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Posted: 11 November 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

At 11 o'clock on the 11th day of the 11th month a bugle was sounded, and World War One officially ended.


Read poems from the likes of Wilfred Owen , Siegfried Sassoon and Rupert Brooke to get a flavour of this crazy conflict... below  is a famous piece by Owen, who died on November 4 - a week before the conflict ended.

Relevance to the Markets? Plenty.


Rightly, it was known as the Great War - not because this or any war is "great", but because of the bizarrely high death tolls. World War One has also been called "the war to end all wars", since its accepted figure of 38.8m killed, woulded and missing in action seemed an unbeatable level. Taken over the 4 and a bit years, that amounts to 24,907 people lost every day, of which around 6,350 died. Daily!  Which seems impressive, unless you compare it with battles like the one at Canae in 215 BC, where Hannibal's Carthaginians gave the Romans a bloody hiding, with a one day Roman death toll of 48,200 ( according to Livy), 50,000 (Appian, Plutarch) or 60,000 (Quintillian). Add some 8,000 dead Carthaginians, and that was a very bloody single day.


So, it appears that history does repeat, with due adaptation for the technology and fashion of the day. And the reason is dreadfully simple - humans seem unable to evolve. The species agglommerates into empires, the winners conquer, then they collapse. And so it repeats.


So where is our much-loved JSE right now?


Here is the last 50 years, tracking the index vs earnings, and showing CPI inflation. The smooth line is the "trend" of where it seems both profits and the index normalise - a geometric compound return of 12.3% (excl dividends). Can we ever get very far from either the earnings line or the trend?




And here is a zoom in onto the last decade. Notice the average forecasts for JSE earnings, predicting strong growth of 30% then 17%.

And yet we are still some 51% higher than the average earnings multiple would have us trading, and 19% above the multi-decade trend.




So if you think history may come round again, are the eps forecasts too low? Is sharp profit growth going to get the blue line back up to, or maybe even above, the trend? Or, will it be different, this time?









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