will have a good day, page-54

Cheers MissionX, I'm a bit of an instinct trader I guess, I did intend to hold longer but got a bit nervous when I heard what the yanks were saying on ABC radio this morning. Here is a good article I read, enjoy.
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1987 stock market crash anniversary. Will it repeat?
Last Update: Tuesday, November 13, 2007. 11:35am AEDT

By Anne Delaney

The stock markets are at record highs, so with the 20th anniversary of the 1987 stock market crash having just passed, it's appropriate to compare the two to make sure we aren't repeating history. Scott Mildren is ABC Riverina's regular commentator of the world of finance. Here's his reading of the situation.


The Australian share market is in its 5th year of 20% (plus) p.a. gains since the market bottomed in February 2003 which has been a remarkable run. Even the recent sub prime mortgage debacle wasn't able to upset the bull run for too long with the market up an amazing 20% in two months from the bottom in mid August.

So what was the market like in 1987 and does it compare to now.

Gains made from bottom to top
1987: The bull run started in July 82 and had increased 420% by October 87
2007: The bull run started February 2003 and is up 150% to date.
So this bull run has been good and similar in length but no-where near the gains made in the 1980's.

Price/Earnings Ratio
1987: 21
2007: 15
This means in 1987, investors were paying $21 for every $ of profit. Now we are paying $15 for every $ of profit. This means the market is 40% cheaper than in 1987. This means the index would need to be over 9000 to equate to 1987.

Dividend Yield
1987: 2% (No franking)
2007: 3.5% (plus franking) equates to 4.5%
The income generated from share investments is twice what it was in 1987.

10 year Government Bonds
1987: 12.5%
2007: 6.2%
Government Bonds are considered to be risk free. Therefore the capital growth had to be more than 10% from shares to make up the difference between the Bond rate and Dividend rate. 12.5% - 2%. Today, capital growth has to be 1.7%. Being 6.2-4.5%. 10% isn't sustainable, but 1.7% is.

Corporate Debt
1987: High
2007: Low
Australian companies are in much better shape than they were in 1987. This means they are able to better cope with any financial shocks. IE Sub prime.


Residential Property Yields
1987: X%
2007: 2-3%
This is the income return from the asset. Currently the residential property market isn't providing the income return to allow investors to jump ship from the share market.


Are we in a bubble and will it burst?
For a bubble to burst, investors need to have another asset class to run to. In 1987, 12% return from Government Bonds compared to 2% from shares was the tonic as capital growth is only gained when some pays more for the asset than you did. In today's market, there isn't an obvious market to run to and company profits and economic growth continue to be above long term averages.

Based on history our market today isn't at a bubble stage. It is however at a mature bull market stage which means it can continue on its merry way but with increased volatility from time to time. New investors need to be more selective about the investments they make.

The positives and negatives
On the positive side - economic growth is good, inflation within the RBA bands and share valuations are around long term averages with company profits still growing (albeit at a slower rate than they have over the last 4 years). The transformation of the BRIC (Brazil, Russia, India, and China) economies is allowing this economic cycle to run longer than normal thanks to our great supply of commodities.

On the negative side, we have a tighter labour markets, high levels of capacity
utilisation, cost pressures and a stronger $A which could lead to higher inflation and interest rates. This could take some shine off company profits and the market.

There is a bubble building in the domestic China share market with their PE ratio touching 50 which is close to the high levels seen by US Technology stocks in 2000 where they reached 60. If this bubble is pricked it could unnerve global markets who only see good things coming from China. Directly it would only effect domestic Chinese investors as they are the only ones invest in that market, but it could have an indirect effect on sentiment.

So, while share markets have had a great run over the last four years, it would seem that there are good returns to be had as long as you are investing for the long term and accept that there will be some more volatile period like we saw in August/ September where the market pulled back 10% over the coming year or so. But we aren't likely to see a 1987 crash where the market fell 25% or in today's points that's 1700.

But you can never say never when talking about investing in the future as risk is always there.
Scott Mildren is a Certified Financial Planner (CFP), an authorised representative of Hillross Financial Services.