A CALL FROM THE PAST?

Here’s something interesting that was in one of my Google articles.

[By the way, please forgive me for the variety of indices I use in this blog to make points. I do not have a research house behind me so please condone that I use different ratios and indices to offer a conclusion.]

We hear a lot about Trump and the people and things he is upsetting. He really does seem like a bull in the china [should that be China?] shop but, on the other hand, what he does is critical to the world. America, for all her woes, is the bedrock of the Western world and the Dollar still the pre-eminent currency on the globe.

Juxtaposed to this, is Warren Buffet. In every Press release, he is seemingly infallible in choosing winning industries and their winning shares. From Bitcoin to Gillette razors, he always seems to have a view and his views are revered. And, he’s been very confident in the American economy believing that, despite occasional setbacks, the economy will grow and richly expand. Of course, this view finds reflection in the New York Stock Exchange which at 22283 right now [26 September 2017: 14:53 CAT] and is trading in the highest range in history. Much has been said about the meteoric rise of the NYSE and Trump, whilst he gives it jitters from time to time, so far at least, has not stopped the cork-popping good times.

Before I make the point of this blog by referring to the attached graph, I remember sitting in our Ballito flat in 2008 watching the market go through 10000. It was obviously crashing before my eyes. From 14000 points in October 2007, the Dow Jones Industrial average index dropped to around 6600 by March 2009 – a collapse of unprecedented proportions but for the Great Depression. As a proxy for the NYSE, one can understand how this current market is very exciting for investors.

The question is, will it last? Have a look at the attached graph for a moment……..

 

Tracking from January 1871, the S&P500 rose from 80 points to 260 30 years later and then plunged back to 80 points in 1916 when, after the First World War probably, it collapsed, only to rise to  500 points before the Great Depression of 1931. Per the black line on the graph, it had risen to 2048 before 2006 when it re-corrected to 1020. If the graph continued, it would show the index at 2502 at 10h00 this morning [26 September 2017]. The straight black dotted line shows the rate of growth over the 135 years and it’s impressive.

Have a look at the red line. It records the P/E ratio which is simply the Earnings per Share [EPS] divided by the Share Price. So a share of R43 with an EPS of R1.95 would result in a P/E ratio of 22.05. Essentially, this is telling us that at the current ratio, it would take 22 years to earn the price of the share. Now looking at the graph, the P/E ratio rose spectacularly before the Great 1929-1931 Crash ie from 4 in 1916 to 34 in 1929 – that’s 850% in 13 years. You can see, after its ups and downs, the P/E ratio rose to just under 30 after 2006, probably 2010 when the world was beginning to sense some relief after the Sub-Prime crisis. As at this morning, the P/E ratio is 24.89 against an average of 15.67 and a minimum of 5.31 in December 1917 and a maximum of 123.7 (!) in May 2009. So, the P/E ratio is now trading at 58% above its long-term average.

Finally, the dotted line that skips from pullback to pullback is our focus of attention. It took 45 years for the Great Depression to occur and then about every 30 years for a deep adjustment to occur. The question for the experts now is simply when will the next one occur as, if you look at the volatility of the S&P, it was really jumpy when the Trump ticket was campaigning but in the last few months it has stabilized a little. The jury is really out on whether we will see a correction soon or whether Mr. Buffet is correct.

All this detail to what end? The American market is a huge dipstick to the state of American Corporates and its economy. After the Financial Crisis and at the opening edge of interest rate and FED balance sheet adjustments, it seems Big Business is confident of good growth. There are more compelling articles written about a slowing of P/E expectations but against sustainable growth than what seems to be the pure downside case. In essence, we hope that the growth in Corporate profits will continue albeit at a slower rate of increase.

In my previous blog I suggested that, for various reasons, the current state of the SA property market is a new normal. Please be sure, that’s not because I like it, and it could be Much better, but, because it could be much worse. Just looking at the most recent ooba Origination Overview, volumes of Granted bonds are down but not drastically at -1.3% yoy.

As they say in the Classics: Hou Moed!

Yours in Property.