price crash over fifteen percent in new york, page-53

Mongo, thank you for your insight.

the figures you used for Forecast Forward Earnings were based on continuing output I am sure.

I fear Rio and BHP have been all too human in listening to the Chinese say "more" and believing in continual escalation of demand, the words they wanted to hear, the words the Chinese wanted them to believe.

Demand decreasing and commodities decreasing does not bode well for Forward Earnings to be realised.

I gained a laugh or 2 when I said that RIO would get to $66 and funnily enough it has, why? Because of the same fundamental reason as above.

So knowing that we can not rely on Future Forecasted Earnings we have to come back and use figures which we know.... Historical PE's reveal the following:

06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07 06/08
Avge ann PE ratio (%) 17.07 11.75 18.70 20.62 14.57 12.06 10.52 10.22 14.27
Relative P/E(%) 128.6 88.2 134.8 156.2 102.9 82.4 76.6 69.9 93.8

and yes I hear you cry so we are well within band with BHP now travelling at 8.59X Historical... but that is exactly the point. Historical Figures are a good indicator now of what it should be not what it will be, hence buying value.

Keep top of mind that if you buy a business privately, what PE would you pay for this business and it would probably be around 4x Earnings tops.

So what other measures do I have? OK I go to the US and look for "like" companies...

Alcoa 6x PE Hist
Chevron 7x PE Hist
Exon at 8x PE Hist

The market is sophisticated and has already factored in Historical Earnings will not be maintained and hence this is probably the most reliable indicator we have in our posession of what the price should be.

So if I put my stick in the sand and work from these base PE Hist Earnings of US firms and average them it returns and average PE at 7.19x. Based on current share price Fair value therefore is around:

2458/8.59 x 7.19 = 2058

But Fair value in the market sense and it will return to these levels is:

2458/8.59 x (17.07+11.75+18.70+20.62+14.57+12.06+10.52+10.22+14.27/9)

= 2458/8.59 x 14.42 = 4126.

In other words share price at the moment is trading at 2458/4126x100 = 59.5% of historical values and this is the expected profit when the share returns to Normal value.

DYOR.