Archives for posts with tag: CAPE
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Given the increased volatility in markets, I thought I’d share some thoughts on the current state of the market. Note that this isn’t a forecast nor does it constitute advice to buy or sell any securities.

Positives

The STI’s PE10 (data here) is 12.2x which is pretty much the same as it’s PE (12.21x). That translates to an earnings yield above 8% which in my opinion, is pretty attractive.

If you’re wondering how this stacks up the past, the PE10 isn’t dirt-cheap. It was cheaper during the depths of the GFC in early 2009 and also once more in early 2016. However, it is cheaper than it was in 2013- early 2015 and cheaper than during the run up to the GFC in 2006-2007.

Also, 10-year bond yield have fallen really low. The SGS 10-year bond yield is currently 1.735% which means that spreads between the STI and 10-year bond have reached 6.46% which is some of the highest spreads I’ve seen since I’ve started tracking the STI PE10 vs. the SGS 10-year bond yield.

Negatives

From a psychological/technical standpoint, markets are not down in the dumps. The 50-day SMA is still above the 200-day SMA and prices have not fallen all that much (only roughly 14% from its May 2018 peak and 9% from its late April 2019 peak). Also, with the August close, the monthly STI has now closed below the 10 period MA which is Meb Faber’s momentum signal to get out of the market.

Plus, let’s not forget that the Trade War isn’t going anytime soon even though, as of late August, it seems like Xi and Trump are trying to kiss and make up.

Trump faces re-election next year and if he’s playing to win, then it’s likely he’ll find some foreign powers to blame for America’s real or perceived woes. And we know that his go-to guys to blame for America’s woes are those that have huge trade surpluses with the U.S., namely, Mexico and China.

Also, a no-deal Brexit is also looming in October and with Boris Johnson in charge, it’s less likely there will be any sort of deal that can be reached and will tensions between Japan and Korea get worse? And who knows how the situation in Hong Kong will turn out?

Only time will tell.

Overall

I’m near-term negative but long-term positive because geopolitics and economic sentiment is bad but valuations are starting to look attractive. Of course, if you’re a DCA sort of person, then all of the above shouldn’t matter to you.

The Biggest Valuation Spread in 40 Years? (Meb Faber)

A spark of hope for those invested outside the U.S.

Shifting Risks in the Bond Market (A Wealth of Common Sense)

Yield curve flattening. ‘Nuff said.

The Rise of Netflix Competitors Has Pushed Consumers Back Toward Piracy (Vice)

Consumer behaviour is strange, isn’t it? Not really if you’ve studied econ 101. Basically, having to subscribe to other services means more cost for the consumer. Naturally, the consumer will turn to a cheaper (free!) option which is piracy. Content providers and creators can bitch all they want about piracy and the intellectual property rights but it’s their competitive behaviour that’s pushing consumers to the free option.

BBRG: Labor Market Is Doing Fine With Higher Minimum Wages (The Big Picture)

Another one for the Econ folk. Time to shut down the people who have only studied econ 101 and keep saying that a minimum wage will definitely cause an increase in unemployment.

It’s not so simple.

It’s been a terrible week for me. I was pretty much in bed for the first two days of the week and I couldn’t eat much until Thursday. Thankfully, I’m feeling close to a 100% now.

Hope your week ahead won’t be anywhere near as bad as mine was this week.

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The Big Read: Cryptocurrency crash offers industry the reality check it needs (TODAY Online)

Great read on the aftermath (yes, you’ve read it first. I’m calling it an aftermath) of investing in Cryptos with accounts from those who had substantial (relative to probably their own net worth) skin in the game.

Good lessons abound and I wish I had kept better records or accounts of what was happening in ’07, ’08 and ’09. I was only in university then and beginning to start learning about the markets but I remember how some guys were trading warrants and making/losing 5-figure sums in the room that us Honours year students were given to use.

That was in ’07 and of course, we know what came after. I would have liked to remember a little better how I felt about the markets in ’08 and ’09 because the sentiment now in 2018 certainly fits those times better.

Of course, in recent times, we haven’t seen the participation of the masses in any widespread, crazy speculation (apart from a tiny group in crypto) so my question now is: What is the next shoe to fall?

As Singapore’s population ages, I suspect we’ll see this sort of thing start to pop up as well. I mean, we hear of elderly folks being conned of their CPF savings through various means (appealing to their vices, taking advantage of their less-than-once-stellar mental faculties etc.) but I’m waiting to see if it happens at the financial institutions level.

I suspect it’ll come from the financial institutions offering a product that isn’t actually designed to give returns much better than the risk-free rate but with all the “protection” of a bond. That sounds like Structured Products which kind of gave banks a bad rep but if you know of anything new, do let me know. It’s fascinating stuff really.

Russell Napier: Equity Markets and Structural Change (Enterprising Investor)

A plausible sounding narrative for where U.S. markets are headed in the longer term. Not optimistic but if it does happen, it would provide a good buying opportunity.

Could we Model Our Retirement Spending like Endowment Funds? (Investment Moats)

Sharing this not because it’s a new idea to me but I think it could be a paradigm shift for many people.

Most people aim to accumulate a certain sum before they retire and upon retirement, spend down the sum and upon their deathbed, leave the rest for their beneficiaries.

It’s not that I think that’s wrong but I think the pros of acting as if your money should last forever outweigh the idea behind spending it down.

For starters, aiming to have the accumulated sum grow/last forever means greater prudence in spending. It also means greater prudence in investing as it requires a proper plan for investing the money instead of sticking to investments that guarantee the principal at the expense of purchasing power.

The biggest downside is what the growing sum of money is meant to do. If the beneficiaries are too few, you end up with a generation of spoiled heirs who will eventually squander it all.

Updated the STI PE10 stats.

airport bank board business

Photo by Pixabay on Pexels.com

 

As of 1 Dec 2018, the STI closed at 3,117.61 with a PE of 11.53x. That gives it a PE10 of 12.6x or if you prefer, a ten-year average earnings yield of 7.94%. On this basis, markets haven’t been this cheap since early 2017.

In fact, the STI was cheaper just a weak ago which shows us how fast sentiments can change. The STI would have been cheaper still if we go back to late October where it briefly dropped below the 3,000 mark.

Over in U.S markets, November was probably a horrid month for most investors. Major drops in the Dow, S&P, Oil and even Bitcoin marked a month where the only refuge was in cash.

 

 

 

Sorry for the late notice but the PE10 has been updated.

airport bank board business

Photo by Pixabay on Pexels.com

 

Following the selloff in the last week of October, the PE10 reached lows that we haven’t seen since early 2017. At a PE10 of 12.2x, that translates into a 10-year earnings yield of slightly over 8%.

It’s cheap but it certainly isn’t dirt cheap. Dirt cheap would be when the PE10 is hovering around 10x average 10-year earnings. That would mean that the STI would be at levels of around 2500 or so.

Having said that, there’s no guarantee that the STI will fall to those levels. The market has run up a bit since I took the reading so who knows where we’re headed. What I’m confident enough to say is: based on what we’re seeing in the market, we’re certainly close to cheap than expensive.

Updated one day late! (check the stats out here)
But still representative of the overall picture of the markets.

Markets have climbed a little in the last week of September. I’m lucky that I stuck to my plan and committed some capital to the STI ETF a couple weeks back.

Anyway, Q3 is over and we’re heading into Q4. Sentiments are kinda pessimistic around the world with all the trade spats going on but markets don’t seem to care that much.

 

airport bank board business

LOL. I didn’t mean to choose a pic of such an exotic exchange.

 

We’re heading deep into the 3rd quarter of the year. The STI’s been largely directionless while U.S. markets have continued to hit new highs. Nothing surprising here as markets outside of the U.S have been weak since the start of the year. It also reminds me of a post by Ben Carlson on how U.S. markets and World Markets don’t exactly have a one-to-one correlation. In fact, the correlation can sometimes be negative. A good reminder of why we need to be diversified beyond our home markets.

Having said that, it does mean that other markets are cheap relative to the U.S. If that’s the case, then where should you put your money?

I think the answer’s fairly obvious.

Check out the PE10 stats here.

Following a reader’s comments on the STI PE10 data, I’ve decided to make it available for download. If you go to the site, you’ll now notice that I’ve added a “Download Data” button in the ‘Background’ section.

dwnloadData.JPG

Have fun with the PE10 data. It’s something I’ve compiled every month for the last 5-6 (?) years.

There are five pieces of data in the file:

(1) the STI close,
(2) the PE  ratio,
(3) the date,
(4) the implied earnings, and
(5) the average 10-year earnings.

(1), (2) and (3) are self-explanatory. You may find some discrepancies with actual data as there were certain months that I failed to update the data in time and therefore had to extrapolate the data, or I updated a day or two later than I was supposed to. However, for all intents and purposes, it should reflect the PE10 fairly accurately.

(4) and (5) are calculated based on (1) and (2). In order to get an average of the past 10 years’ earnings, I need the current earnings. This is where the “implied earnings” is easily calculated by taking (2) divided by (1). With (4), you can then calculate (5). The PE10 which is not in the file is then simply (1) divided by (5).

Some people may prefer to use an exponential moving average of 10-year earnings or you want to adjust earnings for inflation like Shiller does. Feel free to use the data as long as it’s not for commercial purposes.

If you find anything wrong with it, feel free to let me know.

 

 

In case you haven’t heard about it, I have an STI PE10 site that will track the STI PE10 and generate some simple statistics.

And I’ve updated it! It now displays a chart showing the STI’s PE10 versus its closing price all the way back till 2003.

stiPE10chart

Here’s what you’ll see on the site. Generated the chart using chart.js

STIpe10ScreenCap

It’s not much but I’m proud to say that it works and I made it from scratch (with a lot of dependencies and googling)

 

Finally, I got down to creating a page for the Straits Times Index’s PE10. Right now, it’s very simple. it just displays the latest month’s PE10 as well as the historical average and median values.

I’ve picked up coding for some years now but my progress was and still is, slow. However, it looks like I learned enough python and javascript to create a page where I can share the STI’s PE10. The page will be updated monthly.

What I did is really hacky because:

  1. I have to manually key in the STI closing price and PE.
  2. Run a python script locally to process the latest entry, calculate the PE10 and output to a json file.
  3. Upload the json file to the server for the page to retrieve the data, do some calculations for the average & median, and display it.

At some point, I hope to add a chart to the page so you can track how the PE10 has changed over the years and the subsequent capital gains based on a certain year’s PE10 ratio.

You can check out the page here or from the list of resources on my blog.

If you have any tips on how I can improve the page, please let me know in the comments below.