0958 [Dow Jones] RBA unlikely to loosen tightening bias in response to Fed's cut in discount rate last week, National Australia Bank chief economist Rob Henderson says. NAB has not changed outlook for Australian interest rates, expects RBA to hold rates at 6.50% until end of 2008. Adds outlook for global growth likely to remain strong even if Fed cuts official cash rate.(SRH)
Read somewhere that Wednesday is the last day to get in redemption (withdrawl) notices to hedge funds for the current quarter. If there is a mass of them will it lead to the funds selling down more marketable assets ( shares, gold, oil, metals etc) to cover the withdrawls/calls???.. Possibly an interesting week..
Cheers
..........Kauri
Two days before the Federal Reserve stunned markets with a cut in the Discount Rate, governor William Poole said that nothing short of "calamity" would cause the bank to make an unscheduled change in policy. So do we now face calamity, or was Mr Poole being flippant?
Read somewhere that Wednesday is the last day to get in redemption (withdrawl) notices to hedge funds for the current quarter. If there is a mass of them will it lead to the funds selling down more marketable assets ( shares, gold, oil, metals etc) to cover the withdrawls/calls???.. Possibly an interesting week..
Cheers
..........Kauri
most of them are done on the 15th, so it was last wednesday.
[/FONT][FONT=Verdana, Arial]Last week saw extreme volatility on the markets as the central banks fought to stave off a collapse in the financial markets in response to the ongoing credit crunch.[/FONT]
[FONT=Verdana, Arial]On Friday the battle was temporarily won by the Central Banks with the US Feds decision to effectively cut interest rates by 0.5% on the discount rate, which included the unprecedented step of changing the financing terms from overnight to 30 days.[/FONT]
[FONT=Verdana, Arial]However two key elements remain -[/FONT]
[FONT=Verdana, Arial]1. That the amount of bad debts is unknown due to the fact that many of the deals were off the exchanges. Derivatives trades on parcels of debt on margin between banks and hedge funds. This means that even though US Sub primes may only be valued at $100 billion, the actual amount of bonds and derivatives contracts affected by sub primes are in excess of $1 trillion, and may even be as high as $3 trillion, hence the panic. [/FONT]
[FONT=Verdana, Arial]2. That there will be more bad news on the US housing sub prime front as Adjustable Rate Mortgages (ARMs) reset at higher rates at ever higher numbers during the next 9 months. This is termed as Arm-ageddon!. The only savior for the impact of further credit crunches is deep interest rate cuts.[/FONT]
[FONT=Verdana, Arial]Therefore despite Fridays rally, and undoubtedly many stocks look cheap after recent plunges. The market is unable to price the risk of all these bond packages as the instruments have become illiquid, stock valuations therefore in the financial sector at least are expected to change drastically from cheap to expensive 'if' the worst case scenario is observed. Though companies in sectors such as Oil, Gas and Mining look appealing for long-term investments, so there are bargains out there.[/FONT]
[FONT=Verdana, Arial]Additionally, volatility is not going to go away and we can expect many more days of the indices moving by more than 3% in either direction.
Acquisitive QBE lifts 56pc for half
August 20, 2007
QBE Insurance has posted a 56 per cent lift in first half earnings and says it is looking a making further acquisitions.
It has also forecast its insurance profit to grow by 18.5 per cent to 20 per cent for the full year.
QBE's first half net profit was $921 million, up 56 per cent on the same period last year.
QBE upgraded its full year insurance profit forecast to 18.5 per cent to 20.0 per cent of net earned premium, subject to large risk and catastrophe claims not exceeding the substantial allowances in its business plans.
The previous insurance profit target was 17.5 per cent to 18.5 per cent.
"The significant increase in net profit and positive outlook for the rest of the year reflects the constant focus the QBE team has on all the key drivers that determine profitability in the insurance business," group chief executive Frank O'Halloran said.
Still trapped in the past I see kennas.
Now, to the issue of P/E ratios based on forward operating earnings. As noted above, it's clear that forward operating earnings are generally much higher than the record level for trailing net earnings to-date, and of course, record earnings are always equal to or higher than raw trailing earnings.
Investors are used to the idea that “normal” P/E ratios are typically in the range of 14 to 16. But as Cliff Asness of AQR has repeatedly stressed, those norms are based on raw trailing earnings. If you calculate P/E ratios based on earnings figures that are higher, you clearly obtain lower P/E ratios.
As it happens, the long-term historical norm for the P/E ratio based on forward operating earnings would be about 12.
It gets worse. Currently, profit margins are at the highest level in history, which further reduces the P/E multiple we observe. If investors wish to use that observed P/E ratio as their standard of value without normalizing for profit margins, they should be aware that they are implicitly assuming that profit margins will remain at current levels indefinitely.
That assumption is hard to support. Historically, profit margins have been highly cyclical. But it's important to understand the argument here. I am not arguing that stocks are vulnerable because profit margins are going to come down, so earnings are going to come down, so stocks are going to follow earnings lower. No. There is virtually no correlation between year-over-year movements in earnings and year-over-year movements in stock prices. The argument isn't about the near term direction of earnings.
Rather, the argument is about the long-term valuation of stocks. If an investor is going to use the current level of earnings to determine the reasonable price to pay for a long-term asset, it had better be true that those earnings represent a normal and sustainable level of profit. You wouldn't buy a lemonade stand by extrapolating the profits it earns in August.
The following chart presents the ratio of forward operating earnings to S&P 500 revenues (net profit margins are even more volatile).
You'll notice that prior to 1995, there were only a few instances when operating profit margins exceeded 8%. At those points, prior to the late-1990's bubble, the forward operating P/E for the S&P 500 averaged just 8. That's not a typo.
Investors appear eager to “scoop up” so-called “bargains” on the belief that stocks are “cheap relative to bonds.” All of this is predicated on the belief that profit margins will remain at record highs, that the Fed Model is correct, and that P/E ratios based on extremely elevated measures of earnings should be evaluated based on norms for much more restrained measures of earnings.
That's not investing. It's speculation. And it's speculation that runs entirely counter to historical evidence. While an improvement in market internals might provide reason to speculate modestly on the basis of market action, there is no investment merit in current market valuations. Again, we do not need stocks to become “fairly valued” or undervalued in order to remove most or all of our hedges, but in the absence of reasonable valuation, we do need constructive market internals (short of extremely overbought or overbullish conditions).
Look at the composition of S&P 500 earnings. Financials currently make up about 25% of the S&P 500 market capitalization, but close to 40% of the earnings. Wages and salaries as a fraction of U.S. corporate profits have rarely been lower. Irresponsible lending and suppressed labor costs have been strong contributors to S&P 500 earnings in recent years thanks to a massive leveraging cycle – financial profits exploded, while wage demands stayed low because it was easy to spend out of home equity withdrawals and strong real-estate gains. But these are not permanent factors, and it is dangerous to value stocks as if recent profit margins will endure in perpetuity.
Based on daily closing prices, the S&P 500 has not even experienced a 10% correction, yet the recent decline has been characterized as if investors are acting “like the world is about to end.” This is not the pinnacle of human irrationality, but in fact, quite a shallow selloff from a historical standpoint. The fact that Wall Street is branding it otherwise is evidence that investors have completely forgotten how deep the market's losses can periodically become.
LOL. Yep, way in the past. Are pe's done on future earnings? I'm no economist.
I can't make heads or tails of this article. (one man's opinion - perhaps he's Dr O?)The generally accepted method these days is to use forecast earnings one year out from the present for P/E multiples.
I recommend you read the whole article for a better understanding:
Long-Term Evidence on the Fed Model and Forward Operating P/E Ratios
Still trapped in the past I see kennas. What is the point of posting results that were largely known and happened over the preceding 12 months and thus are largely priced in?
Stocks End Week Sharply Higher On Signs of Stronger Economy
Stocks closed sharply higher, with the Dow posting a triple-digit gain, after stronger-than-expected housing and durable goods data overshadowed lingering concerns about the credit markets.
"The data was very encouraging, a step in the right direction," said James Maguire Sr., managing director at LaBranche. "It was something that was long overdue as far as investors' expectations were concerned."
"We saw an extreme representation of buying opportunities, and this is the snap-back rally," said Marc Pado, U.S. market strategist at Cantor Fitzgerald. "We're powering up, we'll sit at a high point here and we'll probably see some sort of a test (to the downside) next week. But we're going to build the base through September, and we should have a very strong fourth quarter."
The Dow Jones Industrial Average had its best week since the week ending April 21, while the Nasdaq and the S&P 500 posted their best gains since the week ending March 24.
Most Aussie stocks won't be hurt by US downturn, analysts claim
Geoffrey Newman | August 25, 2007
INVESTOR worries about a US-sourced domino effect on Australian industrial stocks are overblown, even if the US does slip into recession, according to analysts.
A survey by The Australian found that only industrial stocks with a large portion of their business in the US are likely to see their profitability suffer significantly from the expected economic slowdown there, although a recession would cause wider damage in the sector, analysts say.
They believe that while the US economy was once pivotal to the health of its Australian equivalent, most of our stocks would remain unscathed by the expected weakening in the US economy because of its diminishing direct importance to the strength of the Australian economy.
Most analysts are not yet predicting a recession in the US but see a significant slowdown.
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