The
Detroit Motor Show (or North American International Automotive Show)
has kick-started the new auto-exhibition calendar.
Domestically,
the “Big 3” are eager to demonstrate an ability to not only
satisfy the domestic market's strengthening confidence – as Yellen
balances QE tapering measures vis a vis economic growth – but also
critically to highlight the notion that even if Detroit is a bankrupt
city, its prime pan-American and pan-global inhabitants remain
investment propositions
Re-Jigged
Business Models -
The
much noted return of mid-size pick-ups was always expected given
Detroit's desire to re-broaden its vehicle range and re-capture the
previously lost smaller 'tradie' commercial customer and younger
private-buy male and female truck customers of the Mid-West and
South. So as to now gain improved unit margins these smaller trucks
(formerly S10 and Ranger) have for some time been produced in the
likes of Thailand and Brazil to create better quality local supply
bases. This then allows for even today a reduced 'Bill of Materials'
(especially regards low-value components) which can be shipped to the
US for local assembly - such as at the Chevrolet plant in Wentzville,
Missouri - in effect a reversal of what was previously outward-bound
CKD (“Complete Knock Down”).
All
the while US auto-makers still gaining good margins on full-sized
trucks and additionally seeking-out engineering synergies between
mid-size and large pick-ups; so creating a virtuous cost-saving
circle from basic input materials to what are deemed value-adding
electronics. (Though the content-loading of various cars vs sales
incentive discounting undermines the basic profit model, even with
reduced cost stepped scale purchasing)
And
of course a new era in pay-relations is well under way with previous
UAW recognition of the necessary labour-rates and employment terms US
players must deploy given global VM competitor strength.
So
the US is seen to be undergoing an economic transformation, as the
country weans itself off of the Federal induced national expansion of
money supply toward a more state and regionally based generation of
value, primarily for domestic but also export consumption.
The
Prophecies of Profit -
Such
insights (across all sectors from Energy to Housing to IT) into how
North America will maintain its corporate profitability are today of
vital importance presently. Since in recent months there has been
much talk of possible US capital market's returned over-exuberance -
as recently showcased by Prof Shiller's CAPE P/E Index. The dangers
of short-term market over-heating was mentioned many months or so ago
by investment-auto-motives, stating the need for a mild correction
before returning to a steady upward trajectory in what are
historically momentis times.
That
proviso given since investment-auto-motives had concerns that an
extended market irrationality and subsequent negative over-reaction
(ie major sell-off) would drastically harm what in reality appears a
substantive rebuilding of corporate America and so the national
economy. The lowered-cost business plan efforts of US automakers a
core economic pillar in that industrial revival.
Valuations
-
As
specifically regards the capital markets attitude toward Detroit's
'Big 3', such a correction was seen with Ford in a very orderly
manner between October and December, and is seemingly yet to arrive
with an aguably over-vitalised GM (unless it can continually beat
expectations), and was partially seen in FIAT-Chrysler over H2 2013,
but largely negated given its expected and now announced complete
integratio.
As
per market valuations, as of 16.01.2014 (or in US-speak 01.16.2014)
their price-earnings ratios respectively stood at:
GM:
16.75
Ford:
11.79
FIAT
(Chrysler): 24.77
Thus
we see a great valuations spread between these presently US-centric
producers, far more explicable in FIAT's case given the still seen
'early-bird' investor sentiment which boosts its p/e rating given its
overall lower corporate profits but in expectation of a better
tomorrow. But is GM truly that much better a company than Ford?
Of
greatest interest here is the effective dissimilarity of GM and Ford, of
course partly explained by GM's greater exposure to China and lesser
debt levels. Yet still such a marked difference presently points to
possibly either Ford being under-valued or GM over-valued; or partly
both.
The
Valuation Dilemma -
This
present “valuation dilemma” has ostensibly been with us since
2009 given the previous lack of true foundations upon which
conservative, fundamentals based valuation metrics are set. But as normality
continues to return so better reasoning can be applied; this
transition itself highlighted over a year ago, with the very
expectations of such as transition adding to market complexity through perceptional behavioural dynamics.
It
is these still firming market perceptions, and the previously
unconventional behaviour of markets - though not all too surprising
during unconventional times using unconventional macro-policies -
which have driven the need for assumed understanding and an effort toward explanation.
Generalistic
Overviews -
One
such is the seemingly ever-present 'bible' of the Shiller Historical
Price-Earnings Index of the Standard and Poor's 500. Recently
re-presented - along with seemingly supportive alternative P/E
historical charts from Goldmas Sachs – it states that the S&P
is presently largely over-priced and so it is to be presumed that a
noted possibly large correction is to be expected, and concerns about
future growth into 2014, especially after the large 54% gain over the
previous 2 years.
But
is that really the case?
Generalisations
rarely provide a true reflection, especially so here, given the
innate complexities of massive-scale capital markets.
Whilst
investment-auto-motives has indeed highlighted the appearance of a
general market overun, seemingly noted in the 'running before
walking' of some valuation expectations, it has also stated on
numerous occaisions that not just today, but throughout 2013, that
generated whole market valuations must 'drilled into' to provide be
far more sectorial and company interpretation.
Improved
Conditions for Frankenstein Markets -
Yet
investment-auto-motives is also very much cogniscent of this still
re-awakening period within western economies, the US being the
furthest forward, so a long run of future value awaiting, but also
weary of the overt valuation generalisations that occur from
simplistic market modelling.
Firstly
the S&P has always been an evolving beast, so whether: the shape
of a specific veteran company, the indice's own constituent companies
or its sector biases, no true 'like for like' historical overview can
be captured; since its very being has altered massively.
Secondly,
arguably ever since the dotcom era, what were old fashioned valuation
disciplines have been markedly altered as western capital markets
seemingly 'bake-in' much more mid and long-term value expectation,
this trend driven by the ever rising crop of venture companies, which
in turn has become intentionally or unintentionally index altering
The
once high double digit, triple digit and even quadruple digit P/E
numbers once reserved for historically proven but temporarily
cyclically un-aligned sectors (ie insurance, commodities etc), have
over the last 20 years been applied to the big promises of new
technologically or sector-specific 'disruptive companies'. Some may
indeed last and prosper, but (as historically seen) many will wither
away as a consequence of either ill-considered business models,
changed environment conditions, competitor actions or early phase
acquisitions. So what may become highly valued but unproven
enterprises fail to live up to their supposeldy long-term based
valuations standing; with to outsiders some having been created
simply as money-making entry and exit ventures for the founders, with
little true regard for the interests of long-view investors. Yet
their very existance changes valuation perceptions and has an impact
on the averaged index.
Thirdly,
the world of finance itself has massively affected western indices.
The massive growth of the financial services sector, powered by IT
and linked to an ever griowing inter-connected global web of physical
and service industries, has helped improve the lives of billions of
people. But it has also become a very complex animal in terms of its
financial instruments and its algoritjmic trading methods, and (as
seen by the financial crisis) has itself a massive influence on the
make-up of western capital markets regards perceived corporate
valuations.
These
aspects have had important influence on the very DNA of western
capital markets, just as newer EM bourses have their own biases and
indiosyncracies, though less complex. Yet unlike true biological DNA
which has a constant strong inter-generational thread, modern markets
should be seen as hybridised, possibly even Frankensteinian, given
how technological, business, financial and trading innovations have
altered the once simple markets' DNA.
So
whilst well intended, any modern attempt today to simplify the whole
market may be unwittingly counter-productive, even if easy to absorb.
The
very fact is that their are still extremes in mass market P/E
valutions means that any averaged indices, even if seemingly well
weighted, becomes less insightful for whatever type of investor.
Whether
a long-term or short term investor, better to look at the big picture
for specifc companies – the bottom-up and top-down approaches of
micro and macro. Necessary whether on-board for the long-haul or
seeking out temporary valuation descrepancies.
However
before doing so regards the US Automotive sector,
investment-auto-motives will take a quick look at the generalised
whole market approach, not so to wholly undermine it, but to set it
in context, so that it may be viewed in the appropriate economic
background.
The
Present Wall St “Exuberance”-
One
of the more academically respected models is the now well established
Shiller CAPE Index: the Cyclically Adjusted Price Earnings Index. As
the name posits, the CAPE is a measure which seeks to smooth -out any
immediate earnings volatility by utilising a measure based upon an
average of the last 10 years worth of corporate earnings.
This
approach is effectively engrained in equities analysis, its origins
in the original stock-picking 'bible' 'Securities Analysis' by
Benjamin Graham and David Dodd, as compiled at the beginning of last
century.
Robert
Shiller's own work has been extended further and applied to over 30
foreign markets worldwide
Presently
the Shiller CAPE model states that the US market sits in what may be
described as historically high territory, somewhere in the price
range of 23/24 x trailing (2013) earnings.
But
this is a backward-looking measure which encoompasses what could be
described as a tough period for corporates. All the more so when
viewed over the prescribed context of the last 5 and 10 years.
American corporations have started to re-invest in what are costly
capital expenditure projects, so as to both be ahead of B2B and B2B
consumptive expansion and indeed prompt such expansion through
investment and re-employment. Set over the relatively poor earnings
of the last 5 years and the much diluted earnings of teh last decade,
it is little surprise that presently, on an averaged P/E of 23 or 24
x ttm (trailing twelve months) that the prices now paid for various
American domestic stocks do indeed stand high.
But
this cannot be viewed as such in the now expanding macro-econiomic
context, it is simply an unflattering measure applied in what is the
apex of an unusual historical period.
To
better set that into context the following reviews P/E rates from
1898 to date throughout the depressionary and recessionary peaks and
troughs.
Depressions
and Rebounds:
1916-20
trough at p/e of 4, followed by exuberant high of 33 prior to 1929
crash
1931-36
trough at p/e of 4 (again), peak at 22
2008
fall from 27 to 12
2009
trough of 12, peak of 17 in 2010
2013
current at p/e of 17
Here
in basic terms we see that in the first half of the 20th
century that p/e measures rated at 4x were seen as low buy
opportunities whilst peaks arrived at 33x and 22x.
Recessions
and Rebounds:
1941-46
trough at p/e of 8, peak of 17
1950-56
trough at p/e 0f 9, breather in 1954, peak of 20 in 1956
1958-67
trough at p/e of 13, climbing to peak of 23 in 1966
1969-73
trough at 15, peak of 19 in 1973
steady
fall to 1983 when p/e troughed at 6
1983-87
trough at p/e of 6, peak of 19
1988-1995
trough of p/e 11, peak of 19
1995-1999
temporary rest at 15, (dotcom induced) peak of 27
2002-2004
trough at 17, peak at 21
2004-2008
rangebound volatile between 16 and 17
Mid
century the best buy opportunities appeared at 8x, 9x and 13x, whilst
late-century they were 6x, 11x and even seen at 15x. The respective
peaks hit at 17x, 20x, 23x mid-century whilst seen again at 19x, 19x,
27x late century.
But
what is also of importance was the range-bound effect of western
bourses between 2004 to 2008 as they remained static (so
demonstrating continued value) even as the EM markets comparitively
surged.
Thus
during the early part of the 21st century a p/e of 16x and 17x was
paid for what appeared comparitively lacklustre but critically
important solid and stable companies versus their more exotic foreign
counterparts. So by historical terms, a relatively high price
consistantly paid equivelent to what had previously been a sell
signal just after WW2, that 16x price seemingly set after it
represented the low in 2002 after the dotcom crash.
Hence
momentary and indeed long-term measures, CAPE or otherwise, are
wholly contextual and must be seen to be so.
Value
is Cyclically, Regionally and Globally Relative -
Without
seeking to under-mine Shiller CAPE – itself useful in its
consitancy – surely a more meaningful ability to assess both the
engines of commercial growth – and so in turn economic growth –
aswell as market interpretation and reaction would prove vitally
useful. Something which incorporates a greater contextual picture.
This
no doubt is a hard task, hence the reliance upon age old models, but
vitally necessary nearly a 100 years on.
Whilst
the 2007/8 crash was very destructive, it also re-set perspection,
investors seeing p/e of 12 as the new value-level re-entry point,
with thereafter 17 appearing 'fair value' given its rangeboundness in
2010/11 assisted by QE, yet also still awaiting the expected
positivity fof fundamental economic traction.
It
must be agreed by all that US stocks look presently "full",
but also recognised that institutional investors will be awaiting for
the US economy to drive revenue, EBITDA and EPS levels and so
draw-down the respective p/e values as the top and bottom lines
respectively increase.
As
stated on previous occaissions by investment-auto-motives, whilst
conservative value measures (as indeed used in 'Coupled Ratios') set
a historical constant, in the first phases of an economic upturn
long-term investors are willing to momentarily paid “over the odds”
recognising inherent value and awaiting the return of corporate
earnings power. The greater the expectation the higher the price
paid.
That
appears to be the case today with the recognition that post 2008
those first stages of said economic rebound have been very, very
drawn-out. Creating both severe societal pain, but also more
beneficially, what may prove to be perhaps the best long-term
investment opportunity for many decades if not centuries, so
promising a new 're-built' era of sustained economic health
constructed upon not only a better balanced economic platform but
also conveying the need for a more pragmatic approach to investing.
The
USA vs the RoW -
The
US Fed realises that it must maintain its off-seting “tapering”
policy, retracting QE support in a measured and balanced manner
relative to the data indicators of returning US growth. But the US
sits in a very different international context to that of the last
century. Whereby the US is a natural investment hub for the wealth of
what are now far richer foreign interests: corporate, governmental
and private. Thus the created wealth and higher liquidity generated
between 1995 and 2010 and held by foreign hands has and will continue
to variously seek investment opportunities and safe-havens.
This
wealth effect on its domestic bourses and city-centre property) was
formerly seen in Japan before its mid 1990s decline, with even after
the onset of economic stagnation, the wealth of the influential Mrs
Watanabe's maintained high domestic P/E levels simply in search of
marginal returns. Added to this is have been the former mega-highs
(30x plus) benchmarks set during the meteoric rise of China.
Hence
even the very notion of “value” has shifted given the broader set
of multi-type investors which now inhabit the investment universe;
albeit their own investment routes presently typically regionally
restricted. But as bourses continue to merge so access improves.
Nevertheless,
here and now their are – at an averaged surface level – real
discrepancies between various Western and many prime EM markets.
A
global comparison of nominal (not CAPE) P/Es follow:
(As
of 13th January 2014)
USA:
19.6x
Canada:
18.6x
Mexico:
21.3x
UK:
14.5x
Ireland
21.6x
France:
18.8x
Germany:
16x
Norway:
13.7x
Netherlands:
17.5x
Switzerland:
19.8x
Spain:
20x
Italy:
20.7x
Poland:
12.1x
Hungary:
16x
Greece:
2.3x
Cyprus
(South): 37.5x
Turkey:
8.4x
Russia:
5.6x
India:
15.1x
Pakistan:
12.9x
Malaysia:
17.2x
Singapore:
12.7x
China:
6.8x
Australia:
18.1x
Argentina:
4.3x
Brazil:
13.4x
Colombia:
14x
[NB
the obvious real anomolie here is Southern Cyprus, which at 37.5x
appears comparitively heavily over-bloated. This probably a reflects
a retained store of wealth by foreign interests, as undoubtedly noted
by Brussels, which will seep back into mainland Greece, Russia and
probably 'invisible' places such as Cuba as it continues to slowly
transform].
However,
beyond the stated measures, the issue of real importance is at which
stage of their respective economic cycles each country and region
sits, the exposure of domestic corporations therein and of course the
performance and structure of their individual businesses.
Though
plainly without such deep analysis, there appear to be “bargain
markets” and no doubt within these “bargain stocks”, across
various EM countries
But
to state again, all is relative.
Western
vs EM Perceptions of 'Basement Value' -
Given
that the financial crisis trough saw an average 'basement value' P/E
rated at 12x (in line with the trough valuations of 1958 and 1988)
just like that mid-century 'basement re-rating', it can be plausibly
argued that in the West that the very notion of low P/E valuation
levels have fundamentally shifted; even though they have appeared in
certain EM markets.
The
noted differential between Russia's 5.6x and China's 6.8x versus
Brazil's 13.4x and India's 15.1x, highlights the prime difference
between what are still effectively narrow commodity and export
dependend economies versus those which have greater balance, both
regards domestic and export consumption and the breadth of commercial
activities.
Recognising
this difference the once previous idea of comparitive BRIC valuations
is redundant. Morer likely the higher valuations given even in lean
times pre-empting the awaited economic rebound.
Presently,
Brazil and India are far more 'valuation aligned' with the likes of
the UK
This
may also be partly affected by EM investor perceptions of what
constitutes a 'bargain value' in notionally advanced countries, with
greater liquidity and less reactionary buying and selling, the
inverse of what was previously seen in EM markets.
Furthermore,
given the EM boom of the 2000s, it seems likely that the managers of
large EM funds (SWFs etc) were ready and waiting to switch from
over-heating domestic and regional EM bourses toward cooled Western
bourses, so providing that 12x floor.
Thus
unlike many of the periods throughout the 20th century,
when 'basements' were rated at mid single digit figures, the new 21st
century western floor was greatly re-rated thanks to the influences
of the post-dotcom pick-up and global fund flows.
Await
the Earnings Catch-Up -
Given
this very broad perspective it appears that if the US and western
economies maintain their respective and gradual economic
improvements, which is the expectation without any major external
shock, then stock prices nearer 20x will dip and those at 15x or so
track sideways in a rangebound manner, that action allowing corporate
revenues, EBITDA and EPS to grow whilst gradually lowering the actual
nominal P/E values.
Of
course during such a 'breather' period those companies which
presently see flagrantly over-extended stock prices will rightly
experience necessary corrections so as to regain re-investment
credibility.
The
US Cross-Sector P/E 'Spread' -
Yet
for the USA, although the CAPE ratio is over 20x and nominal average
about 19x, this high valuation is also a consequence of the greater
Frankenstein nature of the NYSE; and it must be noted that these are
only calculated averages, nothing more.
And
of course different commercial sectors typically see different
investor treatments of different companies within. relative to
different investor types, perceptions and return needs/expectations.
Hence
disparity is seen even amongst the heartland of US consumption, with
the retail giants Wall-Mart and CostCo showing differing valuations:
14.6x vs 25x, though the latter one-fifth the former's MktCap, and
Target Group on 16x, though 20% smaller than CostCo, demonstrating
that smaller size and so expected growth does not automatically bring
higher P/E.
The
Here and Now -
So
the more sophisticated investors mayy feel they have extracted full
short-term value and re-appear as improved corporate data and so
balance sheets draw them back in; as individual stocks themselves
reach price trend floors.
Thereby
providing new overall market impetus in recognition of the US's,
North America's and possibly NAFTA's still broadly under-utilised and
substantial productivity components of cash, commercial facilities
and labour
Such
a temporarily 'sideways' USA outcome will then mean that a portion of
that money seeking better returns will be re-circulated into the UK
and Europe – still at 60% or so of historical norms (if presumably
all stays well); and notably toward specific company opportunies
amongst those best under-valued and healing EM economies.
Whilst
the appearance of sideways trending being seen as a disadvantage to
various investors, logic supports the reasoning that institutional
funds (whose balance sheets are re-boosted from pension contributions
of a revitalised labour-force) will stay closely aligned to Western
bourses, whilst hedge funds etc will seek-out opportunities across
those under-valued BRIC, CIVETS and new 'Pioneer' markets.
This
then sets the scene for continued economic steadiness in the West, no
doubt with specific sector rotation as brokers advise clients to
switch from temporarily over-valued companies to temporarily
under-valued sectors and firms
The
Broad American Auto-Sector -
The
following provides a momentary P/E snap-shot of the various
constituents:
Major
Manufacturers:
GM
: 16.75
Ford
: 11.8
FIAT*
(Chrysler) : 24.8
Whilst
obviously not notionally 'American owned' it does gain much of its
present income from NA and will undoubtedly have a large American
share-holder interest.
European
and Japanese VMs
VW
: 11.29
BMW
: 10.65
Daimler
: 9.51
Renault
: 17
Peugeot
: n/a
Toyota
: 10.5
Honda
: 14.3
Thus
we see that great variation amongst the 'American' firms and amongst
the Triad's auto-producers.
To
aid comparisons, following are those US listed suppliers.
Automotive
Suppliers:
American
Axle : 4.18
BorgWarner
: 21.6
Cooper
Tire : 6.7
Dana
Corp : 105
Delphi
Automotive : 18.66
Eaton
Corp : 22.2
Goodyear
Tire: 16.66 (NASDAQ)
Johnson
Controls : 30
Lear
Corp : 5.79
Magna
International : 13.6
Meritor
Inc : 25.9 (est)
Tenneco
Inc : 21.5
TRW
Automotive Holdings : 9.2
Tower
International : 11 (est)
Visteon
Corporation : 20.5
To
set a yet broader tone, the following firms could be viewed as
medium-term entrants into mass personal mobility sector, so competing
against a portion of the city-car / sub-compact car 'share of mind',
given their multiple variant off-road buggy offerings.
Potential
Entrants* -
Arctic
Cat : 18.55 (NASDAQ)
Polaris
Industries : 27.8
(John)
Deere and Co: 9.8
(*based
on the precept of small buggy-like 'Neighbourhood Vehicles' [or
'NV's'] which have more limited performance and regulatory
boundaries, but seen as an increasingly powerful cost-saving and
eco-alternative to a family's 2nd or 3rd car,
and oft used by Sunbelt pensioners).
Given
the broadened context of US Autos, the inclusion of recent
'disruptive' entrants is obviously required.
“Sector
Disruptive”
Tesla
Motors: 270 (est)
Synopsis
-
Thus
we see a wide P/E difference between the American auto-producers, GM
'riding high', FIAT-Chrysler more highly rated still (well above the
sector norms) awaiting new revenues streams from elsewhere effecting
a reduction in the current P/E premium; and Ford having seen a
'breather' on its rebound.
For
the most part, the Supplier sector has obviously seen fortuitous
stock-price growth aligned to the expansion of the NA vehicle
markets, yet as seen, given more constituents of varying vehicle
systems core competence, there is yet wider P/E variability; their
valuations dependent upon business model strength – the
more 'smokestack' orientated (and so exposed to EM competitors) the
less favoured – along with the obvious factor of balance sheet
strength. As seen with Cooper' s failed Indian acquisition attempt to expand reach and reduce costs, the less favoured forced to try to re-invent themselves; either expectantly (as seen) or more radically, along the lines of Germany's Continental AG, which leaped-up the value-ladder into chassis control systems and travel-tracking instruments.
Of
additional long-term interest are those off-road utility, leisure and
sports vehicles which grew favour in farming communities from
Quad-bikes onward, to become ever more able, powerful and comfortable
alternatives both off and on road. This alongside the growth of
'neighbourhood vehicles' (presently largely EVs). Both sub-sets should merge with both ICE and EV power. The dual
participant of these trends has been Polaris Industries so
under-pinning what presently seems a 'peaky' rating, though based on
an efficient re-branding and on-seller business platform from a
quality source. Arctic Cat and Deere and Co are seen as otherwise
diluted by their less efficient models, respectively offering ATV
associated merchandise and exposed to what has been a trough in
heavy-segment agricultural equipment sales and slack in private and
municipal ground-work sales. Yet in the longer-term, all 3 could
potentially gain new segment 'road-buggy' product sales given what
may be favourable state transport planning policies for lower speed
city traffic.
As regards Tesla, it did indeed absorb the failed Fisker Cars to retain itself as the sole luxury-sports EV, and reports 20,000 sales to date of its original sportscar and later sedan now assembled in what was the ex GM-Toyota NUMMI plant in Fremont, California. However, at was was 6 months ago a built rate of 3-5 days per car relative to a conventional car plant, capacity seems restricted by build process, using five methods of structural fusion versus the fewer in 'designed for manufacture' aluminium bodies such as that at JLR. Though flexi-task robots greatly assist. Tesla has certainly impressively progressed in its product and plant roll-out. But, besides the overtly optimistic stories regards battery-tech performance vs range vs longevity (super-charge vs trickle) greater headwinds are now faced with what will be reduced conventional energy costs within the US (via gas 'fracking' and domestic oil drilling) and little or no federal eco-subsidies, though not needed at present MktCap rates. So now seemingly with 'professionalised' in aluminium industrial technique, Tesla could just as easily sell-off its advanced plant back to GM, or to Ford or FIAT-Chrysler [esp given ;Fre(e)mont connection], (or another) given that arguably its mid-scale 'lightweight body-structure' factory is arguably the real asset; part paid-for by the US population directly and indirectly. Tesla perhaps then able to replay what it has done in the US in another countries offering governmental eco-subsidies. Impressive achievement to date given innate sector caution, but whether really a 21st century alternative power car-company, or 're-play' venture-firm remains unclear. As such, it seems an intentionally designed 'multi-stage rocket'business model, a real enigma, so harder to objectively gauge, as does its present extreme P/E valuation rating.
Thus overall for the US automotive sector, variously interesting multi-point P/E levels, much dependent on company specific
tailwinds and headwinds.
Conclusion
At
low 20sx trailing CAPE earnings and notionally 16x estimated notional
earnings it is recognised by some that shares are near and indeed
well over their average over the last 30 years. Whilst others state
that from an actual time-based measure the average actually stands at
13x forward earnings, so well below some ratings today.
But
it is perhaps far better not to seek out the average, but instead
more historically representative case-study periods. That is to say
the rate of P/E climb during what have been post heavy depression and
heavy recessionary rebounds. This then creates a far more “apples
for apples” approach as opposed to the oft seen “apples for
pears” approach.
Most
of those rational capital markets' participants who have invested in
western stock markets, and especially the Standard and poor's 500,
should well recognise that after the massive fourfold valuations rise
since 2nd March 2009 to date (683 to 1,838) what is of
importance was the nature of that rise. A five year chart shows that
though on a historical basis it seems to mimic the rapid growth of
previous bubble markets, and has surpassed their peaks, it has in
fact been a generally steady rate of growth over those 5 years.
More
over, whilst the climb rate on a 75 year chart appears very similar
to the dotcom boom and subsequent failure and the re-climb between
2003 and 2008 ending in the financial crisis crash, today it appears
that for the most part a necessarily more rational approach has
gained favour. One far more suspicious of possible 'snake-oil' boom
and bust schemes (such as the almost mythical BitCoin).
And
importantly, given that much is based on liquidity and associated
credit, the central banks QE efforts have injected huge amounts of
liquidity into the USA. Thus whereas the financial crisis was born
out of what was effectively CDO based (faked) 'soft-credit, today
commercial and home loans are drawn from what may be described as
'hard-credit'.
So
whilst the market appears on surface inspection to be a similar
dynamic to that of the onerous past, an objective viewpoint states
otherwise.
On
this simple observable assumption it seems rational to presume that
mid and long-term investors will simply wait for corporate earnings
from B2B (now including SME's) and B2C sources to improve on the back
of the continued upturn in the economic cycle.
Yes,
in a manner similar to 2003 onward, but now seemingly largely abhorrent of
irrational speculative excess (though a few supposedly "visionary" companies do appear to stand-out) and at governmental policy-level, overtly aware of self-serving
financial machination with presumably greater checks and balances beneath what appear relaxing strictures.
One which recaptures the very roots of American enterprise and its original 'puritanical pilgrim' societal ideals.
