Posts Tagged ‘Investing’

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By one very important measure, stocks are set to crash. This will not be any old crash, but a really major one – as significant as 1929, 1987 or what we saw in 2000 and 2008. And the measure that tells us this is not some obscure ratio, familiar only to academics locked away in ivory towers; it is the ratio that many of the world’s top investors say is the single most important ratio they use to judge whether or not stocks are overvalued. Yet despite this very powerful evidence to say we are set to see a crash, many say that this time it is different. Are they right this time?

The measure that looks so dangerously elevated is called the CAPE – or the cyclically adjusted price earnings ratio. It is calculated by taking the current capitalisation of stocks, and comparing it with average earnings over the last ten years.

For US stocks right now the CAPE is 23.8. The long term average is 16.5. Ergo US stocks are overvalued. And although stocks listed in London are not as expensive, the markets across the world tend to follow the US. If US stocks crash, others will follow, regardless of fundamentals.

Bullish defenders of US stocks are saying: “This time it is different.” And they are greeted with derision. There is one golden rule in investing. When people say: “this time it is different,” sell.

It is just that when you think about it, of course, US earnings over the last ten years have been low; the US economy has suffered a very nasty recession. The CAPE, they say, is distorted by the unique, and never to be repeated experience of 2008.

Besides, add the bulls, the CAPE is not the only measure. Look at current PE ratios, look at stock values to net assets, look at a myriad of other measures, and stocks don’t look that expensive at all. They can even turn the “this time it is different” argument back on their critics, and say: “but by a long list of measures stocks are not expensive, why do you think they will crash?” To the bears they might say: ”Are you saying this time it is different?”

But then we get a counter argument. Sure, the US has suffered one mother of a recession, but corporate profits did surprisingly well. The truth is that corporate profits to GDP are close to an all-time high. The argument continues, if the ratio returns to its historic average, earnings will fall, even if GDP rises.

And finally just to retort to that argument about profits to GDP being high and thus they will fall, some might say: “Yes it is true that profits to GDP are exceptionally high, but this has been a bad thing, and it may have been a factor that triggered the crisis of 2008.” To explain this argument, see it this way: the economy needs demand to rise for growth to occur. If profits to GDP are rising and wages to GDP are falling, demand can only occur if people borrow more. Hence high levels of debt were a symptom of rising profits squeezing wages. If we see the ratio return to average, that will be good for the economy, and in the long run, what is good for the economy is good for company profits.

So where does that leave us? If profits to GDP fall, that may be negative for stocks in the short term, but positive in the long term. If profits to GDP stay where they are, that may lead to earnings rising with the economic recovery, justifying stock valuations, but this may not be so good in the long run.

© Investment & Business News 2013

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As you know, we are ageing. We are all literally ageing, of course; there are no real life Benjamin Buttons out there. But as a country and as an economy we are ageing too, and that means there could be a pension problem in the future. The solution is obvious. We all have to save more, throw more money at our pensions. Or do we? A new report suggests that this approach may be flawed.

According to EuroFinUse: “Recent OECD statistics have cast a dark shadow over the aspirations of private pension savers. Over the last 5 years, real returns from private pension funds (after inflation) have been negative in many EU Member States. They have failed to hold their purchasing power, setting a gloomy outlook for tomorrow’s pensioners.”

In fact the real return (that’s after inflation) on five years’ pensions across Europe has been just 0.1 per cent over the last ten years and negative and minus 1.6 per cent over the last 5 years – at least that is what the OECD shows on the products and countries it covered.

EuroFinUse stated: “Despite such concerning results, the OECD still strongly recommends that citizens should make a greater contribution to personal pension provision. When advising people to save more, public authorities should bear in mind that pension saving products are in many cases destroying real value of citizens’ savings. This is why providers and public authorities should seek to protect the long-term purchasing power of savings, before advising citizens to increase those.” See: The Real Return of Private Pensions 

Actually, when you think about it, the report should not really come as a surprise. Many pension funds in an attempt to meet solvency laws, have been flocking to bonds, even though such bonds pay out lower percentage yields than inflation.

The truth is that many pension funds have been paralysed by the regulator into becoming so risk adverse that they threaten to bring down the economy. The economy needs risks; there is no such thing as risk free. The obsession with risk free in recent years has ironically created more risk.

That is why investing under your own steam, privately rather than via a pension fund is interesting.

And here is a thought to leave you with. A recent article in ‘Fortune’ magazine quoted London’s Tech City CEO Joanna Shields as saying that not so long ago her employees scoffed at stock options. They wanted pensions. She says that today that they all want to be the next Mark Zuckerberg. See: What London can teach Silicon Valley 

If you want a secure retirement, saving for a pension may be a partial answer, but stock options and investing directly, without the straitjacket of a pension fund and its requirements, may provide a better alternative

© Investment & Business News 2013

Uk Population

Here’s a chart for the UK population as of now with a line for the official projections 10 years hence.

As a tool for prediction this chart can be quite powerful; pictures speak a lot louder than words.  The way to use the chart is to imagine the blue and red lines being pulled across the page as we all move inexorably towards God’s waiting room on the right.

We’ll be pulled past 2 marks on the way. The left block shows where young people (16 – 24) might find themselves becoming employed and paying taxes – remember that 20% don’t though so the ‘new workers’ line is copied and shifted lower.

The next mark, for the retiring age for men, shows an ever increasing rate of retirees, after a very steep previous 10 years there will be another 7 million arriving during our 10 year look into the future. You might notice an almost mirror image of the lowered ‘new workers’ line but the unemployed are living off the state too, so there is another 1 million to be added to the line on the right if we want to balance workers vs. state supported.

Unfortunately, because the leading edge of retirees points up and the leading edge of new workers points down, things just get worse. While this demonstrates the ex-growth nature of the economy it is reassuring to compare the huge block of substantially employed people and the much smaller wedge shaped block of the already retired.

So it looks a lot less gloomy right now but as our 10 year view unfolds it builds to uncomfortable levels all the way up to and past the baby boomer’s peak in 15 years.

Note how the red projection line slumps after the retirement age. I’d like to think that this is not an early death syndrome but rather an indication that retired people like to head off to countries with blue skies and sunshine. As we have seen, the retiree level is really lower than the new workers level and that’s a significant first; it just gets progressively worse after this as the retirees line builds even steeper and the workers line pulls across a dip. Incidentally there are dips because WW1 and WW2 were one breeding cycle apart (27 years) and the resulting post war pulses have yet to die down.

If you are about 50 now you are at the population peak age. Births subsequently declined for 13 consecutive years, and that was another first, signalling the end of centuries of perpetual population growth. Because accounting practices, pension arrangements, government finance, and much more, all worked because growth conveniently forgave all sorts of silly thinking, there were, and still are, bound to be some serious consequences.  The way the world works has changed forever.

The workings of pension schemes are of particular interest. With perpetual growth there was always a bigger pool of funds to pay out the liabilities so nobody needed to be particularly efficient. That is no longer the case and you can be sure there will be a raft of pension scheme failures.

With such a huge pension liability arriving over the next 15 years the pension funds have to prepare by switching out of equities and into bonds and then progressively the bonds are then sold as net payouts increase. Logically we might expect weak equities and strong bonds eventually followed by weak bonds.  When the bond sell-off stage arrives one wonders how the Government finances will work – who will they sell bonds to then?

An ex growth world has some implications for equities. Shareholders have got used to accepting lower yields in exchange for corporate growth. As soon as the growth stops then a proper yield will be required. As an example a company yielding 2% and going ex-growth might have to yield 4% to remain attractive. So that means the share price would have to halve!  How likely is this scenario?

Well take a supermarket for example. As a footfall company, whose profits are directly linked to the traffic through the door, the impact of an ex-growth population will be severe. Actually the population is not quite ex-growth, it is just slowing down, but even so companies in this category are subject to massive falls as soon as their growth is seen to end. Just to be safe, sell all your growth stocks?

You can see why there was a property boom over recent decades as the only way the available housing stock grew was via owners dying or new houses being built. Looking back it seems so obvious that fewer old people (from a previously smaller population) supplying demand from a much bigger block of house seekers would result in big price rises.

The chart is giving a strong indication of a repeat performance. Note how there is a bulge moving into the first time buyers age groups and then compare that to the lower height of the chart where old people might shuffle off. Demand will clearly outstrip supply for a while and looking forward 10 years this is increased by immigration as can be seen by the way the bulge actually grows as it moves across. The low end of the housing market looks like a good bet and you can expect a rally in the house builders too.

All this is good for the economy with an added twist. The baby boomers already have a house and yet they are about to inherit their parents houses which can easily be sold on at today’s fairly substantial prices; an added boost to the economy for several years to come.

This last point reinforces the idea that retiring couples with windfall cash will head for the sun. That’s bullish for overseas holiday homes so get in while they are depressed.

Any negatives? Well the way the dotted red line sits above the blue line has implications for NHS services over the next 10 years. It doesn’t look much but in percentage terms there is a significant increase with a detrimental age bias to account for too. An already stretched service has a crisis looming.

The big bulge in the new adults group will all be driving cars for the first time; good for the motor industry but bad for traffic jams.

Conclusions:  No great dramas for the next 10 years but this is the lull before the storm. After 15 years the peak of the baby boomers will be at retirement age and from then on it is hard to see how the books stack up unless the, already brimming, country is filled with more foreigners.

The houses to buyers ratio is likely to top out, leading to a sustained bear market in house prices. The stock market will slump horribly as it goes absolutely ex-growth and the pension funds go into net draw down.  The Government will find it hard to fund the state pension burden and increased demands on public services. Borrowing to bridge the gap will be hard as traditional lenders, in the net draw-down scenario, have no need to buy bonds. Interest rates may well climb as a result and then the National debt financing costs spiral up. Pay more, borrow more, pay higher; sounds familiar.

A UK Government default before 2028?  Not so hard to imagine is it?

Data – The Office for National Statistics

Opinion – Patrick O’Connormist

With the FTSE 100 now into the mid-6700s, it is in territory not seen since the last century. Indeed it is only 200 points off passing its all-time record set in December 1999.

But can it last?

There is clearly a disconnection between the FTSE 100 and the UK economy, but then again many of the companies listed on the UK’s headline stock exchange index barely trade in the UK at all. Many are global in their reach, and thus the correlation may be between the FTSE 100 and the global economy.

Look at valuations, the FTSE 100 does not look especially high. The FTSE 100 peaked at 6930 in December 1999. Its current cyclically adjusted pe is around 12, while the average since 1975 is just under 14.

In the US it is a different story. With the cyclically adjusted PE being around 24 compared to a historical average of 15 since 1900.

Of course, if things got nasty in the Eurozone again – and they might – then markets across the world will look dangerously exposed.

The big question mark relates to QE, however.

No one really knows the extent to which QE explains stock market rises.

If QE were to be reversed, if inflation was to pick-up – for example thanks to rises in wages in China – then things may look very different. A fuller analysis will be published later this week.

© Investment & Business News 2013

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When you read this, the story may be even more positive. But at the time of writing the FTSE 100 is just half of one per cent shy of a millennium high. In other words, it is just one day’s worth of modest rises from passing the level it last reached back in 2007, before the economy went into a nose dive. The index is also just 3.5 per cent short of passing the all-time high set on December 30 1999.

If – and it’s a big if – stock markets are a good gauge of the wider economy, and if their value is reflective of the underlying strength of the economy, then that may provide reason to celebrate.

Here is another indicator for you: house prices. Okay, view this next statement with a large pinch of sodium chloride, but one key indicator may be pointing not only to recovery in the UK housing market, but in the economy too.

And finally, there is hard data. That is not half bad either – actually, it is a little bit bad, but it is a good deal better than it was.

Here are a series of articles which leave just one question: Is the UK finally on the mend?

FTSE 100 moves to within an inch of passing millennium high 

Are the stock markets set to crash? 

Japan’s miracle cure has been tried before in Britain – and it worked 

Economic recovery says Bank of England inflation report.

UK wages fall in the year to March 

© Investment & Business News 2013