monday monogram, page-6

A few things come to mind, with regards to coincidence.

In 2008, when the RBA raised what was deemed by many as an unneccessary rate hike in March, the market held on until approximately June, and began a freefall right up to October, before recovering a little at the end of the year. It subsequently plunged into new lows culminating in the capitulation we saw in March 2009.

The last rate hike in April, was deemed by many as unnecessary. The additional 25 basis points squeeze in the markets may prove once again to be the undoing of an economy trying to rationalise between a ridiculous super tax on its best performers and a worldwide imminent carnage, spawning from the Eurozone, with implications as far as Chinese consumption being threatened.

I'll say this again, although people may laugh. The World Cup is no laughing matter. The amount of cash being sucked out of the market to get involved in gambling is phenomenal. As yet, the odds for the favourites have yet to narrow, which points out to the fact that the real size bets have not made their way into the pool. Furthermore, think of all the bookmakers who have to cash up for this major event. Productivity in Europe is set to drop significantly, especially since its going to be in its time zone.

And the final point that occured to me while I was on my morning coffee was the PE ratios of the markets. I keep on hearing the rants and raves of brokers and analysts saying that our market prices are currently on PEs of 10-12 for major counters (forward of course). I did speak to someone awhile back, who was somewhat of a cynic, but with an interesting view point.

If today's prices reflect a PE of 14 on last years earnings, and 10 on this years earnings, does that mean that the share prices have to go to a PE of 14 once more based on this years earnings, or does the EARNINGS have to increase to justify the current price level?

It's an interesting view point. Based on one camp (PRICE component), because the shares traded up to a PE of 14 in 2009, it must mean that based on this years forecast, shares should increase by 30% if its current PE for FY 10/11 is at 10. If however, one values PE with the EARNINGS component, rather than the Price component, then one is looking for companies to deliver a 30% growth from last year to justify the current pricing levels.

So which do we use? The fair point I guess would be to meet somewhere in the middle, as this chap said. So on assumption that the true middle ground PE based on the variables of last years earnings and this years is probably 12, taking into account dilution, inflation and expectation.

On that assumption, our markets have got around 15% to go before they become "priced for purchase" on a PE basis. Which brings our index to around 3850-3900.

I would be interested to see how the charts value this area of 3850-3900 as an entry point, non withstanding any change in economic climate.