analysts like to dismiss the actual earnings because they are “depressed” and include too many writeoffs, which, of course, will never occur again. Fine, on a one-year forward (operating) earning estimates, the P/E ratio is now 16.2x, the highest it has been in nearly five years. During the last cycle, at the peak of the S&P 500 — October 2007 — the forward P/E was 14.3x and the highest it ever got was 15.4x. So hello? In just six short months, we have managed to take the multiple above the peak of the last cycle when the economic expansion was five years old, not five weeks old (and we may be a tad charitable on that assessment).
At the end of a given recession, the forward P/E multiple is closer to 14x or a good 15% lower than what we have on our hands today. As an aside, the forward multiple on the eve of the 1987 stock market collapse was 14x and one of the explanations for the steep correction was that equities were so overvalued and overbought that it was vulnerable to any shock (in that case, it came out of the U.S. dollar market). It certainly was not the economy because that sharp 30% slide took place even with an economy that was humming along at a 7.0% clip and corporate profits were rising at over a 50% YoY pace.
And finally, on P/BV:
The price-to-book ratio for the S&P 500 is currently at 2.4x, which is exactly in line with the average of the past four decades. However, at the end of recession, the market is normally trading closer to 1.5x book. Moreover, as the FT recently highlighted, a fair-value price for the S&P 500, based on ROEs, P/Es and price-to-book ratios, would place the “equilibrium” level for the S&P 500 right now at 867, which means we do have potential for a 20% correction here.
Whatever way we look, there’s just seems nothing that tells us this rally (and maybe even the recovery) is genuine. In the same report, Rosie also spoke about a new paradigm, a recovery that is jobless. He points out that for a 60% rally such as ours at the moment, 2 million jobs should be created, not lost. So this doesn’t quite add up.
Some headlines for today:
Some of today’s headlines:
On Morgan Stanley’s new CEO/Mack stepping down:
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It’s becoming a regular in major newspapers. Everyone’s just talking about how the markets have gone up so much so fast and a (steep) correction’s just lurking around. A piece from the NYT names people who were once bullish but are now threatened by the market actions. Well why not, you have light trading volume the past couple of weeks and last week the WSJ ran a story, which indicated 5 stocks that were responsible for more than 30% of the trading volume at the Big Board at some point last week. To prove my point (from the WSJ):
On Monday, 34% of all trading volume on the New York Stock Exchange was concentrated in three stocks: Citigroup, Fannie Mae and Freddie Mac, according to Thomson, and Citigroup alone accounted for 17.8% of all volume. On Tuesday, five stocks: Citi, Bank of America, AIG, Fannie and Freddie accounted for 36% of all volume, according to calculations by The Wall Street Journal’s Market Data Group.
Anyway, here’s what NYT is saying today:
Some of the analysts and investors who called a bottom in March, when the markets hit their worst levels in more than a decade, now say they are detecting a peak in share prices, and they warn that stocks could be headed for a sharp pullback.
On Friday, the research firm TrimTabs reported that insider selling had grown to $6.1 billion in the month of August through last Thursday, its highest levels since May 2008 — when the Dow Jones industrial average was floating above 12,000, compared with just over 9,500 at Friday’s close.
The ratio of insider selling to insider buying also soared in August, to about 30 to one, its highest levels since the firm started keeping numbers in 2004.
Read the story from the NYT.
I wonder if this Friday’s unemployment data would serve as a good exit point, although experts are expecting a lower decline in the data – 225,000 vs. 247,000 in July.
Just a quick thought, and a little off topic: declines in the US markets don’t seem to take heed of the very volatile situation in China, whose Shanghai Composite Index has seen declines of more than 5% a few times last week (followed by not-as-strong jump up). Today it dropped it’s biggest for the year of 6.7%. Now, the Index is down more than 20% from its crisis-peak. The market close for today marks two significant events: this is the first month for the year that China has closed on the red and SCI is back to the bear market stage. Has China gone ahead of the market correction expected of others who have similarly picked up quick from the lows of the year? When is the US correction really happening? (Will people be caught off guard again?)