This is an update to my previous posts and I have been able to make some improvements to my fair value system. This system is based on fundamental analysis and is 100% reliant on earnings to derive fair value.
I have two trackers: the first is fair value as determined by consensus earnings forecasts. The second is determined by economic indicators.
The earnings forecast fair value measure is obviously not a static figure. Consensus forecasts change frequently, if not daily, and therefore it is a moving target. Eventually they move towards actual earnings as tracked by the historical chart. The more accurate the forecasts in advance, the greater the efficacy of this indicator.
The economic indicator fair value measure completely disregards actual/forecast earnings and predicts earnings based solely on economic indicators (US) to feed through to fair value. This is a good counterpoint to consensus earnings forecasts which often change after the economics.
I've made a few adjustments since I last posted this information.
- FGL removed from list - added CCL instead - ad hoc improvements of consensus fair value - added historical chart of fair value determined by economic indicators
Consensus EPS forecasts
Based on current forecasts, the fair value of the XJO is estimated to be 4462 - compared to current level of 4101.
I also note that this indicator (if correct) shows that there is good value at current levels. Fair value is not changing rapidly, so we are looking at a relatively flat environment.
Economic indicator
This is the first time that I have charted the historical fair value measured by my economic earnings indicator. I'd like to make it clear that this is a quantitative valuation system and is not subject to any revisions.
What is most noticeable for me is that based on economic indicators and fundamental data, it was able to show the dramatic deterioration of fair value during 2007 and that the market was over-valued from 2007 to late 2008/early 2009.
Also, it suggested that the recovery from 2009 lows was way ahead of itself and it is only now that fair value has once again exceeded market price.
Outlook: the combined indicators are bullish as long as the economic indicators do not substantially deteriorate. The current trajectory is decisively bullish.
(20min delay)