Hutch - to elaborate a little. It seems that a factor you haven't considered is the question of future profits in listed securities.
A couple of ways of evaluating a business would be the use of break up value, and also the discounted present value of future earnings. A valuer looks some way out into the future, (not like a Wall Street analyst who only looks a year out it seems, and more often only a quarter out). There has to be an interest assumption, usually based on prevailing rates. The lower the interest rate the higher the present value (of future earnings), the higher the rate, the lower the p.v. The stock market does something similar in the way it arrives at value, bearing in mind also that the rate of growth has a huge effect on multiples - so we get huge p.e. ratios for growth stocks and have the situation where there is a huge premium given to stocks (eg internet ones) which have shown no profits at all - but which are expected to be profitable at some future date.
The market has been discounting, in many sectors, high growth and continued acceleration of growth. If earnings turn flat, or if they only just beat expectations - then we could get a sharp ride - down. This market is looking very tired. What is going to drive it higher than irrational exuberance can take it? The business cycle can't be dead.
The banks appear to be pulling in their horns. Large write-offs deplete previous assumptions of bank capital growth.
The pat answer I find hard is the one which suggests that AG has only to open the tap a little and markets will go up, and the economy will be fine. I think the outlook for future earnings growth, and all the underlying assumptions build into this marker, will become the dominant factor from here on. E |
