Buy Like The FTSE's At 4,000

Analysts are always pitching earnings estimates too high (it sells shares, which is how their companies make money) and you can see analysts gradually lowering their estimates as each year goes by.

Beware the analyst predictions that the FTSE's P/E will be an attractive 10.5x in a years time. I think that it'll be more like 12-13x, which is about average, maybe slightly cheap, on a long term view.

An interesting point is that the FTSE's P/E and yield are very attractive on a *relative* measure - such as when compared with interest rates and bond yields.
With the 10-year UK Government bond paying only 2.9%, the FTSE's dividend yield of 3.2% (net after basic rate tax) looks excellent.

The author is an idiot, don't risk your hard earned money in this market.

Luniversal is correct, this has been a bear market rally, and its coming to an end. Nothing fundamental has improved.

When we have meaningful decines in unemployment, then we'll know the recovery is around the corner, and not before.

The article is irresponsible at best and willfully misleading at worst.

The assertion that buying the FTSE here is the same as buying the FTSE at 4,000 in April last year is among the most ignorant commentaries on a financial website I've ever seen - and I've seen a few.

As ever, consensus earnings forecasts are a lagging not a leading indicator. Analysts fell over themselves to cut forward earnings forecasts on the way down in 08 and 09 - a process which bottomed in March and April of last year.

When the authorities intervened on an unprecedented scale and companies cut costs aggressively - the analyst community then found themselves chasing upgrades. Companies have consistently beaten forecasts over the last twelve months.

The trouble is that analysts have once again donned their rose-tinted spectacles and assumed earnings continue to grow at a healthy rate going forward. Given that most of the economic data has been significantly worse than expected over the few months - which way do you think earnings are going to go when companies get round to reporting on the second half of the year?

With margins already at cyclical highs - does anyone really believe that corporate America can deliver profits growth of 15% in the next twelve months? Because that's what's priced in to the S&P 500 - and the FTSE. Downgrades in the region of 20%-25% are much more likely. Does anyone seriously believe that equities will rise against a backdrop of downgrades?

As for a bubble in bonds - How many people do you know under the age of 55 who have a meaningful portion of their investment portfolios in bonds? Ask your colleagues if they even invest in bonds. I will boldly predict that not many - if any at all - will answer in the affirmative. How can there possibly be a 'bubble' if that is the case?

When my postman stops for a chat and asks me which corporate bonds he should be buying then I'll know we are in bubble territory. A bubble in bonds? You have to be kidding.

Instead of falling over ourselves to use low bond yields to support the consensual bullish valuation case for equities - perhaps investors should listen instead to the clarion call of the bond market and its clear message about the outlook for the US economy and therefore for corporate profits.

It's going to be ugly.

thepoetpunter

Further to my 27 Aug 2010 , 9:38am posting.....

I think that what we're seeing is a mid-cycle slowdown, not the start of another bear - not yet, anyway.
The easy money has been made. After a healthy pause - which may be approaching completion - I expect stockmarkets to move back towards the old highs over the next couple of years, before pulling back once again, as the US presidential election is completed in late 2012.
Stockmarkets historically do quite well in the last two years of a presidential cycle, but often badly during the first year.

Governments can easily stop deflation if they wish - currency devaluation worked in the 1930's and it would work again, if required.

As the likes of Brazil, Argentina and Russia demonstrated in the last couple of decades; a currency devaluation kickstarts a struggling economy, at the expense of the bond holders.

A double dip recession is still firmly on the agenda.

And in support of this, we have the following:
Dr Doom himself, Nouriel Roubini, the man who predicted the last financial crisis, says the chances of a US double-dip recession are now more than 40%.

So, Roubini thinks the probablility of a double-dip recession is greater than 40%; presumably the chance of avoiding such an outcome are less than 60%. That sounds very much like sitting on the fence to me.

Realistically wise to invest in oil, gold and other commodities for medium and long term situation immaterial to whatever views coming out in the press. What a simple move!

In defence of Buffett, and his minions Buffett does not buy or sell because the market is low or high. He buys because an asset can be bought at a good discount to its value, or sells because the market price of an asset is more than its value. This applies to whichever asset he considers. Where the broad market level is (for stocks) is not important, only the price of the asset relative to its value (long term value in the case of a Munger type stock).