"The best investment on the Earth is Earth" ~ Louis Gilckman.
Stocks and stock markets rise above the existing levels over a long run. And this seems to be backed with evidence; if you take any 20 year period, Wall Street has always delivered positive real returns and not to count our Sensex. Research however, throws argument contrary to this popular belief. Take for instance, the Japanese stock markets, their popular Nikkei 225, peaked at 38,915 during the last trading day of the 1980; last week, almost 18 years later, it’s still around only 17,000; less than half of its peak. So, buying in that market during dips didn’t quiet yield; for eg. by 1994, the Nikkei had fallen to 21,000 levels – a point at which most analysts believed to be a great long-term buying opportunity.
The root of this post is out of the infinite growth of Indian & Asian stock markets over the past weeks esp. after the US Fed rate cut even ignoring the inherent housing problems as the latest gloomy statistic to emerge was a 21.5% annual fall in pending American housing sales, a figure that’s a leading indicator for actual sales. House prices will surely fall further and defaults increase, as homeowners struggle to cope with higher mortgage rates from “teaser” loans taken out in ’06.
The Fed’s reaction to cut the interest rates by 50 basis points has been taken as a government’s weakness by the market speculators and has given wrong signals that it always backs the losses by bail-out packages and add to this is the politicians’ attitude at announcing such schemes. Ohio’s state govt was the first to set up an explicit foreclosure rescue fund: it has promised $4.6mn to help distressed homeowners who earn up to 125% of their county’s median income. The state will put up to $3,000 towards mortgage refinancing.
Of course, I’m still bullish about the Indian operations, industry and as a success story but what is happening with our current valuations. If you observe, a significant proportion of the returns from equities came after the liberalization and re-rating of shares and investors were willing to pay a higher multiple for profits. But, re-rating can’t continue forever and how this Forward PEs can be stretched in further? If investors want a simple parallel with share prices, they need to turn only to American Housing market. Back in 2005, Bernanke (now, Fed Chairman), then an economic advisor to the President said, “We’ve never had a decline in housing prices on national basis. What I think is more likely is that house prices will slow, maybe stabilize.”
Lots of people who took the same view and were willing to borrow/lend on a vast scale on the grounds that higher housing prices would always bail them out are now counting their losses. Equity investors just have to ask the Japanese on over committing themselves on the basis of similar belief.
The root of this post is out of the infinite growth of Indian & Asian stock markets over the past weeks esp. after the US Fed rate cut even ignoring the inherent housing problems as the latest gloomy statistic to emerge was a 21.5% annual fall in pending American housing sales, a figure that’s a leading indicator for actual sales. House prices will surely fall further and defaults increase, as homeowners struggle to cope with higher mortgage rates from “teaser” loans taken out in ’06.
The Fed’s reaction to cut the interest rates by 50 basis points has been taken as a government’s weakness by the market speculators and has given wrong signals that it always backs the losses by bail-out packages and add to this is the politicians’ attitude at announcing such schemes. Ohio’s state govt was the first to set up an explicit foreclosure rescue fund: it has promised $4.6mn to help distressed homeowners who earn up to 125% of their county’s median income. The state will put up to $3,000 towards mortgage refinancing.
Of course, I’m still bullish about the Indian operations, industry and as a success story but what is happening with our current valuations. If you observe, a significant proportion of the returns from equities came after the liberalization and re-rating of shares and investors were willing to pay a higher multiple for profits. But, re-rating can’t continue forever and how this Forward PEs can be stretched in further? If investors want a simple parallel with share prices, they need to turn only to American Housing market. Back in 2005, Bernanke (now, Fed Chairman), then an economic advisor to the President said, “We’ve never had a decline in housing prices on national basis. What I think is more likely is that house prices will slow, maybe stabilize.”
Lots of people who took the same view and were willing to borrow/lend on a vast scale on the grounds that higher housing prices would always bail them out are now counting their losses. Equity investors just have to ask the Japanese on over committing themselves on the basis of similar belief.
"Until you encounter the truth of God, everything else is speculation.”
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