egilmore wrote:In Feb 2007 I posted

egilmore



Joined: 02 May 2003
Posts: 3831
Location: Sydney
Posted: Fri Feb 16, 2007 4:47 pm Post subject:

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Lainie Jean Quote:
Will all this prop up the market. I think it will. I think the end result will not be a stockmarket crash, but a huge round of capital asset price inflation, so you need more and more money to gain the same retirement income.




If the scenario of both sokeye and LJ eventuates the market will CRASH because fundamentals would not support the soaring assets .
The treshold should be this : ASX200 not to pass its projected FY2008 of gradual movement from PER 14.5 towards 17-17.5 by 30/06/2008 .
as long as this model is adhered to do not expect crash but do expect a few mini corrections

Remember that crashes are the end results of IRRATIONAL EXUBERANCE when values of assets are way higher and beyond their intrinsic value , which correlates to a reasonable rate of return .

Remember that the inverse of PER is basically the ROR . At 17.5 PER the ASX 200 would return 5.71% . That is with at least 20% risk premium embeddded into it ( equals to 30 year Bond rate of 4.60% ) .

Now if the high GROWTH rate of earnings would not abate , projected EPS will be upgraded , and PER is further reduced . This will push the equities in the ASX200 higher no doubt .

Severe Corrections ( not technical one which are based on TA ) can happen due to FORCE MAJOR like Tsunamies , terror , Hedge funds financial gigantic wrong punting , severe wars that potentially can spill from being localized to something broader and more complexed , sudden civil commotionin major economy ( such as Russia, India and God forbid China ).

We have to realize that Severe Corrections can occur at any given minute , and they are outside managements agendas .

I hope I did not weary U too much here .
Have a nice weekend ...cheers eG ]

Herebelow is an echo of my post , in more elaborate language from Alan Kohler :

http://www.theage.com.au/news/business/ ... 80761.html

My comments are :
1. MR Kohler has based his assumptions on HISTORIC PERs and INVERTED YIELDS , while markets factor in FUTURE EPSs , PERs and INVERTED YIELDS ( as I did ) . Of course historic parametres are factual , but the market behaves in the futures not at either past or present performance .

2. MR Kohler did not take in account the at least 20-25% RISK PREMIUM , which should be ascribed to EQUITIES versus BOND RATES . This missing gap is critical in getting a properly moderated equity yields versus bond rates .

3. I must admit that my posts have never tyaken in account the rate of inflation . However when comparing the above parametres , the RATE of INFLATION , is excluded from both sides of the equation , which mathematically is correct because they become mutually exclusive if both in or out the equation .

4. For the ASX200 to reach 13000 in the near future GEPS of its companies has to reach something like a 95% to 30/07/2008 , or instant doubling of future 2008 Growth in EPS rates . I KNOW IT WOULD NOT HAPPEN ...cheers eG

With a (10 year bond rate at 6% allow for a 20% risk premium 1.2% Total 7.2%) fair value by your logic EG for the ASX would be around 13.89 times earnings, atm we're around 18 times earnings.

Some of the distortion is attributeable to Private/Equity and merger activity pushing prices up. Some companies are trading at hefty premiums to the market, but there is still some value in the market, inflation is benign and with low inflation and high liquidity bond rates may trend down.

In the medium term the biggest risk to the market is the Chinese economy overheating, most economists though seem very bullish on China regardless of any correction they may have, plus 10% growth for the next 10 years.

Got the following in the email from a friend . it's from a very respectable private bank / broking firm ...cheers eG

[quote]10 May 2007 Strategy
Why the ASX200 is worth 5,852 points

You don’t have to be a wizard to know that the stockmarket has been going
up. Even so, it is surprising how far the ASX200 has risen in the past 2
months.
Back on 5 March, after the Shanghai inspired correction of those days, the
ASX200 closed at 5,654 points. A little over 2 months later on 10 May, the
ASX200 is up only slightly less than 700 points at 6,349 points. This of
course asks the question, has the Australian stockmarket risen too far?
In this issue we update our model of the ASX200. This is a very good model.
It explains 95.3% of monthly variation in the ASX200 since January 1992. I
wish all our models were so good. Our model is based on operating earnings
of companies in the ASX200 and on Australian 10 year bond yields.
The growth in 12 month rolling operating earnings for the year to April 2007
is 28.8%. This is an extremely good number. For the year to June,
operating earnings for the American S&P500 is expected to grow only 5.5%.
Clearly, earnings growth in Australia is strong by international standards.
Most observers however recognise that this earnings growth is mostly in the
resources sector and is the result of continuing upward movement in
Australian export prices.
The other important component in our model of the ASX200 is Australian 10
year bond yields. Australian 10 year bond yields have been moving up
because of the strength of Australian economy. Still, bond yields are really
quite low by historical standards. On 10 May, Australian 10 year bond yields
stood at 5.91%. Taken together with operating earnings, our model tells us
the fair value of the Australian stockmarket is now 5,852 points.

The problem is that the ASX200 on 10 May was 6,349 points. This means
that the ASX200 was 497 points overvalued. In points terms, that level of
overvaluation is high, being the most overvalued that the market has been
since May 2002 when the market was some 680 points too high. Of course,
points of overvaluation must be compared to the general level of the market.
In percentage terms we calculate the market as now some 8.5% overvalued.
That is in excess of one standard error too high. A standard error over the
period since January 1992 is 7.5%.
The market in percentage terms is not as overvalued as it was for example in
April 2006 when it rose to 9.32% overvalued on the last day of April. In
percentage terms it is no-where near as overvalued as it was in May 2002
when it was some 25.3% overvalued. It is however approaching a region
where recent peaks such as that in 2006 have been found. It is approaching
a point where it could suffer a bull market correction.
The normal pattern of the Australian stockmarket is for it to suffer a period of
seasonal weakness in July and August. This sell-off does not happen every
year. Still, starting from an overvalued position at the end of May certainly
can help. The old adage of course is “sell in May and go awayâ€

this thread sort of fell away mid 2007

(and then so did the market .. all that talk of XJO 6000 .. makes me dizzy ... nostalgic .... confused ....)