The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – June 2012 Update

It’s been a year almost to the day since I last posted data on the FTSE 100 Cyclically Adjusted PE ratio.  It’s therefore worth taking a little more time on this post to spell out how exactly I’m calculating this metric.  To my knowledge I am the only person on the internet who is freely making this data available however I have had to make some assumptions to build this dataset.

As I write this post the UK stock market is closed.  The last trading day was Friday 01 June 2012 at which point the FTSE 100 closed at 5,260.  At this price the FTSE Actuaries Share Indices provides us with a FTSE 100 P/E Ratio of 9.4 which allows us to calculate Earnings as 562.  These Earnings are as Reported Earnings, which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings.  This will differ from a lot of calculated earnings presented online, which will be on an ‘as earned’ (which is the current forecast earnings) basis, resulting in differences, particularly when there are large upward or downward adjustments in earnings.

As of Friday the dividend yield has crept up to 4%.  The last time we were over 4% was July 2009.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – May 2012 Update

As I write this post the S&P 500 is priced at 1,310.  By my calculations I have current earnings at $91.4 for an S&P 500 P/E Ratio of 14.3.  The earnings I use are as Reported Earnings, as opposed to the much more ambitious Operating Earnings, as I believe these are a much more appropriate (and conservative) measure.  As a quick reminder Reported Earnings will typically always be lower than Operating Earnings as they include the cost of non-recurring items such litigation charges, costs of shutting a factory and good will write downs to name but three.  Now it’s only my humble opinion, but I believe these are real and true costs incurred by the business, even if they are non-recurring and so badly want to be excluded by the “Company Bean Counters”. 

Let me also be clear on how I calculate the Reported Earnings.  I am using the Earnings as published by Standard and Poors.  At the time of writing they have published:

• Actuals for quarter end 30 June 2011, 30 September 2011 and 31 December 2011;
• A hybrid of 98.7% actual with the remaining as estimates for quarter end 31 March 2012; and
• An estimate for quarter end 30 June 2012

I then extrapolate these figures to cover a year to the end of May 2012.

Gold Priced in British Pounds (GBP) – May 2012 Update

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I haven’t written about gold priced in Sterling since June 2011.  Since that time it reached a new all time nominal Monthly Gold Price high of £1,121 in September 2011 and has since fallen back to £1,003 as of Friday.  All of this action can be seen in my first chart.

For me though, it’s my second chart which corrects for the devaluation of sterling through inflation, that is the important one.  This chart, which shows the Real (inflation adjusted) Monthly Gold Price, reveals to us that the peak in September came within 2% (£1,170 vs £1,151) of the January 1980 real peak before the fallback. 

Real gold today is still well above its long run average of £515 still indicating large overvaluation and if it was to follow the history of 1980 has a long way to fall before a bounce.

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.