I have already noted market reaction to the bank bail out this morning. It is clear that £500 billion is not enough to stabilise markets. There are sound reasons for thinking this.
Net dividend yield on the FTSE 100 was about 4.6% at the end of September. Of course it has risen since then: the market has gone down by about 15% (give or take). That pushes the yield to over 5%, but that's based on last year's dividends. There is no way dividends will be that high across the market this year and the prospect of capital growth is quite clearly remote: we are heading for a recession. Any growth prospect has therefore to be massively discounted right now.
All this means that for now dividend yield is the only reason for being in the market. And when cash is paying higher rates than Stock Exchange dividend yield with UK banks now near nationalised and therefore offering effective guarantees on deposits the only possible direction for the FTSE is down. So the question is how far down?
It's notable that the Treasury is looking for a return of more than 10% on its investment in the banks. That's quite reasonable, maybe low even, partly because there is no real upside potential. Maybe with a long term prospect of gains this could be discounted a little: maybe 8% on ordinary shares is a rational expectation now. In 1975 when we last got to this position the dividend yield reached 10%.
But where does that leave the index? Based on data for September 2008 and requiring this rate of return to compensate for current risk the rational value of the index would be no more than 2900. I can't see it settling above that right now. In other words, the fall has some way to go as yet as the fundamentals have not been corrected for at the moment, and it could get worse still before any bounce begins.
Of course if the banks were taken out it might not get that bad - but that would require nationalisation. Which might be an argument for doing it. They're too toxic to be in the index or the market right now, so why not accept that as a reality and bring them under the control of the state, which is the only place for them at present.
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Interesting! In a previous article you claim” the markets are ignoring government interventions: that’s irrational.
Second this chart shows the people undertaking these trades are witless”. Now you claim” The FTSE is massively overvalued: those selling are behaving rationally”. Do you even know where you are? I really suspect that you are either an idiot or a drunkard.
Max
Insults will clearly get you everywhere, I’m sure. Reading the web site from which you have unashamedly lifted your comments will not.
The reality is that my comments are wholly consistent. The people undertaking the trades are witless: they are ignoring rational indicators. The government intervention was ignored when rationally it suggested a period of stable reflection. They are still overall trading the market too high because they are trading on short term impulse not fundamental analysis.
In both cases my comments are entirely appropriate. They are also entirely reconcilable: I was analysing other’s motives for behaviour. I made different assumptions of motive in each case, quite fairly since not all in the market need have the same motive, and anyway we have to assume motive so it is reasonable to test varying scenarios: in each case the answer was that perceived behaviour could not be matched with expectation.
Neither analysis suggests I am either drunk or an idiot. Both suggest I am applying objective critical thought to the situation we are in. Neither suggest I am ‘hard left’ as your friend Georges implies: social democrats exist in all three major parties in the UK, although rare in the Tories these days (their loss).
What this really shows is the depravity of your argument. Insults don’t work. Why not try thinking, even at the risk of being misunderstood?
Richard
[…] I’ve suggested the FTSE is overvalued on fundamentals still, and that logically a value of 2900 is appropriate at the moment. […]
[…] I’ve suggested the FTSE is overvalued on fundamentals still, and that logically a value of 2900 is appropriate at the moment. […]
[…] suggested here that a value in excess of 2900 was […]
[…] suggested here that a value in excess of 2900 was […]
[…] suggested even lower was right a while back – at around 2,900. Maybe I was a little cautious, but those pinning on their hopes on equities right now are simply […]
[…] suggested even lower was right a while back – at around 2,900. Maybe I was a little cautious, but those pinning on their hopes on equities right now are simply […]