Keep calm and carry on

Over a lifetime of investing we’re going to see a lot of things happen.  The more obvious events will likely be the continual bull and bear markets that have occurred in the past and I wouldn’t bet on not occurring in the future.  Filter the noise by correcting for the continual devaluation of money via inflation then plot on a log chart and they’re clear to see for both the US and the UK.

Click to enlarge, Monthly real S&P500 price

Click to enlarge, Monthly real FTSE100 price

I’m not old enough to have invested through all the FTSE100 cycles shown and I’m certainly not old enough to have invested through all the S&P 500 (or it’s predecessors) cycles that are visible.  Instead I started investing seriously in late 2007 so my early days saw the global financial crisis but I’ve then been able to ride that bull wave.  Today that bull wave has resulted in valuations such as the Price Earnings Ratio (P/E) or even the Cyclically Adjusted Price Earnings Ratio (CAPE) looking high compared to history.  The P/E for the S&P 500 is 26.3 against a long run average of 16.0 and the CAPE is 28.7 against a long run average of 16.7.  The FTSE 100 is in a slightly different state, albeit measured against a data set with a different duration.  It’s P/E today is a silly 30.7 against a long run average of 17.2 while the CAPE is 15.2 against a long run average of 18.0.

US vs UK vs Aus Equity Valuations

The largest country equity holding within my portfolio is my home country, the United Kingdom, at 20.4% of total portfolio value.  This is then followed by Australian equities at 10.1% (a mistake I've mentioned numerous times previously) and then US equities at a relatively paltry 4.5%.  The Equity markets of these three countries make one third of my portfolio and so their performance (particularly that of the UK) matters.

My total portfolio year to date is under water by a few percent and since I started my DIY journey to FIRE (financially independent retired early) in late 2007 I've only managed a real (after inflation) annualised 3%.  Looking at the data what is clear is that to date I have backed the wrong horse.  Let’s take a look.

Firstly the US S&P500:

Click to enlarge, S&P500 Price Performance, Source: Yahoo Finance

Now the UK FTSE100:

Click to enlarge, FTSE100 Price Performance, Source: Yahoo Finance

And finally the Australian ASX200:

Click to enlarge, ASX200 Price Performance, Source: Yahoo Finance

Year to date the S&P500 is down 2.3%.  In comparison the FTSE100 is down 9.3% and the ASX200 is down 7.0%.

Valuing the UK Equities Market (FTSE 100) - May 2015

My investment strategy requires me to moderate my equity holdings based upon my view of current equity market values.  I run this valuation monthly for the Australian (currently targeting 15.5% of total portfolio value at current valuation vs 17% at fair value), US (as a proxy for my international equities and currently targeting 10.4% vs 15%) and UK (currently targeting 19.0% vs 20%) Equity markets.  Let’s look at the UK Equity market in more detail.

Firstly nominal values.  Between yesterday and the 1st April 2015 (“month on month”) prices are up 3.3% and since the 1st May 2014 (“year on year”) prices are also up 3.3%.

Chart of the FTSE 100 Price, Click to enlarge

Regular readers will know I’m not a fan of this type of chart as:

• the unit of measure, £’s, is being constantly devalued through inflation (although in the current market one wonders for how much longer); plus
• Pricing should be plotted on a logarithmic scale as opposed to a linear one as by using this scale percentage changes in Price appear the same.  

So let’s correct the chart for the devaluation of the £ through inflation (I use the Consumer Price Index (CPI) here) and convert to a log chart.  This normalised chart shows that Friday’s FTSE 100 Price of 7,031 is actually still 25% below the Real high of 9,331 seen in October 2000.  We’re also still 14% below the last Real cycle high of 8,164 seen in June 2007.

Chart of the Real FTSE100 Price, Click to enlarge

Valuing the UK Equities Market (FTSE 100) - February 2015

I have an investment strategy that requires me to moderate my equity holdings based upon my view of current equity market values.  I run this valuation monthly for the Australian, US and UK Equity markets.  While I run it monthly I've just realised that I haven’t shared that analysis for the UK market for 4 months now.  So without further ado let’s run the numbers for all to see.

Firstly nominal values.  Between yesterday and the 2nd February 2015 (month on month) prices are up 5% and since the 3rd February 2014 (year on year) prices are up 6.3%.

 Click to enlarge

Regular readers will know I'm not a fan of this type of chart as:

• the unit of measure, £’s, is being constantly devalued through inflation (although in the current market one wonders for how much longer); plus
• Pricing should be plotted on a logarithmic scale as opposed to a linear one as by using this scale percentage changes in Price appear the same.  

So let’s correct the chart for the devaluation of the £ through inflation (I use the Consumer Price Index (CPI) here) and convert to a log chart.  This normalised chart shows that Friday’s FTSE 100 Price of 6,874 is actually still 26% below the Real high of 9,317 seen in October 2000.  We’re also still 23% below the last Real cycle high of 8,152 seen in June 2007.  We are therefore a long way from previous highs.

Click to enlarge

Valuing the UK Stock Market (FTSE 100) - October 2014

Over the past couple of weeks the mainstream media have been getting all excited about recent share price falls.  As a group of people who are paid to write stuff I guess you could easily get excited by a graph like this:

Click to enlarge, Source: Yahoo Finance

Eyeball this short term chart and of course they’re right.  Over the past 6 or so weeks there is no denying the FTSE100 has fallen 8% or so.  Personally, as a long term investor with a mechanical investment strategy I ignore it all and simply think that markets go up and they go down.  This is more the view I’m interested in looking at:

Click to enlarge, Source: Yahoo Finance

On this scale the recent pull back is a bit of noise that means nothing more than my next share purchase is likely to be made at a better valuation than it was going to be.  Providing of course that earnings hold up.  Given I’ve now mentioned the valuation word as investors let’s today spend some time valuing the FTSE 100 over the longer term rather than wasting our time on short term price movement discussions.

Firstly let’s normalise the data by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

The normalised dataset shows that Friday’s FTSE 100 Price is actually still 32% below the Real high of 9,339 seen in October 2000.  We’re also now 23% below the last Real cycle high of 8,171 seen in June 2007.  We are therefore a long way from previous highs.

Click to enlarge

Valuing the UK Stock Market (FTSE 100) - June 2014

When nominal charts of the FTSE100 start looking like this:

Click to enlarge, Source: Yahoo Finance

Which are showing us being within 1% of the nominal 30 December 1999 record high of 6930, the chatter in the mainstream media about the potential to reach new highs kicks off.

So what do I think about the potential to reach new highs?  Well I don’t actually even waste brain power considering it for a few reasons:

• The most important is that my investment strategy is no longer based on any form of emotion but is instead now purely mechanical.  This was done because early on in my DIY investing career I realised that no matter how much energy I expended I actually had no idea whether the market was going to go up, down or sideways.  A lot of people out there do claim to know but from what I can see most of these seem to make their money by commenting on it in the media, writing books on the topic or by selling investing newsletters.  If they really do know why are they expending energy doing this rather than making a fortune trading with this great knowledge?  I really do now believe that unless you have inside knowledge, which you can’t profit on legally, then they are all actually just like me.  They have no idea. 
• As I’ll show in this post the market is actually nowhere near a new high.
• Again, as I’ll show in this post, while I believe the market is slightly overvalued it’s still only in the bottom 17% of monthly valuations since 1993.   

Let’s run the numbers.  Firstly we’ll remove the excitement and normalise the data by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

Valuing the FTSE 100 - November 2013

A quick glance at one of the many FTSE100 charts published by the mainstream media might start to get the average punter a little excited.

Click to enlarge, Source: Yahoo Finance

Why?  Well, with the market closing at 6,735 on Friday we have now passed the previous nominal 15 June 2007 high of 6,732 following which the market proceeded to fall 48%.  We are also now only 2.8% from the nominal 30 December 1999 record high of 6,930 after which we saw falls of 52.6%.

A FTSE 100 Price of 6,732 also has us up 4.3% when compared with the 01 October 2013 Price of 6,460.  We are also up 14.9% year on year.

Am I getting excited?  In short, no.  This is for a few reasons:

• The most important is that my investment strategy is no longer based on any form of emotion but is instead purely mechanical.  Once I made this move I found very quickly that all emotion, whether that be pessimism or optimism, when it came to economic or market news drained from me.
• As I’ll show in this post I don’t believe that the market is actually anywhere near a new high.
• Again, as I’ll show in this post, while I believe the market is partially overvalued it’s still only in the bottom 16% of monthly valuations since 1993.   

Let’s now run the numbers.  The last time we looked at this dataset was on the 26 June 2013.

Let’s firstly remove some of excitement by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

Looking at the chart this way reveals the FTSE 100 in a very different light.  That light shows that Friday’s FTSE 100 Price is actually still 27% below the Real high of 9,273 seen in October 2000.  We’re also still 17% below the last Real cycle high of 8,084 seen in June 2007.

Click to enlarge

Give Me the Dividends Mr CEO (Valuing the Australian Stock Market)

As a stock market investor there are only 2 ways for your wealth will grow – share price appreciation and the reinvestment of dividends which are also hopefully appreciating on a per share basis.  How do CEO’s achieve this share and dividend per share appreciation for us?  I see two distinct methods.  The first is what I like to see and includes:

• funding of focused and targeted R&D to generate new products with unique selling points when compared to the competition allowing market share gain;
• looking for new white spaces in the global market where products can be sold; and
• tirelessly working to find operational efficiencies which increase profitability for a given amount of earnings, to name but three.

The second method I'm not so keen on and includes:

• the merger and acquisition (M&A) of companies that supposedly have “synergies”.  Sure, some acquisitions work resulting in 1+1=3 but “study after study” also “puts the failure rate of mergers and acquisitions somewhere between 70% and 90%”.
• share buy backs.  Maybe I'm being cynical here but why do I believe CEO’s undertake share buy backs?  I believe it’s to boost Earnings per Share and the Share Price.  Now why would they want to boost those?  A lot of Executive bonuses are based improving metrics such as these including straight up cash incentives but more stealthily through incentives like share options.

What would I prefer to see from CEO’s?  If they are out of ideas on how to grow the top and bottom lines organically then give the profits back to me in the form of dividends.  Unlike the CEO I can then reinvest those dividends across the whole market if trackers are my thing or a completely different sector if I think that one is overvalued in any world location.  This gives me an advantage over the CEO who only has his/her own company or “synergistic” companies to choose from.

Give Me the Dividends Mr CEO

It’s not a perfect science, because issues like company and shareholder taxation get in the way which/do cause forced behaviours/distortions, but if we look at the ratio of dividend yield to earnings yield we might be able to get some idea of which countries CEO’s are trusting the shareholder and which are having delusions of grandeur and trying to line their own pockets.  Today the S&P500 has a dividend yield of 2.0% and an earnings yield of 5.7% for a ratio of 0.35 meaning US CEO’s are only giving the owners of their company’s 35% of company earnings.  In contrast the FTSE100 is offering a dividend yield of 3.6% (80% more than the US) and an earnings yield of 6.7% for a ratio of 0.54.  So FTSE100 CEO’s are giving back 54% of earnings.  Now let’s jump to another developed country with a relatively small population – Australia.  The ASX200 today has a dividend yield of 4.3% (19% more than the UK and 115% more than the US) and an earnings yield of 5.6% (pretty much identical to the US) for a ratio of 0.77 or 77% of earnings being returned to shareholders.  A visual representation of this can be seen in the chart below.

Click to enlarge

This method doesn’t claim to be perfect and I could write a page of caveats as to why but it does give some food for thought and further analysis.  One of which is that the reason the return to shareholders is so large in Australia is because Earnings are falling while CEO’s naively maintain (or increase) dividend payments.  Let’s therefore step away from the method and analyse whether the Australian Share Market is good value.

The S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - August 2013

This is the monthly review of the S&P500 including a couple of S&P 500 valuation metrics.  The last review can be found here.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,691.  That is a rise of 1.4% when compared with 1,669, which is the average closing Price of each trading day last month.  It is 20.5% above last year’s August monthly Price of 1,403.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I’m a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

The FTSE 100 Cyclically Adjusted Price Earnings Ratio (FTSE 100 CAPE) Update - June 2013

Ever since Bernanke opened his mouth about potentially easing back (not stopping) on the amount of Quantitative Easing he is undertaking each month we've seen the price of many asset classes fall.  This has included the FTSE100.  Am I worried about it?  Well as a person who is investing large amounts every month into the markets the answer is no.  I hear you ask why.  Well if I use the FTSE100 as an example I’ll show today that both company earnings and dividends  are rising.  Therefore a falling price combined with rising earnings and dividends simply means a higher dividend yield and earnings yield.  That means that I'm simply buying the market at better value.

Let’s now run the numbers.  The last time we looked at this dataset was on the 30 April 2013.

FTSE 100 Price

In early morning trade today the FTSE 100 was priced at 6,160.  That is a fall of 4.5% when compared with the 01 May 2013 Price of 6,451.  It’s still 17.1% above the 01 June 2012 Price of 5,260.  How this pricing compares with history can be seen in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media.  Let’s now remove the sensationalism by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

Looking at the chart this way reveals the FTSE 100 in a very different light.  That light shows that the compound annual growth rate (CAGR) in today’s £’s has only been 1.7%.  Correct it by the Retail Prices Index (RPI) and that falls to 1.0%.

Click to enlarge

FTSE 100 Earnings

As Reported Nominal Annual Earnings are currently 504, up from 481 on the 01 May 2013.  They are down 10.4% on last year and down 19.8% on October 2011’s peak of 628.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

The S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - June 2013

This is the monthly review of the S&P500 including a couple of S&P 500 valuation metrics.  Last month’s review can be found here.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,627.  That is a fall of 0.8% when compared with 1,640, which is the average closing Price of each trading day last month.  It is 22.9% above last year’s June monthly Price of 1,323.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I’m a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

S&P500 Earnings

As Reported Nominal Annual Earnings (using a combination of actual and estimated earnings) are currently $90.96.  That compares with this time last year at $87.92 implying earnings growth of 3.5% year on year.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

The New FTSE 100 Cyclically Adjusted Price Earnings Ratio (FTSE 100 CAPE) Update - April 2013

Welcome to the new look UK FTSE 100 monthly stock market review which includes a couple of valuation metrics.  The last time we looked at this dataset was on the 10 March 2013.  This monthly review will now loosely follow the same format we use for the S&P 500 which will enable us to get some consistency across regions going forward.

FTSE 100 Price

At market close on Tuesday the FTSE 100 was priced at 6,430.  That is a rise of 0.8% when compared with the 01 March 2013 Price of 6,379 and 9.5% above the 02 April 2013 Price of 5,875.  How this pricing compares with history can be seen in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media.  Let’s now remove the sensationalism by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

Looking at the chart this way reveals the FTSE 100 in a very different light.  That light shows that the compound annual growth rate (CAGR) in today’s £’s has only been 2.0%.  Correct it by the Retail Prices Index (RPI) and that falls to 1.2%.

Click to enlarge

FTSE 100 Earnings

As Reported Nominal Annual Earnings are currently 483, up from 458 on the 01 March 2013.  They are down 18.3% on last year and 23.0% on October 2011’s 628.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

Click to enlarge

The New S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - April 2013

I've been publishing a review of the S&P500 and all its nuances every month for over 3 years.  This is data that I personally use for my own investments and as my knowledge has grown so too has the content posted but the format has remained largely unchanged.  I've received no complaints but to me the format has now grown a little unwieldy, not as clear as it could be and probably most importantly I've become a little bored with it.  Last month’s review can be found here.  I've therefore spent some time reformatting the charts, adding some more relevant historical content and hopefully arranging the content into something a little more logical.  I hope it works for you.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,555.  That is a rise of 0.3% when compared with 1,551, which is the average closing Price of each trading day last month.  It is 12.2% above last year’s April monthly Price of 1,386.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I'm a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  This unfortunately means, unlike the mainstream media in recent times, I can’t report that the S&P500 has reached new all time highs as in real terms it is still 22.5% below the Real high reached in August 2000.
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – March 2013 Update

 This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 6,484 which is a gain of 2.1% on the 01 February 2013 Price of 6,347 and 9.3% above the 01 March 2012 Price of 5,931.
• The FTSE 100 Dividend Yield is currently 3.42% which is down against the 01 February 2013 yield of 3.47%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 14.44.  
• The Price and the P/E Ratio allows us to calculate the FTSE 100 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) as 449.  They are down 13.0% month on month and down a large 23.9% year on year.  The Earnings Yield is therefore 6.9%.

So we find ourselves in a continuation of the interesting situation that I highlighted last month.  Nominal Earnings are falling off a cliff and have been consistently falling since October 2011’s Earnings of 628.  They are now down 28.5% since then yet in comparison Prices are increasing.  Nominal Prices are up 27.7% over the same period.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  Look at the trend line of the Real Price.  After you strip out the effects of inflation the perceived market value is doing not much more than oscillating above and below a flat line which we are now sitting on.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – March 2013 Update

With the mainstream media this week reporting new nominal highs for the Dow Jones Industrial Average lets also run our own regular analysis of the US market to get some detail on what is really going on in this market.   As always instead of the Dow, which only looks at 30 large companies, we’ll turn our attention to the S&P500 which looks at 500 leading public companies.  Last month’s update can be found here.

Before we crunch the numbers it’s worth pointing out that while titles like Asian markets climb after Dow Jones hits record high make for great headlines, I can’t help but feel that this is misleading the general public as they might actually think that the market is at new highs.  Of course regular readers will know that Dow isn’t at a new Real (inflation adjusted) high, but only at Nominal highs, as the unit of measure that the Dow and S&P500 is measured in, the US Dollar, is constantly being devalued through inflation.  When it comes to the S&P500, the Real high was way back in 2000 and we are still some 22.5% below that level.  

Let’s now look at the key S&P 500 metrics:

• The S&P 500 Price is currently 1,543 which is a rise of 2.0% on last month’s Price of 1,512 and 11.1% above this time last year’s monthly Price of 1,389.
• The S&P 500 Dividend Yield is currently 2.0%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $89.63 for an Earnings Yield of 5.8%.
• The S&P 500 P/E Ratio is currently 17.2 which is up from last month’s 17.0.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Click to enlarge

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – February 2013 Update

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 6,338 which is a gain of 5.2% on the 01 January 2013 Price of 6,027 and 9.5% above the 01 February 2012 Price of 5,791.
• The FTSE 100 Dividend Yield is currently 3.47% which is down against the 01 January 2013 yield of 3.64%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 12.96.  
• The Price and the P/E Ratio allows us to calculate the FTSE 100 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) as 489.  They are down 4.6% month on month and down 11.7% year on year.  The Earnings Yield is therefore 7.7%.

So we find ourselves in an interesting situation.  Nominal Earnings are falling and have been consistently since October 2011’s Earnings of 628 yet Prices are rising.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  Look at the trend line of the Real Price.  After you strip out the effects of inflation the perceived market value is doing not much more than oscillating above and below a flat line which we are now sitting on.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

Click to enlarge

Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – February 2013 Update

The US stock market has seen some large gains since New Year’s Eve. As I write this post the mid market price for the S&P500 is down 0.9% on the day at 1,499.8 but still up 5.2% in little over a month. Similarly, the Dow Jones is down 0.8% at 13,903.5 but is up 6.1% since the market close on the 31 December 2012. It’s therefore appropriate to run the standard Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE). Let’s see if the market is just exuberant or starting to head towards Irrational Exuberance.  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,500 which is a rise of 1.3% on last month’s average close of 1,480 and 13.3% above this time last year’s monthly Price of 1,324.
• The S&P 500 Dividend Yield is currently 2.1%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.85 for an Earnings Yield of 5.9%.
• The S&P 500 P/E Ratio is currently 16.9 which is up from last month’s 16.8.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Click to enlarge

Click to enlarge

As always let us now turn our attention to the metric that this post is interested in which is the Shiller PE10.  This is also shown in the first chart which dates back to 1881 and is effectively an S&P 500 cyclically adjusted PE or CAPE for short.  This method is used and was made famous by Professor Robert Shiller.  It is simply the ratio of Real (ie after inflation) S&P 500 Monthly Prices to 10 Year Real (ie after inflation) Average Earnings. 

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – January 2013 Update

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 6,104 which is a gain of 4.0% on the 03 December 2012 Price of 5,871 and 7.1% above the 02 January 2012 Price of 5,700.
• The FTSE 100 Dividend Yield is currently 3.64% which is a little down against the 03 December 2013 yield of 3.73%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.78.
• The Price and the P/E Ratio allows us to calculate the FTSE 100 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) as 518.  They are up 1.1% month on month but down 6.5% year on year.  The Earnings Yield is therefore 8.5%.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  Look at the trend line of the Real Price.  After you strip out the effects of inflation the perceived market value is doing not much more than oscillating above and below a flat line.  This then presents a problem for any buy and holder reinforcing the importance of dividends.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

Click to enlarge

Click to enlarge

As always let us now turn our attention to the FTSE 100 Cyclically Adjusted PE.  This is also shown in the first chart above.  For completeness let me also detail the usual reminders.  I do not use P/E ratio’s to make investment decisions from and instead use this CAPE.  This is because the P/E ratio does not take the business cycle into account which the CAPE tries to adjust for.  The method used is similar to that developed by Professor Robert Shiller for the S&P500.  The calculation is the ratio of Real (ie after inflation) FTSE 100 first possible day of the month Price to the 10 Year Real (CPI adjusted) first possible day of the month Earnings.  Unfortunately the dataset I have created only goes back to July 1993.  Therefore to get a meaningful set of numbers I have had to average in to a PE10 for the first 10 years.  What this means is that July 1994 is actually a PE1, July 1995 is a PE2 and so forth until July 2003 when we have a full FTSE 100 PE10.

The ASX 200 Cyclically Adjusted PE (aka ASX 200 PE10 or ASX200 CAPE) – January 2013 Update

This is the Retirement Investing Today monthly update for the Australian ASX 200 Cyclically Adjusted PE (ASX 200 CAPE).  The last update can be found here.

Before we run the CAPE analysis let us first look at some of the key Australian Stock Market metrics:

• The ASX 200 Price at market close on Friday was 4,709 which is up 1.3% from last month’s Price of 4,649 and up 10.5% year on year.
• The MSCI Australia Dividend Yield is currently 4.6%.  I accept this Index as an ASX200 proxy for both Dividend Yield and P/E Ratio based on this analysis.
• The ASX 200 Earnings (calculated using MSCI Australia P/E Ratio and ASX 200 Price) are currently 304.  This gives an Earnings Yield of 6.5%.
• The MSCI Australia P/E Ratio is currently 15.5 compared with the dataset (since December 1982) average P/E of 18.3

The first chart today shows a historic view of the Real (inflation adjusted) ASX 200 Price and the ASX 200 P/E.  The second chart provides a historic view of the Real (after inflation) Earnings and the Real (after inflation) Dividends for the ASX 200.

Click to enlarge

 Click to enlarge

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

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 mid market Price is currently 5,960 which is a gain of 1.7% on the 01 November 2012 Price of 5,862 and 8.6% above the 01 December 2011 Price of 5,489.
• The FTSE 100 Dividend Yield is currently 3.73% which is flat against the 01 November 2012 yield of 3.71%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.46.
• The Price and the P/E Ratio allows us to calculate the FTSE 100 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) as 520.  They are up 1.2% month on month and down 7.1% year on year.  The Earnings Yield is therefore 8.7%.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

Click to enlarge

Click to enlarge