The FTSE 100 cyclically adjusted PE ratio (FTSE 100 CAPE or PE10) – June 2011

While we all sit back and watch the train wreck that is Greece prepare to default (or whatever posh name they will come up with in due course) the UK goes on happily borrowing money at the rate of £17.4 billion for the month.  That’s £17,400,000,000 in a month.  What’s concerning me is that servicing our debt now takes 8.5% of government spending.  That’s more than the complete tax take from corporation tax (page 6 here).  All I can say is that the future generations will not be pleased.  I’m just a simple Average Joe but it really just doesn’t seem right asking children who are not yet born to pay for our lifestyle today.    

As this all unfolds we’ve seen stock markets around the world decrease in price in recent times.  I actually have no idea what moves prices (that’s why I don’t trade) but I can’t help feel that Greece is having a good impact but also we shouldn’t forget good news like this from China.

Is the Australian stock market cheap? - ASX 200 cyclically adjusted PE ratio (ASX 200 CAPE or ASX200 PE10) – June 2011 Update

As shown in my first chart the ASX200 cyclically adjusted PE (ASX200 PE10 or CAPE) has been steadily declining since February.  Today with the ASX200 closing at a price of 4567 the PE10 is 15.8 compared to the long run average since 1993 of 22.4.  A quick look at these two values would suggest that the ASX200 is undervalued however I’m not so sure.  The problem for me is that the data set that I have is a short period of time.  Comparing the ASX200 to the S&P500 where I have S&P500 PE10 data going back to 1881 allows for a very crude extrapolation though.  The long run average S&P500 PE10 is 16.4 however the average PE10 for the same period as my ASX200 dataset is 26.9.  Extrapolating this to a long run average ASX200 PE10 reveals (22.4/26.9)x16.4=13.7 which would imply that the ASX200 is in fact not undervalued but overvalued to the tune of about 15%.  To put this value in to perspective the PE10 low during the Global Financial Crisis (GFC) was 13.8 in February of 2009. 

The Importance of Reinvesting Dividends

The S&P500 is today yielding somewhere around 1.8% per annum.  This doesn’t sound like a lot and indeed it isn’t if the investment amount is small. To demonstrate this let’s say an Average Joe had an index tracking (to keep fund fees down) S&P 500 fund/ETF with £1,000 in it today.  Having bought a year ago he would have accrued somewhere around £18 (ignoring fees and taxes) in dividends by now.  If he didn’t know any better he could assume that amount will make no difference to his Retirement Investing Today portfolio and instead ‘blow’ it on a few beers.  What I’m going to show today with some charts is just how much damage that would do to his portfolio in the longer term.

Gold Priced in British Pounds (GBP) – June 2011 Update

It’s all very well for me to review the price of gold in USD’s however at the end of the day for a UK investor who will be living in the UK for the foreseeable future it is the price in GBP’s that is really important.  So today let’s review gold when priced in GBP’s.

I have my Index inked Savings Certificates. Do you? – UK savings interest rates – June 2011 Update

It has been a little bit of a faff and my recent adventure didn’t help but as with Salis Grano and Ermine I now have in my possession Issue 48 NS&I Index Linked Savings Certificates which offer index-linking to RPI plus 0.5% pa compound if held for 5 years.  Unfortunately I wasn’t able to buy them on the day they were re-issued for 2 reasons:

-          Following my overseas adventure I had to update my address details with NS&I.  This is quite a clunky process and takes a few days as it can’t be done via internet or telephone.  Instead I had to send off a signed letter requesting my details be changed which took a few days for them to process.

-          I had to transfer the funds from my online savings account into my current account which takes the usual 3 days.  I still can’t believe that in 2011 it takes 3 days to move money electronically.  In fact, yes I can, because we all know that this limbo period is where the banks hold on to your money and not pay you interest on it.  A nice little earner I’m sure.  What was also interesting was that my online savings account provider very quickly sent me a survey saying that I had recently moved a large sum of money from my account and they would like to understand why.  I’m amazed that they have gone to the trouble of paying somebody to set up a survey.  Surely the answer is always going to be because “I want to buy something” or “your rates are uncompetitive”.  Funnily enough they didn’t have an option that said “moving money from poor insulting interest rate to NS&I”.