Are NZ stocks too expensive now?

[King1212]

What do guys think?:mellow:

http://www.nbr.co.nz/article/kingfishs-fisher-says-over-valued-nz-shares-have-no-room-earnings-disappointment-b-192315

[trader_jackson]

I suppose we'll find out this month if some are to expensive... but I believe there are some that are reasonable, if not slightly 'conservative' valuations, and some that are trading at ridiculous valuations

[King1212]

I suppose we'll find out this month if some are to expensive... but I believe there are some that are reasonable, if not slightly 'conservative' valuations, and some that are trading at ridiculous valuations

sample of reasonable valuation and ridiculous valuation stocks please Tj. Thanks:D

[King1212]

sample of reasonable valuation and ridiculous valuation stocks please Tj. Thanks:D


Thanks TJ for your email.

[forest]

Ok, I will give my opinion.

Ridiculous, XRO and WYN.

Reasonable in my mind, but very view people seem to agree with me so don't see this as advise to invest in it.

SAN, 1H16 NP from operations close to $22mil, full year by my calculations should be >$40mil. At present Share Price of $5.62 this gives an P/E of just over 13 for 2016.
This together with a gross dividend yield of over 5% is reasonable in my books. Company has been manages quite badly in the past but to me it seems the new CEO Volker Kuntzsch is getting the company back on track.

[King1212]

Ok, I will give my opinion.

Ridiculous, XRO and WYN.

Reasonable in my mind, but very view people seem to agree with me so don't see this as advise to invest in it.

SAN, 1H16 NP from operations close to $22mil, full year by my calculations should be >$40mil. At present Share Price of $5.62 this gives an P/E of just over 13 for 2016.
This together with a gross dividend yield of over 5% is reasonable in my books. Company has been manages quite badly in the past but to me it seems the new CEO Volker Kuntzsch is getting the company back on track.


Yes sad, WYN lost 3/4 of the value in less than 6 months...anyone thinks they will be back on th track?

[Hectorplains]

BFW, FLI, MOA - are crazy over. The gentailers are starting to look 'fully' priced - I'm still holding two but...

[Fox]

The gentailers are starting to look 'fully' priced - I'm still holding two but...
IMO the Gentailers will remain on a premium price level for the time that interest rates are so low, due to their high yields. They attract typical mum & dad investors looking to put their money into something better than term deposits and with the OCR looking like it will remain relatively low for the foreseeable future, I don't see any reason why such high yielding shares will retreat.

[Beagle]

Interest rates at record lows and headed lower still will underpin the market. PE's looked stretched based on historical averages but when you consider the 10 year risk free rate is circa 3% below historical averages the market is not expensive and pockets of value are there to be found for anyone willing to do the research.

[kizame]

IMO the Gentailers will remain on a premium price level for the time that interest rates are so low, due to their high yields. They attract typical mum & dad investors looking to put their money into something better than term deposits and with the OCR looking like it will remain relatively low for the foreseeable future, I don't see any reason why such high yielding shares will retreat.

Yep the market boyancy comes down to the very low interest rates world wide IMOP, HBL is probably one of, if not the best,value play at the moment.
I don't think typical mums and dads invest directly in the sharemarket in my experience,they would actually be extraordinary mums and dads. Most are way too scared of gambling their funds away.

[Big Blind]

What is the actual definition of a "mum and dad" investor? Obviously not investing as a job, but what other criteria? No debt?

[King1212]

What is the actual definition of a "mum and dad" investor? Obviously not investing as a job, but what other criteria? No debt?


Like me, limited fund:D

[Snow Leopard]

What is the actual definition of a "mum and dad" investor? Obviously not investing as a job, but what other criteria? No debt?

they have children.

Best Wishes
Paper Tiger

[Baa_Baa]

they have children.

Best Wishes
Paper Tiger

So they have debt, or liabilities if you prefer. Fits with the criteria, of mum and dad investors.

[Jantar]

What is the actual definition of a "mum and dad" investor? Obviously not investing as a job, but what other criteria? No debt?
My children have left home, but my wife and I are still in this category. Small investors, The value of my entire portfolio is smaller than some are expecting as dividend from a single stock.

Investing for a better return than the banks can give, and hoping for some capital gains at the same time.

For my purposes most stocks are currently overpriced, but there are still some opportunities out there, and with timing one's buying risk can be reduced. E.g. AIR. Have just bought a few more. Will place a further buy order after the annual result is announced, and a further buy order 2 or 3 days after it is ex div. This should give a reasonable average value to the AIR shares and make me reasonably indifferent to changes in SP.

[Sgt Pepper]

Geneva Finance? Cavalier Carpets?

[Balance]

What is the actual definition of a "mum and dad" investor? Obviously not investing as a job, but what other criteria? No debt?

Often used as a derogatory term in investment banking circles to define naive, unsophisticated, last cab off the rank and sucker 'investors'.

Always used in funds management circles as mugs to be milked for management fees.

[Hoop]

Tried to find the GDP over the same time period but as usual freely available NZ data is hard to find..Easy to find it in US$.. 7.6%pa year compounding but those figures are overstated by the increase in value of the NZ$ and would be a misrepresentation if added to the NZX50 index chart which is based on NZ prices..

So a rough guess is the GDP may (Not sure) follow a similar line to the mid blue line on the chart...Maybe someone on ST can post that GDP or GNP data for us

Also... it would have been nice if I could added another 20 years or so to the chart get a better representation...but again there's a data problem...

So..with the data we have, whats overvalue undervalue or normal..If you assume the midline as a normal value level you will see that the NZ Share Market is hardly ever priced at it's normal value.. a fleeting 3 times in 13 years...Therefore a Share Market operating around it's fundamental (normal) value can be regarded as a myth.

It seems the NZ Share Market alternates every 4 years between various degrees of overvalued and undervalued...if this cyclical event oscillates the same frequency as it has done previously then time is nearly upon us for a reversal..Carmel Fisher is probably on to something...eh?

http://i458.photobucket.com/albums/qq306/Hoop_1/NZX50%2005082016.png (http://s458.photobucket.com/user/Hoop_1/media/NZX50%2005082016.png.html)

[Beagle]

My children have left home, but my wife and I are still in this category. Small investors, The value of my entire portfolio is smaller than some are expecting as dividend from a single stock.

Investing for a better return than the banks can give, and hoping for some capital gains at the same time.

For my purposes most stocks are currently overpriced, but there are still some opportunities out there, and with timing one's buying risk can be reduced. E.g. AIR. Have just bought a few more. Will place a further buy order after the annual result is announced, and a further buy order 2 or 3 days after it is ex div. This should give a reasonable average value to the AIR shares and make me reasonably indifferent to changes in SP.

AIR a good example of a counter intuitive / counter cyclical buy. Not counter cyclical in the classic sense of the term, because buying now is buying at what is recognised as the peak of the cycle, but the market has already smashed them for a six and expects dramatic reductions in future years earning hence the super low PE of only 4. What I've learned before is there's often a lot of money to be made when everyone is on one side of the bet and thinks profits will smashed and sound well managed companies trade on super low multiples. NZR springs to mind in years gone by, when that stock traded on a PE of 4 because everyone thought their earnings would get smashed and yet in the years that followed some serious money was made. On the other hand people buying stocks like AIA on circa 30 times forward earnings might like to consider if the aviation sector they're relying on for most of their earnings growth is cyclical and whether they might get affected by that ? Why one stock would trade on circa 8 times the multiple of another when they potentially both subject to the vagaries of the same industry, well that's something that might be worth pondering., (yes I know much of AIA's revenue is property related but I also know you can buy property stocks on far more attractive multiples than AIA too).

[King1212]

Tried to find the GDP over the same time period but as usual freely available NZ data is hard to find..Easy to find it in US$.. 7.6%pa year compounding but those figures are overstated by the increase in value of the NZ$ and would be a misrepresentation if added to the NZX50 index chart which is based on NZ prices..

So a rough guess is the GDP may (Not sure) follow a similar line to the mid blue line on the chart...Maybe someone on ST can post that GDP or GNP data for us

Also... it would have been nice if I could added another 20 years or so to the chart get a better representation...but again there's a data problem...

So..with the data we have, whats overvalue undervalue or normal..If you assume the midline as a normal value level you will see that the NZ Share Market is hardly ever priced at it's normal value.. a fleeting 3 times in 13 years...Therefore a Share Market operating around it's fundamental (normal) value can be regarded as a myth.

It seems the NZ Share Market alternates every 4 years between various degrees of overvalued and undervalued...if this cyclical event oscillates the same frequency as it has done previously then time is nearly upon us for a reversal..Carmel Fisher is probably on to something...eh?

http://i458.photobucket.com/albums/qq306/Hoop_1/NZX50%2005082016.png (http://s458.photobucket.com/user/Hoop_1/media/NZX50%2005082016.png.html)


so...time to sell all hoop?

[bull....]

some nz shares are cheap, most commentators so called fund gurus don't know what they are talking about. they talk PE valuations etc being high compared to historical norms etc - hello dummies we are not in a environment that you can compare to historical norms because we never been in this environment before.
anyway in this low interest rate environment why cant you have valuation expansion? they must be using historical discount rates hahha hahaha

[Hoop]

so...time to sell all hoop?

No..anyway why would you want to sell while the market keeps being overvalued....It's time to run when the market wakes up and begins to get cheaper

[King1212]

Just recently read CNBC, couple of fund managers called to sell off everything....some of them ask to put everything in gold....just like bloody clown..try to entertain the readers.

http://www.cnbc.com/2016/08/05/equity-sell-off-next-year-as-china-starts-printing-money-says-this-swiss-bank.html

[Beagle]

some nz shares are cheap, most commentators so called fund gurus don't know what they are talking about. they talk PE valuations etc being high compared to historical norms etc - hello dummies we are not in a environment that you can compare to historical norms because we never been in this environment before.
anyway in this low interest rate environment why cant you have valuation expansion? they must be using historical discount rates hahha hahaha

Exactly. Carmel and her so called expert team thought the market was overvalued a year ago LOL. probably explains their lacklustre performance in the last year / years. If they can't understand that PE's are inversely related to interest rates then God help the poor people who invest with them. Little doubt we're going to plumb uncharted waters on the low side with interest rates where they're going so why is it a surprise to so called professional fund managers we're going into uncharted waters with PE expansion ?

[winner69]

Hoop: Tried to find the GDP over the same time period but as usual freely available NZ data is hard to find..E

Try this file mate

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Statistics/Key%20graphs/graphdata.xlsx?la=en

[Raz]

Exactly. Carmel and her so called expert team thought the market was overvalued a year ago LOL. probably explains their lacklustre performance in the last year / years. If they can't understand that PE's are inversely related to interest rates then God help the poor people who invest with them. Little doubt we're going to plumb uncharted waters on the low side with interest rates where they're going so why is it a surprise to so called professional fund managers we're going into uncharted waters with PE expansion ?

Its all relative with world wide QE and historically low interest rates, by any historical measure all my assets are overvalued so....

[Hoop]

Try this file mate

http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Statistics/Key%20graphs/graphdata.xlsx?la=en

Winner it is the CPI data...but its valuable NZ raw data so I've bookmarked it...thanks Mate..

I opened up the file (above) scrolled through it..and found!!! wait for it...Did you know, the last time inflation hovered around zero + or - for any length of time was between 1924 to 1929... I guess the Market Theorists used the same argument to answer why the "over to top" market kept on going up... low to no inflation supports a higher PE Ratio...right?

[winner69]

Hoop - there are several tabs / sheets in that file

Real GDP is there plus lots of other things

Cheers

[winner69]

Winner it is the CPI data...but its valuable NZ raw data so I've bookmarked it...thanks Mate..

I scrolled through it..and found!!! wait for it...Did you know, the last time inflation hovered around zero + or - for any length of time was between 1924 to 1929... I guess the Market Theorists used the same argument to answer why the "over to top" market kept on going up... low to no inflation supports a higher PE Ratio...right?

Stirrer

Maybe Carmel noticed that as well.

Don't spoil the party

[777]

So this is now a slam Carmel thread. I was under the impression this was a forum with adults contributing. Kids now it seems.

[Hoop]

Hoop - there are several tabs / sheets in that file

Real GDP is there plus lots of other things

Cheers

Oh...so there is...Now I feel like a silly stirrer...
Is there a party? ..You better let the AIR people know where it is ;)

[trader_jackson]

Is there a party? ..You better let the AIR people know where it is ;)

The HBL holders may know, although the best part is about to beginning for them...;)

[moka]

This article is about S&P500 not NZX, but the article is interesting as it talks about using a fair yield as a measurement.

http://seekingalpha.com/article/3995633-s-and-p-500-400-bps-can-cause-50-percent-loss

(http://seekingalpha.com/article/3995633-s-and-p-500-400-bps-can-cause-50-percent-loss)

Summary
S&P 500’s earnings yield is going lower and lower, currently at 4%.
Low earnings yield today does not reflect the fact that earnings yield will increase in the future as profits increase.
According to Standard & Poor’s estimates, the S&P 500 could rise by 44% by the end of 2017 if the current earnings yield is maintained.
Changes in the fair yield are a far bigger problem. A 400 bps change can wipe out 50% of the index.
We can solve the fair yield problem by having a long investment horizon.


Conclusion
Investors are not picking up pennies in front of the steamroller today. On the contrary, the future looks very bright given Standard & Poor's earnings forecasts and my positive outlook for the economy. A more real risk is one that is purely valuation related. If the fair yield increases just by 400 bps, the S&P 500 could theoretically drop by 50%.

[h2so4]

Tried to find the GDP over the same time period but as usual freely available NZ data is hard to find..Easy to find it in US$.. 7.6%pa year compounding but those figures are overstated by the increase in value of the NZ$ and would be a misrepresentation if added to the NZX50 index chart which is based on NZ prices..

So a rough guess is the GDP may (Not sure) follow a similar line to the mid blue line on the chart...Maybe someone on ST can post that GDP or GNP data for us

Also... it would have been nice if I could added another 20 years or so to the chart get a better representation...but again there's a data problem...

So..with the data we have, whats overvalue undervalue or normal..If you assume the midline as a normal value level you will see that the NZ Share Market is hardly ever priced at it's normal value.. a fleeting 3 times in 13 years...Therefore a Share Market operating around it's fundamental (normal) value can be regarded as a myth.

It seems the NZ Share Market alternates every 4 years between various degrees of overvalued and undervalued...if this cyclical event oscillates the same frequency as it has done previously then time is nearly upon us for a reversal..Carmel Fisher is probably on to something...eh?

http://i458.photobucket.com/albums/qq306/Hoop_1/NZX50%2005082016.png (http://s458.photobucket.com/user/Hoop_1/media/NZX50%2005082016.png.html)

http://www.tradingeconomics.com/new-zealand/gross-national-product

[winner69]

Interest rates and PE ratios relationships are interesting

I don't have NZ data but have the history for the ASX (Colin Nicholson). Reasonably close to home so might have some relevance - even if only to show if there is any relationship

Chart is Earnings Yield (inverse of the PE) v 10 Year Bond Rates for the ASX All Ords.

Consensus on this thread seems to be that lower interest rates lead to lower earnings yield (ie higher PE ratios)

For the ASX - interest rates have fallen steadily from the early 1980s. The ASX earnings yield followed it down from early 1980's to about 1999 but one would have to say that since 2000 the earnings yield has been pretty consistent around the 6%/7% mark (except for market shops like GFC etc) even though interest rates have continued to fall

I won't come to any conclusions (publicly anyway) - just a picture for you people to digest. And might not even be that relevant to the NZX

(Hoop - secular bull to 1999 / secular bear since - interesting eh)

[King1212]

Pressure on people..

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11688983

[winner69]

Pressure on people..

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11688983

Ulterior motives for these 'warnings' no doubt

It'll be fine - no worries here







(PS - though AIR might disappoint)

[Beagle]

Pressure on people..

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11688983

Ouch for HLG shareholders, with Craig's singling them out for the possibility of a weak result.

[winner69]

Seems astupid article

After all (extract) "Solly said an absence of negative trading updates in the lead-up to the reporting period boded well for investors"

And

"Craigs Investment Partners analysts Frances Sweetman and Roy Davidson said in a research note that earnings expectations for the 2017 financial year were stronger than those for the year just past."

No worries here

[Balance]

Seems astupid article

After all (extract) "Solly said an absence of negative trading updates in the lead-up to the reporting period boded well for investors"

And

"Craigs Investment Partners analysts Frances Sweetman and Roy Davidson said in a research note that earnings expectations for the 2017 financial year were stronger than those for the year just past."

No worries here

The broking houses have been crying wolf about the market being overvalued and time to reweigh exposures - ie. churn and fees and commissions are required by their brokers who cannot make money when investors do not trade.

Guess they will be right one day but currently, it is all about them justifying their recommendations to 'lighten' up on shares.

You will not be a happy chappy if you fiollowed their recommendations and sold AIA at $5.50 and THL at $2.00.

[Beagle]

Interest rates and PE ratios relationships are interesting

I don't have NZ data but have the history for the ASX (Colin Nicholson). Reasonably close to home so might have some relevance - even if only to show if there is any relationship

Chart is Earnings Yield (inverse of the PE) v 10 Year Bond Rates for the ASX All Ords.

Consensus on this thread seems to be that lower interest rates lead to lower earnings yield (ie higher PE ratios)

For the ASX - interest rates have fallen steadily from the early 1980s. The ASX earnings yield followed it down from early 1980's to about 1999 but one would have to say that since 2000 the earnings yield has been pretty consistent around the 6%/7% mark (except for market shops like GFC etc) even though interest rates have continued to fall

I won't come to any conclusions (publicly anyway) - just a picture for you people to digest. And might not even be that relevant to the NZX

(Hoop - secular bull to 1999 / secular bear since - interesting eh)

That chart says it all mate. No surprises there seeing as expected earnings yields bear a direct relationship the risk free rate. Germany and the Swiss selling 10 year bonds at negative interest rates. Expect 10 year N.Z. bonds to track even lower.

[Sgt Pepper]

My best mate has successfully traded nz shares for many years. He has no regard for Sharebrokers and their advice. Judging by the 2016 share competition on this site broking firms are way down the list

[Nasi Goreng]

I think its fair to measure GDP against NZX although the NZX has to be one of the few sharemarkets in the world that does not actually reflect GDP of its country.

Here are a list of top 10 companies in the NZX who will make up most of the market cap in the NZX50. AIA, SPK, FBU, FPH, RYM, CEN, ZEL, MEL, SKC and SKT.

Most of those are known dividend payers which should do better in this environment as investors go for yield. However, the performance of these companies would have a limited effect on GDP (compare to how miners and banks dominate the ASX20). NZ's two biggest components of GDP are dairy and tourism which are hardly represented at all on that list.

When I look at those 10 companies, there are a few that will continue to grow but others look like cash cows with limited earnings growth, the only thing that will push up share price will be lower dividend yields. How low can yields go?

[winner69]

That chart says it all mate. No surprises there seeing as expected earnings yields bear a direct relationship the risk free rate. Germany and the Swiss selling 10 year bonds at negative interest rates. Expect 10 year N.Z. bonds to track even lower.

Maybe a case of seeing what you want to see (said with all due respect)

What i see is 10 year bond yields falling from about 6% at early 2000's to about 2% now ---- but earnings yield still about 6% (and if anything over time trending up). Is Australia though

A respected Sharetrader poster has mentioned to me off line that he feels a lot of money will be lost with this folly over bond proxies - i agree with him

[sb9]

Pressure on people..

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11688983

As usual Herald got some data wrong, THL results are due on 23rd not on 26th as per Herald article.

[BIRMANBOY]

Generally speaking people/firms dispensing financial advisory services are judged on what they get wrong much more than what they get right. This is naturally going to drive behaviour that is geared to not sticking "heads above parapets" and a rather conservative pattern of advice. The good thing is they tend not to lose as much as the average punter.
My best mate has successfully traded nz shares for many years. He has no regard for Sharebrokers and their advice. Judging by the 2016 share competition on this site broking firms are way down the list

[BIRMANBOY]

As to whether NZ stocks are too high. When all the other options and or places to stick excess cash are uncompelling then it would seem that barring a Trumpageddon, NZ stocks are actually a pretty good alternative. IMNSHO

[fungus pudding]

As to whether NZ stocks are too high. When all the other options and or places to stick excess cash are uncompelling then it would seem that barring a Trumpageddon, NZ stocks are actually a pretty good alternative. IMNSHO

I'm going to nominate you for the New Year's honours list for 'Trumpageddon'. Well done. :t_up:

[pierre]

Are NZ stocks too expensive? Well, I don't think BLT is and I also think its SP has potential to double in the next 2-3 years.

You may not agree with my assessment of that company, but what other currently listed NZX stocks do you consider might double in value by mid-2019?

A bientot
Pierre

[fungus pudding]

Are NZ stocks too expensive? Well, I don't think BLT is and I also think its SP has potential to double in the next 2-3 years.

You may not agree with my assessment of that company, but what other currently listed NZX stocks do you consider might double in value by mid-2019?

A bientot
Pierre

That's way off topic; adds nothing to the question 'are NZ stocks overvalued'. There's been a Blis thread running for years as you well know.

[Beagle]

At issue is where do people invest to get a reasonable return on their money ?

As Raz quite rightly said by any historical measure all assets classes are overvalued.

Does one accept 3% on term deposit with one of the major AA- rated banks, or ~ 2% net return on Auckland rental property, both before tax or do some of the REIT's like ARG trading on a PIE fully tax paid basis offering a 5.25% yield make sense for conservative investors? 5.25% for a taxpayer on the top personal tax rate of 33% is a gross yield of 7.83% and of course if one wants to take on more risk there are any number of companies offering higher yields on the NZX.
Disc Own ARG, GMT, AIR, SCL, PGW and other stocks all trading on strong yields and very realistic PE's. This market in my opinion is all about hunting for value :)

[pierre]

That's way off topic; adds nothing to the question 'are NZ stocks overvalued'. There's been a Blis thread running for years as you well know.

Of course I'm well aware of the BLT thread.

However, this thread is about whether stocks are overvalued so I've proposed one that isn't and asked a perfectly legitimate question about others.

No need to respond if you don't have anything positive to add.

[Jantar]

Of course I'm well aware of the BLT thread.

However, this thread is about whether stocks are overvalued so I've proposed one that isn't and asked a perfectly legitimate question about others.

No need to respond if you don't have anything positive to add.
You have proposed one is well overvalued, nit undervalued. The current shareprice is greater than NTA and they are not yet in profit. There is no return on investment here, nor likely to be in the near future.

[fungus pudding]

Of course I'm well aware of the BLT thread.

However, this thread is about whether stocks are overvalued so I've proposed one that isn't and asked a perfectly legitimate question about others.

No need to respond if you don't have anything positive to add.

It seemed to me to be a blatant attempt to push your own barrow - one with a particularly wobbly wheel.

[Balance]

Of course I'm well aware of the BLT thread.

However, this thread is about whether stocks are overvalued so I've proposed one that isn't and asked a perfectly legitimate question about others.

No need to respond if you don't have anything positive to add.

Having a first look at BLT to consider if it is undervalued or overvalued - market cap of $59.8m and latest update is that FY17 NPBT will be >$0.7m.

Call it $1m which means that it is trading on a multiple of 60 times, with the likelihood of a capital raising to fund 'growth.'

Can't see the sp doubling myself in the next year.

Personally i will pick Cavalier over BLT.

[Hoop]

http://www.tradingeconomics.com/new-zealand/gross-national-product

Thanks H2so4...Yep I do use tradingeconomics site often..I couldn't see any GDP NZ$ figures so I assumed the GNP would be the same..ehhh wrong!!...but as you pointed out the GNP does have them..It didn't occur to me at the time to just look up the GNP on an off chance ...Actually the GNP is probably a better measurement for the NZX share index as it includes I think (off the top of my head) the inflow and outflow of money...The GNP chart is in linear form so I might change my chart from log to linear and overlay the GNP chart on top and see if its meanders around the mid SD line..

[pierre]

You have proposed one is well overvalued, nit undervalued. The current shareprice is greater than NTA and they are not yet in profit. There is no return on investment here, nor likely to be in the near future.

Wrong. BLT is now trading profitably and has been for the past two quarters. They have advised the market that profit for the current year will be $700k. Not a fortune - granted - but the company is clearly now on track for better things.

Didn't want to get into a discussion re BLT though. My main point was to ask if anyone thinks there are any other undervalued shares that might double over the next THREE years - not one year.

[Aaron]

No idea whether it is over or undervalued but in theory if interest rates go negative there is no upper limit to asset prices so todays prices might be cheap.

[Balance]

No idea whether it is over or undervalued but in theory if interest rates go negative there is no upper limit to asset prices so todays prices might be cheap.

Not strictly correct as analysts are still using equity risk premium of between 3% to 8% to calculate cost of capital.

[h2so4]

Thanks H2so4...Yep I do use tradingeconomics site often..I couldn't see any GDP NZ$ figures so I assumed the GNP would be the same..ehhh wrong!!...but as you pointed out the GNP does have them..It didn't occur to me at the time to just look up the GNP on an off chance ...Actually the GNP is probably a better measurement for the NZX share index as it includes I think (off the top of my head) the inflow and outflow of money...The GNP chart is in linear form so I might change my chart from log to linear and overlay the GNP chart on top and see if its meanders around the mid SD line..

Why the NZX50? Why not the NZXALL?

[pierre]

It seemed to me to be a blatant attempt to push your own barrow - one with a particularly wobbly wheel.

You're right - my barrow is a bit wobbly. Carrying a 200% gain on a six figure investment is bound to strain any barrow I guess.

[fungus pudding]

You're right - my barrow is a bit wobbly. Carrying a 200% gain on a six figure investment is bound to strain any barrow I guess.

Fair enough. Well done.

[Aaron]

Not strictly correct as analysts are still using equity risk premium of between 3% to 8% to calculate cost of capital.
Good point. Still, falling interest rates and easy money mean higher asset prices when is that trend going to reverse.

[Hoop]

Why the NZX50? Why not the NZXALL?

NZAllcapital is the only one I can make sense with on a chart...and even then the total period only goes back 10 years...The on balance and some money flow indicators don't seem to be working..probably because most of the volume data is missing...so not sure just reliable it all is...
NZall gross chart is worse it doesnt display properly just a 10 year flatish line

[Nasi Goreng]

Good point. Still, falling interest rates and easy money mean higher asset prices when is that trend going to reverse.

The trend will reverse when there is an inflation warning or shock. It could take years for this to play out which means it's a stock pickers market. Growth or yield, take your pick. When things do turn, you do not want to be holding utilities like our power companies, they could actually be a leading indicator for a market sell off.

[peat]

Good point. Still, falling interest rates and easy money mean higher asset prices when is that trend going to reverse.

By traditional methodology NZ stocks are quite expensive.
Low interest rates seem to be one of the pillars to support this.
I wonder though, if the various arguments to support these valuations, are not simply another version of "this time its different". ;)

[Hoop]

Thanks H2so4...Yep I do use tradingeconomics site often..I couldn't see any GDP NZ$ figures so I assumed the GNP would be the same..ehhh wrong!!...but as you pointed out the GNP does have them..It didn't occur to me at the time to just look up the GNP on an off chance ...Actually the GNP is probably a better measurement for the NZX share index as it includes I think (off the top of my head) the inflow and outflow of money...The GNP chart is in linear form so I might change my chart from log to linear and overlay the GNP chart on top and see if its meanders around the mid SD line..

As I suspected the NZ GNP does meander around the NZX50 mid SD(2) channel line..It makes sense that the wealth trend of the Country would be reflected in its Stock Exchange trend..so if this assumption is true..The NZX50 index is extremely overvalued..

Since 2008 GFC the NZ growth rate trend has accelerated faster than its long term trend, however the NZX50 has accelerated at a faster rate, therefore the argument that the share market has entered a "new normal" (this time is different) does not hold water as the NZ economy (GNP) growth trend does not reflect that argument

Conclusion: A logical view would be that the NZX50 will eventually correct to realign itself with the NZ GNP...

As the NZX50 oscillates within its SD(2) channel its not unthinkable to assume a NZX50 correction within the next 2 years could see a bottom as low as ~4300....This level is the extreme minimum scenario and it may or may not reach this level with the next correction...however the NZX50 oscillation shows it is possible..and looking at the where the NZX50 is at the moment its possible to exceed those maximum and minimum boundaries..

Where the NZX50 is at the moment is a statistical postion where markets rarely gets to.... this is an extreme overvalued position.

There seems to be a slight exponential long term trend (both GNP and NZX50), therefore this linear chart will need an updated SD (2) to be drawn at some future point..If a new updated SD channel is drawn in now the NZX50 index line would still be above the top SD boundary, the new SD channel would have a slightly steeper uptrend than the current drawn SD channel on my chart below and if a correction occurred with 2 years the possible bottom would be raised from ~4300 to ~4400..

It has to be noted:
The NZX50 index data has a short history..to be more reliable it should have another 50 years (at least) added to it..
The GNP relationship with the NZ Stock Market may or may not be significantly proven..

http://i458.photobucket.com/albums/qq306/Hoop_1/NZX50%2008082016%20GNPoverlay.png (http://s458.photobucket.com/user/Hoop_1/media/NZX50%2008082016%20GNPoverlay.png.html)

[h2so4]

As I suspected the NZ GNP does meander around the NZX50 mid SD(2) channel line..It makes sense that the wealth trend of the Country would be reflected in its Stock Exchange trend..so if this assumption is true..The NZX50 index is extremely overvalued..

Since 2008 GFC the NZ growth rate trend has accelerated faster than its long term trend, however the NZX50 has accelerated at a faster rate, therefore the argument that the share market has entered a "new normal" (this time is different) does not hold water as the NZ economy (GNP) growth trend does not reflect that argument

Conclusion: A logical view would be that the NZX50 will eventually correct to realign itself with the NZ GNP...

As the NZX50 oscillates within its SD(2) channel its not unthinkable to assume a NZX50 correction within the next 2 years could see a bottom as low as ~4300....This level is the extreme minimum scenario and it may or may not reach this level with the next correction...however the NZX50 oscillation shows it is possible..and looking at the where the NZX50 is at the moment its possible to exceed those maximum and minimum boundaries..

Where the NZX50 is at the moment is a statistical postion where markets rarely gets to.... this is an extreme overvalued position.

There seems to be a slight exponential long term trend (both GNP and NZX50), therefore this linear chart will need an updated SD (2) to be drawn at some future point..If a new updated SD channel is drawn in now the NZX50 index line would still be above the top SD boundary, the new SD channel would have a slightly steeper uptrend than the current drawn SD channel on my chart below and if a correction occurred with 2 years the possible bottom would be raised from ~4300 to ~4400..

It has to be noted:
The NZX50 index data has a short history..to be more reliable it should have another 50 years (at least) added to it..
The GNP relationship with the NZ Stock Market may or may not be significantly proven..

http://i458.photobucket.com/albums/qq306/Hoop_1/NZX50%2008082016%20GNPoverlay.png (http://s458.photobucket.com/user/Hoop_1/media/NZX50%2008082016%20GNPoverlay.png.html)

Think it's only one signal Hoop.
NZX50 could go up more or might track sideways until GNP catches up.
So are you out then?

[BlackPeter]

Absolutely agree that the NZX50 (as any other share index) is currently quite dear. Same is true for any interest bearing facility .... when was the last time in the previous 100 years that you had to pay for buying low risk bonds (negative interest rates)?

What I want to say is - this time it is different, but this does not mean that the stock market is necessarily overvalued. You will need to be a bit more specific. It is quite dear (measured in P/E) compared to the average PE over the recent decades (though not yet extreme). However - compared to interest paying securities are the NZX50 (or any other stock market index) still quite cheap ... and this despite a potentially even lower risk. Some of the low (or no - or negative) interest papers actually might be more risky to default than some of the better companies on the NZX.

Having said that - your charts (and any other measure you can use) clearly shows that we are historically in (or beyond) the upper limits in terms of "dearness". The low interest rates are extreme, and from them clearly flows the higher valuations of the stock markets.

Nobody knows though how long interest rates will stay low, though markets seem to expect a quite long low interest period (otherwise nobody would buy e.g. European treasury bonds bearing less than 1% over 10 years. There is even some European bond with 1% over 30 years .. now this is confidence in a long low interest period! If (or should I say when) interest rates go up again, than the stock market will quite swiftly look quite dear ... and this is when it will move back into (and potentially below) the long term channel.

So - yes, you are right, investors need to be careful watching the markets (and particularly the interest rates). As soon as interest rates go up, stock markets will decline - and if the feds are not careful, they might quite easily create a situation where there is no place to hide for anybody invested.

On the other hand - despite a lot of noise in various chat groups ... Feds are not (that) stupid. I think they know that they need to move very very carefully - and as long as they move the interest rates only very slowly up, the dip of capital markets should be manageable as well.

In a nutshell - yes, I think stock markets are historically quite dear and at some stage they will come back. Problem is - nobody can predict whether this is in a month, a year, in a decade or maybe two - which means that the information that stock markets are currently dear is interesting, but in practical terms not very useful to support the personal investment strategy.

Discl: Currently quite fully invested in the NZX and ASX (but some "iron" reserve in bonds and property funds) - and prioritising companies with a better than average PE;

[Hoop]

Think it's only one signal Hoop.
NZX50 could go up more or might track sideways until GNP catches up.
So are you out then?
If the NZX50 track sideways the GNP will catch it up by begining of 2024....A long time for smart funds having no capital gain...It would be a decade of investors being bored to tears..eh.....Also if that happens it will be a "this time is different" scenario as the NZX50 Oscillation frequency has broken down..

Disc: 50% stocks : 50% cash...increased my stock levels as it is the pre-dividend announcement buy up season = demand increases the share price....

[Balance]

https://www.nzx.com/companies/SDL/announcements/286946

75% increase in EBIT. No worries here about earnings disappointment. 5.5c fully imputed dividend for FY16 - I know someone who loaded up large at between 15c and 45c. Unfortunately not me.

Point being that not all stocks are exposed to NZ GDP or global GDP.

[Hoop]

Absolutely agree that the NZX50 (as any other share index) is currently quite dear. Same is true for any interest bearing facility .... when was the last time in the previous 100 years that you had to pay for buying low risk bonds (negative interest rates)?

What I want to say is - this time it is different, but this does not mean that the stock market is necessarily overvalued. You will need to be a bit more specific. It is quite dear (measured in P/E) compared to the average PE over the recent decades (though not yet extreme). However - compared to interest paying securities are the NZX50 (or any other stock market index) still quite cheap ... and this despite a potentially even lower risk. Some of the low (or no - or negative) interest papers actually might be more risky to default than some of the better companies on the NZX.

Having said that - your charts (and any other measure you can use) clearly shows that we are historically in (or beyond) the upper limits in terms of "dearness". The low interest rates are extreme, and from them clearly flows the higher valuations of the stock markets.

Nobody knows though how long interest rates will stay low, though markets seem to expect a quite long low interest period (otherwise nobody would buy e.g. European treasury bonds bearing less than 1% over 10 years. There is even some European bond with 1% over 30 years .. now this is confidence in a long low interest period! If (or should I say when) interest rates go up again, than the stock market will quite swiftly look quite dear ... and this is when it will move back into (and potentially below) the long term channel.

So - yes, you are right, investors need to be careful watching the markets (and particularly the interest rates). As soon as interest rates go up, stock markets will decline - and if the feds are not careful, they might quite easily create a situation where there is no place to hide for anybody invested.

On the other hand - despite a lot of noise in various chat groups ... Feds are not (that) stupid. I think they know that they need to move very very carefully - and as long as they move the interest rates only very slowly up, the dip of capital markets should be manageable as well.

In a nutshell - yes, I think stock markets are historically quite dear and at some stage they will come back. Problem is - nobody can predict whether this is in a month, a year, in a decade or maybe two - which means that the information that stock markets are currently dear is interesting, but in practical terms not very useful to support the personal investment strategy.

Discl: Currently quite fully invested in the NZX and ASX (but some "iron" reserve in bonds and property funds) - and prioritising companies with a better than average PE;

Careful..in a old market bull market cycle ....during this phase it is sometimes the companies with lower than average PE Ratios that get clobbered the most when a bear event suddenly emerges.
American studies has shown the Inflation sweet spot ~1% sustains the highest PE Ratio (PE10~22%) as a fair value..anything + or - outside this inflation 1% range and the PE Ratio to fair value falls away rapidly...Remember Wall St and NZ Markets are presently operating within this sweet point..The Fundamental fair value view cant improve anymore it's Maxed out, The only factor left to push the market higher under the same conditions is increasing earning or the perception of better earnings in the near future ...Falling interest rates from now on will have lesser impact and falling into the negatives isn't going to help it may create a negative impact on the markets (deflation)...it's all to do with the perception of safety, available money, and value for that money..Markets in the long term are driven by the inflation rate trend ...either up or down from it's sweet spot is negative for the markets...

.......We have arrived at the market's end game....

[Hoop]

https://www.nzx.com/companies/SDL/announcements/286946

75% increase in EBIT. No worries here about earnings disappointment. 5.5c fully imputed dividend for FY16 - I know someone who loaded up large at between 15c and 45c. Unfortunately not me.

Point being that not all stocks are exposed to NZ GDP or global GDP.

Thats true...but remember these quotes..

The outgoing tide tide lowers all boats
The bear isn't fussy on who it mauls..

After 7 years of partying we tend to forget the important basic things..eh..and where we are at cycle-wise...

In the meantime the party is still raging..so you have to be in...Hmmm SDL arrived late to the party...hmmmm Is it factored in?? still below its high point...I didn't load up 2 year ago either:(

[Well Endowed]

Some good discussion, nice to get both sides of the equation.

Personally I'm in the camp that most previous historical levels seem to have been abandoned. I just don't see the world reverting back to these for a long while (if ever). In saying that I can't see it being a nice gradual rise upwards and am expecting there will be a sustained period of volatility soon - just not sure how/or what will cause it. Using the recent Brexit fiasco, the market seemed to want something to react to, and indeed it did over-react.

In terms of value, I'm currently looking to add to my portfolio in industries providing necessities, namely Food and Healthcare as I see these have good upside and hopefully limit my downside in the event of any market turmoil.

[Beagle]

Absolutely agree that the NZX50 (as any other share index) is currently quite dear. Same is true for any interest bearing facility .... when was the last time in the previous 100 years that you had to pay for buying low risk bonds (negative interest rates)?

What I want to say is - this time it is different, but this does not mean that the stock market is necessarily overvalued. You will need to be a bit more specific. It is quite dear (measured in P/E) compared to the average PE over the recent decades (though not yet extreme). However - compared to interest paying securities are the NZX50 (or any other stock market index) still quite cheap ... and this despite a potentially even lower risk. Some of the low (or no - or negative) interest papers actually might be more risky to default than some of the better companies on the NZX.

Having said that - your charts (and any other measure you can use) clearly shows that we are historically in (or beyond) the upper limits in terms of "dearness". The low interest rates are extreme, and from them clearly flows the higher valuations of the stock markets.

Nobody knows though how long interest rates will stay low, though markets seem to expect a quite long low interest period (otherwise nobody would buy e.g. European treasury bonds bearing less than 1% over 10 years. There is even some European bond with 1% over 30 years .. now this is confidence in a long low interest period! If (or should I say when) interest rates go up again, than the stock market will quite swiftly look quite dear ... and this is when it will move back into (and potentially below) the long term channel.

So - yes, you are right, investors need to be careful watching the markets (and particularly the interest rates). As soon as interest rates go up, stock markets will decline - and if the feds are not careful, they might quite easily create a situation where there is no place to hide for anybody invested.

On the other hand - despite a lot of noise in various chat groups ... Feds are not (that) stupid. I think they know that they need to move very very carefully - and as long as they move the interest rates only very slowly up, the dip of capital markets should be manageable as well.

In a nutshell - yes, I think stock markets are historically quite dear and at some stage they will come back. Problem is - nobody can predict whether this is in a month, a year, in a decade or maybe two - which means that the information that stock markets are currently dear is interesting, but in practical terms not very useful to support the personal investment strategy.

Discl: Currently quite fully invested in the NZX and ASX (but some "iron" reserve in bonds and property funds) - and prioritising companies with a better than average PE;

Excellent post. Some need to ask why would some German and Swiss investors invest money in 10 year Govt bonds at negative interest rates if they didn't think inflation was a non issue for as far as the eye can possibly foresee ?

Welcome to the next decade of the lowest interest rates and inflation any of us have ever known. In my view its all about finding safe sustainable yield to whether what looks like an extremely protracted period of ultra low interest rates.

[Snow Leopard]

Essentially the NZX market is currently going up and it is a good thing to be along for the ride.

However I do not own the market I own particular individual stocks and luckily they are generally going up and quicker than the market overall.

If I have some spare coins I spend them on more stocks and generally make even more paper profits.

But I do not actually give a hoot where we stand in an historical context, the future is where we are going (I seem to be saying that a lot at the moment), but accurate prediction is difficult, I know this from experience.

So I am about as happy as a Paper Tiger can be.


There is always risk from being in the market and risk from being out of the market, the balance changes and so does the appropriate strategy.

When the mood of the market appears to me to have genuinely changed and/or as individual stocks start to turn, then I will make any necessary decisions.
As I have always done.

I just hope that I react to changing circumstances at the right time in the right way.

So anything can happen, just make sure you your system is designed to cope with the possibilities and you know what to do.

Best Wishes
Paper Tiger

[Hoop]

Some good discussion, nice to get both sides of the equation.

Personally I'm in the camp that most previous historical levels seem to have been abandoned. I just don't see the world reverting back to these for a long while (if ever). In saying that I can't see it being a nice gradual rise upwards and am expecting there will be a sustained period of volatility soon - just not sure how/or what will cause it. Using the recent Brexit fiasco, the market seemed to want something to react to, and indeed it did over-react.

In terms of value, I'm currently looking to add to my portfolio in industries providing necessities, namely Food and Healthcare as I see these have good upside and hopefully limit my downside in the event of any market turmoil.

I suggest you read

https://images-na.ssl-images-amazon.com/images/I/41%2B8PU7crEL.jpg

[winner69]

I suggest you read

https://images-na.ssl-images-amazon.com/images/I/41%2B8PU7crEL.jpg

Obviously our Reserve Bank Governor hasn't read that book

I think he only reads the stuff ASB, Westpac et al put out - and he falls for it every time

[h2so4]

Careful..in a old market bull market cycle ....during this phase it is sometimes the companies with lower than average PE Ratios that get clobbered the most when a bear event suddenly emerges.
American studies has shown the Inflation sweet spot ~1% sustains the highest PE Ratio (PE10~22%) as a fair value..anything + or - outside this inflation 1% range and the PE Ratio to fair value falls away rapidly...Remember Wall St and NZ Markets are presently operating within this sweet point..The Fundamental fair value view cant improve anymore it's Maxed out, The only factor left to push the market higher under the same conditions is increasing earning or the perception of better earnings in the near future ...Falling interest rates from now on will have lesser impact and falling into the negatives isn't going to help it may create a negative impact on the markets (deflation)...it's all to do with the perception of safety, available money, and value for that money..Markets in the long term are driven by the inflation rate trend ...either up or down from it's sweet spot is negative for the markets...

.......We have arrived at the market's end game....

This time it's not different we have dealt with all those things before. If the fundamental fair value view is maxed out then the market falls but it can still go up or go nowhere. The game has not changed and we are not at the end.

[Hoop]

Obviously our Reserve Bank Governor hasn't read that book

I think he only reads the stuff ASB, Westpac et al put out - and he falls for it every time

I don't think he's read up on the Austrian Economists version of Business Cycle Theory (https://en.wikipedia.org/wiki/Austrian_business_cycle_theory) or he dismisses it as do all the Bank ecomonists.......... strange ..eh;);)...
They called it a Theory not a hypothesis** so what happens if the Austrians are once again proved right.

***
Hypothesis vs. Theory...A hypothesis is either a suggested explanation for an observable phenomenon, or a reasoned prediction of a possible causal correlation among multiple phenomena. In science, a theory is a tested, well-substantiated, unifying explanation for a set of verified, proven factors.

[skid]

Well,just outside the Sumatran jungle my computer crapped out...now in Lake Toba it has suddenly sprung back to life......so in answer to the big question,my reply would be ..Yes,they are overvalued,but its of no importance until the dominos start to fall in our highly managed economies(and how many think this will never happen)...If and when that happens,will we still be thinking which type of investment gives us a few percents better returns? Or its the place to be because other investments are worse(returns)? IMO those measly term deposit and rental returns etc. will start to look very attractive because (hopefully) they will still be there...but not until the dominos start to fall...

Its interesting that the share market is at all time highs but Gold is still up..and lots are buying bonds
(IMO people buy bonds not because they think inflation will stay low..but because they want a SAFE place to put their dosh (if there is such a thing)
disc..sticking with savings ,gold ,and property for the time being

[Hoop]

This time it's not different we have dealt with all those things before. If the fundamental fair value view is maxed out then the market falls but it can still go up or go nowhere. The game has not changed and we are not at the end...

First of all..I agree fully this time is not different It will only become different if Market Theory is disapproved (not even remotely likely).

Your concept regarding the Market End Game is different to mine.. however.. yes agree when the fundamental fair value is maxed out the market can still go up or sideways or down.....

I wrote a paragraph or two in a private post (copied below)

Hi

My thinking of the fundamental fair value and the market end game is to do with Market Physics...In the Markets there are tonnes of variable factors in play at any given moment......As an example..I will keep it simple by using only one, but a very important variable factor..the main driver called inflation ...

The Scenario:..If inflation runs at 10% then the stock market index with a PE10 Ratio of 15 would be fundamentally overvalued but not maxed out as inflation can fall towards the sweet spot (~1% area or 0.5%-1.5% zone)...If inflation is 1% and the market PE10 is 22 it would be deemed as fairly valued even though it is more than PE10 15..but that fundamentally fair value is deemed maxed out because whatever way the inflation goes (up or down) the market at PE22 will become overvalued and a correction risk has dramatically increased..this situation is called the end-game..

Also think of it this way.....It may seem paradoxical to the layman but inflation decreases as the Equity Market enter and rides the Bull market cycle upwards..therefore the PE10 figure has room to move upwards in number and still remain either under-valued or fairly valued .

It's often perceived by many investors (not knowing their Theory) as a bull market rising "wall of worry" period when share prices increase faster than their earnings...but with lowering inflation (and lowering interest rates) the rising PE10 is still within the fundamentally fair value and also not maxed out and there's plenty of room for the share price to move up and stay within the fundamentally fair value zone even when earnings are still slow to respond or temporarily falter...

At the other end of the cycle...... when the economy is over-heated and the Central Banks fear inflation..they attempt to stop it but often fail and so inflation rises and the PE10 figure for fundamental fair value has maxed out and when the market tries to price correct, the PE10 starts falling but it is always seen as fundamentally overvalued ..so the price spirals lower as the market tries to keep fair value ..This results in investor confusion as the investor perceives an irrational market falling within a still booming economy environment ...This can lead to catastrophic consequences as the investor sees this perceived irrationality as an opportunity to accumulate "cheap shares" not realising that the market has reached it's end game...

Hope this explanation helps...

cheers..

(added later)..
Why used PE10.....I used PE10 (CAPE) as it is a smoothing indicator..the usual PE Ratio is far too noisy (volatile) and can indicate unrealistic values

[kiora]

Great thread everyone.In my view,today NZ stocks aren't too expensive when considering the economic conditions today.Since the GFC its been rewarding to be overweight housing,shares etc and underweight many commodities and farming investments.But any given investment class may be over valued when considering the economic conditions in the future.That's why investors like to diversify their portfolio but are underweight or overweight sectors at any one time.Down the track commodities and farming investments have a fair chance of rising in value faster than shares. That's why its nice to have a diversified investment portfolio and adjust the weightings depending on were you see the future investment climate.
This looks interesting.Anyone had a look ?
http://www.goodreturns.co.nz/article/976504513/tool-helps-analyse-portfolios.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Wednesday+1 0+August+2016

[bull....]

some stocks are very cheap and getting cheaper actually as time passes

its to do with the discount rate, if all else remains equal and the risk free rate declines eg like tomorrow when the rbnz drops the interest rates the discount rate changes which actually makes your investment today worth more tomorrow.
In fact considering the rbnz will have to actually keep dropping interest rates even more as inflation keeps heading down this will continue to make the income producing stocks even cheaper today meaning multiple expansion of these stocks is likely ( unless the world implodes financially).
Of course some analysts don't like using todays risk free rate and prefer to use a historical normalised rate which makes a stocks valuation lower and possibly it may look expensive but I prefer to use a today rate.

Actually of this morning sky city result is a good example of a potentially cheap share which shows growth as well as a declining risk free rate which based on these assumptions tomorrow will be actually considerably cheaper today than tomorrow.

[macduffy]

Perhaps this is the biggest reason why shares remain realistically priced. Some shares, that is!

http://www.marcustoday.com.au/webpages/832_education.php?guid=d14c8f7e3afa231984defc3534d 9192d&id=30166

[Hoop]

Perhaps this is the biggest reason why shares remain realistically priced. Some shares, that is!

http://www.marcustoday.com.au/webpages/832_education.php?guid=d14c8f7e3afa231984defc3534d 9192d&id=30166

Marcustoday Quote:..."....The markets had factored in a 68% chance of a rate cut but the market didn’t take it well, the ASX 200 fell 50 points from its high on the day of the RBA announcement. That’s a very short term reaction but it is an interesting one. It seems we have reached an inflection point where lower interest rates don't stimulate elation and spending as the RBA intend, instead they do the opposite, provoke fear and saving. Clearly some things are changing....."

Nothing is really changing..the theories are the same the systems are doing the same thing the variable factors driving the systems are normal (behaving as they should..being variables)..The networks that contain the systems aren't broken...
We would know if things were either broken or changing..there would be lights on in all the important places..after midnight including Sundays...just how it was back in 2008:)

What is happening are the factors reaching their extreme points within their boundaries while other find there sweet spots within their boundaries and their effectiveness either diminish (the end game) or exaggerate with each movement...

As I said in my above post example with the main driver inflation, it has reached its sweet spot any movement + or - will be a negative for the PE Ratio fair value figure...If inflation figure moves out of its sweet spot and the high PE stays the same the PE may move from fair value to over value....

The same for interest rates...I think if they keep going down into the negatives this will not longer help the share market to the same degree..diminishing effect e.g as inflation may turn to deflation...

Referring to Market factors Inflation (sweet spot) is at its end game...Interest rates could be close to its end game..as Australian markets have shown...

[kiora]

Needs a better proof reader. ie 2015 not 2105 but otherwise interesting
http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php
Buffet indicator "While this indicator is a general gauge of market valuation, it it's not useful for short-term market timing, as this overlay with the S&P 500 makes clear."

Also good read
http://finance.yahoo.com/news/stock-market-highs-bonds-yields-000000616.html


http://finance.yahoo.com/news/heres-most-important-chart-world-133700630.html
"And as dynamics in the housing market, namely increasing rents and a lack of supply on the low end of the market, continue to set up higher prices, the bond market — and financial markets more broadly — could be in for an unpleasant surprise"

[King1212]

http://www.nbr.co.nz/article/ocr-cut-expected-morning-ck-192793

Another cut done...

[bull....]

http://www.nbr.co.nz/article/ocr-cut-expected-morning-ck-192793

Another cut done...

and more cuts coming

[h2so4]

http://www.nbr.co.nz/article/ocr-cut-expected-morning-ck-192793

Another cut done...

Well P/E expansion looks set to continue.

[King1212]

It weird, normally official cash rate cut...NZ dollar will be weak but...instead it is getting stronger!!!

[sb9]

It weird, normally official cash rate cut...NZ dollar will be weak but...instead it is getting stronger!!!

You gotta feel for Mr Wheeler, he wants the dollar to be lower and cuts OCR and bingo it shoots up straight away.

I guess market was expecting an indication of more cuts instead there is likely to be only one more...hence the currency reaction!!!

[Beagle]

Widespread rumours of 50 bps cut so with that not happening....

Market valuation's have to be considered in the context of record low interest rates and they're going a lot lower yet. Are further cuts all the way down to 1% possible ?

[sb9]

Widespread rumours of 50 bps cut so with that not happening....

Market valuation's have to be considered in the context of record low interest rates and they're going a lot lower yet. Are further cuts all the way down to 1% possible ?

I think market priced in a 20% chance of cutting by 50 points. As that's not the case, could be the shorters covering their positions which spiked the dollar.

[bull....]

It weird, normally official cash rate cut...NZ dollar will be weak but...instead it is getting stronger!!!

blame the banks they increased deposit rates slightly makes nzd now more attractive, ocr cuts irrelevant if banks doing this to protect there profits

[Hoop]

Well P/E expansion looks set to continue.
Yeah..in theory
However Mr Wheeler did not address the inverted nature of the market .With 1,2,3 yr swaps still below the OCR2.0% ..I will assume nothing much has changed...ANZ has dropped a token 0.05%.John Key will be pissed off..the market may react unfavourably today...let see at 10.00am

[Hoop]

It weird, normally official cash rate cut...NZ dollar will be weak but...instead it is getting stronger!!!

Not weird.. the market is rational and functioning correctly..
The RB has been too slow in correcting..By waiting to the 11th August it now needed a 0.5% to 1.75% to correct...RB obviously felt that big drop was a bridge too far..

[h2so4]

Banks operate on margin. Not protecting their profits more likely competing for depositors.

[bull....]

by not passing on all the ocr cut banks make more margin and they have increased deposit rates to get more deposits to lend out on housing. higher deposit rates increase attractiveness for offshore people to park money in a term deposit putting upward pressure on the dollar.

banks can spin all they like its all about profit for them

actually the banks made it easy to make money on this ocr decision because they told us in advance what they were gonna do - nz dollar up was a easy punt

[Raz]

The banks need it to cover off the dairy sector so record profits can continue! Good times to be a bank shareholder.

[Hoop]

The banks need it to cover off the dairy sector so record profits can continue! Good times to be a bank shareholder.
Not this morning for ANZ shareholders down -0.7% v Nzx50 down -0.1%

[Raz]

Not this morning for ANZ shareholders down -0.7% v Nzx50 down -0.1%

That is just short term market reaction..they need the margin..that is reality.

[Raz]

Not weird.. the market is rational and functioning correctly..
The RB has been too slow in correcting..By waiting to the 11th August it now needed a 0.5% to 1.75% to correct...RB obviously felt that big drop was a bridge too far..

Not at all, Government economic and other policy need to change as well, he did the cut to be seen to do something yet he is placing it back on Government policy..which is the only effective option...

[Hoop]

Back to harping on about this inverted yield curve thing with it relationship and effect on Equity Markets...Basically speaking (without filling up pages on ST) an inverted yield curve puts negative pressure on Equity Markets...At the moment in NZ we have a partially inverted yield curve...
If you want more complex in depth info...google..
...otherwise...
This is an easy read outlining the basics (http://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp)

[winner69]

I think Wheeler doesn't even have a plan

Not a coherent and consistent one anyway

[Whipmoney]

Not weird.. the market is rational and functioning correctly..
The RB has been too slow in correcting..By waiting to the 11th August it now needed a 0.5% to 1.75% to correct...RB obviously felt that big drop was a bridge too far..

From everything I can see the market appears to be fundamentally broken. The central banks have run their liquidity programmes for far too long and have failed to formulate an endgame, and as a result we're now seeing the formulation of the biggest asset bubble in history.

You may deem the market "rationale" in terms of a mechanism however it's participants (people) certainly are not and are subject to certain cognitive biases which generally lead to self-reinforcing behaviour.

The central banks have played a long game of pumping cheap debt or "liquidity" into the market to promote consumption thereby fuelling aggregate demand. To their dismay they are losing the battle against deflationary forces and the more they try to address structural imbalances through liquidity generation, the bigger the problem they are creating for themselves. Most of this liquidity is shifting into complex financial and other unproductive assets and not into productive real investment (plant & machinery), or investment in people (wage growth).

As a result we are seeing an even greater structural imbalance (even greater leverage against assets that are appreciating in value but which are providing diminishing real returns).

The only question is how long can the game play out for? Never in the history of man has the global economy leveraged so much against its own future.

Take China for example, the country now has a Total Debt to GDP ratio of >250% and there are reports out there that the true balance of their non-performing loans (bad debt) is 15-19% of all loans outstanding, which if were to technically default, would account for 37-50% of their Total GDP. Given that contagion of the Chinese debt bubble has spread to other markets (NZ, Canada, US, Australia to name a few) and created asset bubbles in these respective markets you have to ask: at what point did this become rationale and has the "new normal" gone on so long that people have started forgetting what reality looks like?

[bull....]

if central banks were not doing this dear I say you would be queing for food stamps, not to say your end game wont end there anyway

[Hoop]

Not at all, Government economic and other policy need to change as well, he did the cut to be seen to do something yet he is placing it back on Government policy..which is the only effective option...

The Reserve Bank Act 1989 (https://en.wikipedia.org/wiki/Reserve_Bank_of_New_Zealand) essentially removed political fiddling (a la Muldoonism)..Govt policy in areas of finance (via Labour Greens National) are no longer potent..

The Reserve Bank Act says it 100% owned by the Govt, but it is not a Government department...It is independently run...this has been shown recently with John Keys attitude (frustration) towards the RB slow motion behaviour to tackle issues.. re: property market.
Don't let the Political spin from any party fool you...

[winner69]

if central banks were not doing this dear I say you would be queing for food stamps, not to say your end game wont end there anyway

That's why I put of effort into the vegie garden these days and become mates who have a bit of land to have a few animals

[Ace]

The central banks have played a long game of pumping cheap debt or "liquidity" into the market to promote consumption thereby fuelling aggregate demand. To their dismay they are losing the battle against deflationary forces and the more they try to address structural imbalances through liquidity generation, the bigger the problem they are creating for themselves. Most of this liquidity is shifting into complex financial and other unproductive assets and not into productive real investment (plant & machinery), or investment in people (wage growth). ......
The only question is how long can the game play out for? Never in the history of man has the global economy leveraged so much against its own future.


I read a good analogy a while ago about the state of our global financial markets. It was likened to a car driving on a straight road in the rain at night. We've got our foot hard on the accelerator, making quick progress - and although we can't see, we know the road is straight. And as long as we keep our foot on the pedal, we're happy with the progress until an animal jumps onto the road, or our engine breaks down and we crash - but despite the risks of a traumatic event, we're far more afraid of the consequences of easing off the accelerator.

[Raz]

The Reserve Bank Act 1989 (https://en.wikipedia.org/wiki/Reserve_Bank_of_New_Zealand) essentially removed political fiddling (a la Muldoonism)..Govt policy in areas of finance (via Labour Greens National) are no longer potent..

The Reserve Bank Act says it 100% owned by the Govt, but it is not a Government department...It is independently run...this has been shown recently with John Keys attitude (frustration) towards the RB slow motion behaviour to tackle issues.. re: property market.
Don't let the Political spin from any party fool you...

Read a little more and ensure your not the one fooled. There are many additional factors to the property market (as an example) than just financial stability policy and the ocr which the RB has legislation to control. Who controls the ability to change the other factors..the government of the day. Same deal with exchange rates...

[Raz]

From everything I can see the market appears to be fundamentally broken. The central banks have run their liquidity programmes for far too long and have failed to formulate an endgame, and as a result we're now seeing the formulation of the biggest asset bubble in history.

You may deem the market "rationale" in terms of a mechanism however it's participants (people) certainly are not and are subject to certain cognitive biases which generally lead to self-reinforcing behaviour.

The central banks have played a long game of pumping cheap debt or "liquidity" into the market to promote consumption thereby fuelling aggregate demand. To their dismay they are losing the battle against deflationary forces and the more they try to address structural imbalances through liquidity generation, the bigger the problem they are creating for themselves. Most of this liquidity is shifting into complex financial and other unproductive assets and not into productive real investment (plant & machinery), or investment in people (wage growth).

As a result we are seeing an even greater structural imbalance (even greater leverage against assets that are appreciating in value but which are providing diminishing real returns).

The only question is how long can the game play out for? Never in the history of man has the global economy leveraged so much against its own future.

Take China for example, the country now has a Total Debt to GDP ratio of >250% and there are reports out there that the true balance of their non-performing loans (bad debt) is 15-19% of all loans outstanding, which if were to technically default, would account for 37-50% of their Total GDP. Given that contagion of the Chinese debt bubble has spread to other markets (NZ, Canada, US, Australia to name a few) and created asset bubbles in these respective markets you have to ask: at what point did this become rationale and has the "new normal" gone on so long that people have started forgetting what reality looks like?

well said, Governments should stand up and act...

[macduffy]

I think Wheeler doesn't even have a plan

Not a coherent and consistent one anyway

It's the only tune that today's central banks know. Lower interest; negative interest rates; "quantitative easing". Not entirely their own fault as governments avoid taking hard fiscal decisions.

[Hoop]

People on this thread seem to have a different concept about the "end game" scenario than me..

The market end game occurs when all the factors within the market's system are operating in perfect sync to produce the ultimate maximum performance possible within that Market's system set limits..

That is what we have today or close to it regarding the Equity Market...The Wall St machine is still runningstrongly and it is at PE10 27 ....it's tuned to perfection as it has not blown up..Commentators remark that above PE10 25 is crash area...20 years ago the Wall St machine blow up when it hit PE10 22...because within the system the inflation factor limit was set lower (high inflation)..

I'm not sure how high performance the NZ Equity Market engine is and where it's PE10 crash area is ..but it is running at around 21 as of end June 2016...Is this overvalued? ..yes but not as overvalued as Sweden which has a lower CAPE 18...Why because the factors within the NZ system are more in sync and producing a better performance Equity Market machine.. however when you look at the Denmarks 36.6 figure you say OMG its going to crash...by not crashing by now signifies that system (engine is running at peak performance..and that engine is probably superior to most other Equity engines operating at the moment...Is it at its end game (peak performance) logic would say yes...but if Denmarks 36.6 isn't at its end game than 36.6 could be considered nearer fundamentally fair value However star Capitals says it is at its end game as it has rated it severly overvalued....and as these high PE engines keep running year after year you can now see the uneducated Media labeling the respected Guru's thoughout the world as "Doom Merchants" or "Permabears"...

At the extreme limits of performance..all it takes is a small change (air from a butterfly wings) in a variable factor to throw a perfectly timed maximum performing engine into disarray..

Inefficient engines have wide scope for their factors help to improve the systems performance..hence undervalued..Whether their environment (other interactive systems e.g Goverment, cultural , business etc) which control these factors to some extent allows those factors to improve is another story...


The main point is as Star Capital points out..over the long term undervalued markets perform better than overvalued markets..

Fundamental Valuation Ratios in International Markets as of 30th June 2016..Nz is half way (21st/40) not undervalued not overvalued..The map is interactive have a play with the sliders (http://www.starcapital.de/research/stockmarketvaluation)

[King1212]

One thing that I Am going to do at the current market....buy on fear sell on greed...no emotional attached to the stock anymore..book in the profit ...what do you thinks guys...

SKC posted a good result, good dividend..share got hammered....STU posted decreased revenue and profit..share up more than 5%... What is going on....:eek2:

we are now at 7 years of bull like many gurus said....so no one knows what will happen anytime soon...

[macduffy]

One thing that I Am going to do at the current market....buy on fear sell on greed...no emotional attached to the stock anymore..book in the profit ...what do you thinks guys...


All good stuff, King, but easier said than done!

As for SKC and STU, markets react to more than just the raw profit numbers e.g. What were the expectations for those stocks? What was said about prospects for the coming year? What do economic prospects look like for the particular industries/sectors? How about the state of the market on the day? Optimistic (up) or a down day? etc.

[Leftfield]

Well said Hoop. A very useful post (#114) and the link to the Global Market Valuation is very helpful. Thank you! :t_up:

IMHO while overall market valuations are very important in judging ones overall cash/equity (or risk) ratios, one still needs to keep an eye on individual stocks that have the potential to grow at above the average market rates.

IMO in the current NZ market, for those biased to capital growth rather than dividend yields, stocks such as ATM, SML, BTL, PAY, TIL, THL (and others) have the potential to continue to out-perform, and have even less of a 'risk' profile than the total market.

[Bobdn]

My net worth has been increasing nicely as of late. A lot of this is down to companies like GNE which, even though it has appreciated recently, still has a gross dividend yield of 9.5%. GNE doesn't seem expensive to me in the context of our very low interest rates. I wonder what the cold snap will do to the balance sheet?

[Hoop]

My net worth has been increasing nicely as of late. A lot of this is down to companies like GNE which, even though it has appreciated recently, still has a gross dividend yield of 9.5%. GNE doesn't seem expensive to me in the context of our very low interest rates. I wonder what the cold snap will do to the balance sheet?

Hmmm..GNE up ~30% since this time last year....and the Power companies now have PE's around the 30's* (GNE 31.2) using last reported earnings.......Looks very expensive to me when they are not classed as high growth stocks...* PE raised due to high asset depreciation effect

For:- as I said in my earlier posts ...when inflation is low PE fair value is raised.....also in the mix are low interest rates in alternative markets compared with high sustainable (?) dividend yields in these power stocks........Against:- Power companies are low growth companies...

So.... are power companies e.g GNE a fair value buy at PE 31.2 ?

[kizame]

Well said Hoop. A very useful post (#114) and the link to the Global Market Valuation is very helpful. Thank you! :t_up:

IMHO while overall market valuations are very important in judging ones overall cash/equity (or risk) ratios, one still needs to keep an eye on individual stocks that have the potential to grow at above the average market rates.

IMO in the current NZ market, for those biased to capital growth rather than dividend yields, stocks such as ATM, SML, BTL, PAY, TIL, THL (and others) have the potential to continue to out-perform, and have even less of a 'risk' profile than the total market.

In what I have seen in the past,the market,when it comes to correction time,and that is what everyone is thinking about here I think,doesn't give a damn about the growth potential of those stocks you have mentioned. I own some of those,and I will be out when things turn either individually or with the market as a whole.
In my simplistic view on things,the market needs a catalyst to correct,this imop will be a banking crisis in europe,or as interest rates increase,as historically low interest rates are the driving force behind this prolonged rise in stock markets,or more likely imop just after the elections in the US.
Time will certainly tell,and I am not as well informed as some on here are,but it will be interesting to see what triggers a downturn.
But it is interesting to note,that the US market (dow Jones Index) has come out of a prolonged consolidation period,and is now tentatively moving up,pretty bullish sign. For now my decisions are made by what I see and not what I hear via media.
When everyone is talking about a crash or correction you can bet it won't happen,wait for the complacency.

[Bobdn]

Hmmm..GNE up ~30% since this time last year....and the Power companies now have PE's around the 30's* (GNE 31.2) using last reported earnings.......Looks very expensive to me when they are not classed as high growth stocks...* PE raised due to high asset depreciation effect

For:- as I said in my earlier posts ...when inflation is low PE fair value is raised.....also in the mix are low interest rates in alternative markets compared with high sustainable (?) dividend yields in these power stocks........Against:- Power companies are low growth companies...

So.... are power companies e.g GNE a fair value buy at PE 31.2 ?

Doesn't Genesis have a good deal of free cash flow (I had to look up what that meant: http://www.investopedia.com/terms/f/freecashflow.asp) which is why is can pay out such good dividends? Does that mean that a high PE is not such a big deal? I don't know, just wondering. A P/E of 31 seems step for sure.

Edit:

Just starting to look at free cash flow vs P/E as an indicator of company health, looks like an interesting topic.

http://www.investopedia.com/articles/fundamental-analysis/09/free-cash-flow-yield.asp

[macduffy]

As Hoop "hinted" in his latest post, P/E's aren't a particularly good barometer to apply to power gentailers owing to the accounting rules around depreciation of their generating assets. Free cash flow is a better indicator IMO.

[bull....]

http://www.reuters.com/article/us-usa-stocks-valuation-idUSKCN10U1ZY

on pe ratios and stock valuations in the current market

[Biscuit]

http://www.reuters.com/article/us-usa-stocks-valuation-idUSKCN10U1ZY

on pe ratios and stock valuations in the current market

Not a great article. A critical issue when comparing bonds and shares is: where do you think interest rates are heading, not what is the current interest rate. Bonds go up in value as interest rates fall so can still be comparatively good investments even when rates are low.

[Baa_Baa]

Beware the disbelief rally, today's NZX market said "I don't believe the relief rally in the US". If the saying about noobs open the market and Pro's close the market is true, that might suggest 'it's time to take extraordinary profits off the table' ... NZX closing down on yesterdays lows, in spite of the US relief rally, says caution. Forex disbelieves as well today, Kiwi down on USD. Be alert.

[Snow Leopard]

Beware the disbelief rally, today's NZX market said "I don't believe the relief rally in the US". If the saying about noobs open the market and Pro's close the market is true, that might suggest 'it's time to take extraordinary profits off the table' ... NZX closing down on yesterdays lows, in spite of the US relief rally, says caution. Forex disbelieves as well today, Kiwi down on USD. Be alert.

Actually you believe the NZX market said...

Me, I made a gain of 0.00637% on my NZX investment portfolio today and I believe the market said "you can buy youself a beer".

Best Wishes
Paper Tiger

[Baa_Baa]

Actually you believe the NZX market said...

Me, I made a gain of 0.00637% on my NZX investment portfolio today and I believe the market said "you can buy youself a beer".

Best Wishes
Paper Tiger

Don't be a "know it all", talking in the first person .. I don't believe anything of the sort, the market is not religion nor is it what 'you' own, just putting it out there for people to consider. Try talking to the hypothesis for a change, rather than the commenter.

[Snow Leopard]

Don't be a "know it all", talking in the first person .. I don't believe anything of the sort, the market is not religion nor is it what 'you' own, just putting it out there for people to consider. Try talking to the hypothesis for a change, rather than the commenter.

The Paper Tiger wonders why you would write 'today's NZX market said "I don't believe the relief rally in the USA" ' if you do not believe anything of the sort.

The Paper Tiger believes you are grumpy.

Best Wishes
The Paper Tiger

[Valuegrowth]

How about separating winning individual stocks which are trading great discount to the market?