The Destroyer of Finance

 Still sort of stuck on the whole PE issue while I look for an alternative way of valuing stock indexes that can be more reliably done with easily found data.

 I have been considering a change in the formula as it relates to the economic freedom factors, however.  I applied the ratings at a flat level compared to the time biased PEG results, but I got to thinking that it probably wasn’t as good as I could do it.  So I’m going to go back in and do a similar time biasing for the economic freedom ratings, but inverse to the way I biased the GDP growth.  I figure that even a heavily controlled economy can meet it’s expected growth this year, but the economic freedom should have more of an effect on the forecasts further into the future.  I’m not sure if I’ll use the same weights as before or not, but I’ve been a little busy to pull it together.

 After slotting in adjustments for economic freedom, the top 5 came in as China, Russia, Singapore, South Africa, and Malaysia.

 I also attempted to updated the P/E ratios of the various index funds, but I couldn’t find a PE for China or Russia, which is sort of important given that they are top 5 economies on this list.

 And I added Chile, Austria, the Netherlands, and Belgium to the study, where they ranked 12-15 in that order (out of 26).

 I’m looking for two things now: a source for at least reasonably up to date P/E values for the actual stock indexes (not just the ETFs), or a metric to replace the P/E value in the formula, although I’m not sure what that might be.

 There’s one in every family.

 It’s dark and wet outside.  The clouds hang low with pregnant expectation of more rain to come.  A stiff northern breeze strips away the remaining warmth in the air.  Strewn around us is the wreckage of collapsing financial systems ’round the world.

  Welcome to spring time.

That’s one small step for man! One giant… I have a dream!

 As alluded to, the global markets have responded… unfavorably to recent economic developments in the US, mainly higher than appreciated inflation and lower than appreciated consumer spending.  3% off was the order of the day in Asia (though the over achieving Japanese cut 4.5%), while about 1.5% seems popular so far in Euro trading.

 The Telegraph chimes in with it’s dire drum beat.  According to them, everybody’s straight F’d, and at this point that’s still over dramatic town crier selling copy.  Unfortunately, eh, it is… possible?  It could happen, just like the railing around the edge of the Grand Canyon could break away when you lean over it?  It’s unthinkable, right, but now that you really take a close look, those bolts securing the base do look sort of rusty….

 Don’t feel like clicking?

“I never thought I would see anything like this in my life,” said James Steele, an HSBC economist in New York.

No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan’s giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS).

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72% of face value on Friday. The BBB tier fetched 10.42%. The “toxic” tranches are worthless.

 Err…  let’s rewind back to the derivatives market… the $45 trillion one?  You know, five years ago, Warren Buffett described the derivatives market as a”time bomb.”  People laughed at him.  People laughed at him when he said there was a bubble in the tech market too.  Said times had passed him by.  Who’s laughing now?

There’s no access for you in this quadrant.

 Staying on topic of people who have made a lot of money and might be onto something: Jim Rogers.  Who?  I know, I know.  He kind of carved out a successful career running investment fund Quantum with George Soros (another super billionaire that name is unfamiliar).  He also has some over the top drama but he has backed it up by selling his NYC condo and moving to Singapore.  Although moving to Singapore if you’re predicting armed conflict over food and other natural resources seems counterproductive.

 Happy 143rd birthday to HSBC Group bank, who announced today that they managed a profit despite the mortgage writedowns.

My best friends call me “Cash.”

 Oil is pressing up against $104, Gold is knocking against $1,000 (sorry mike), and the dollar is setting new lows… again.  Speaking of oil, 70 years ago today oil was discovered in Saudi Arabia.

 To help you deal with the oil, VW announces release plans for hybrid diesel.  Look for one of these or something like in my driveway in about two years.

 Speaking of VW, Porsche takes majority stake in VW, Porsche CEO promises to bring company’s expertise in retractable rear wings to VW.

 For a further list of reasons why we’re screwed, click here.  Highlights?  Some new indicators blinking red on the recession dial, another mortgage lender starts walking the bankruptcy plank (Thornburg), Boeing’s pissed, Ford sucks (stunner), and Diebold is up on a takeover bid.  I owned some diebold stock once, but that was nearly 8 years ago.  Good times.  Oh, and Countrywide says: Surprise, we’re going to keep losing money.

 Announcing the BVR Project!

 I’ve decided to title my efforts to develop the international PEG ratios the “Boom-wow Vale Rating Project,” or the BVR Project for short and to satisfy my immature, juvenile sense of humor.

 So far on my list of things to do is 

• factor in a metric for economic freedom, such a state being necessary for continued, sustainable economic growth.  I’m probably going to roll with heritage.org’s Index of Economic Freedom.
• Get updated PE ratios for the indexes included, and attempt to expand to indexes involved in the study.
• Test for correlation between growth in GDP and growth in corporate profits.  I’ll have to use nominal GDP (not inflation adjusted), but I think there’s enough test data for the US and UK to provide me a decent publicly available data set.  I’m certain they are positively correlated, but at what level?

 Well, that’s all for now, I think.  The suggestion box is open.

 So I saw a pretty interesting idea at this seeking alpha post.  Mostly this came to my attention because I bought some stock in an ETF that tracks Singapore’s stock index (EWS).  I didn’t commit enough money to it, blah blah blah, but it’s there.

 As mentioned before, PEG can be an interesting tool for evaluating the “value” of a stock.  No one ratio can ever tell the whole story, but a PEG of less than 1 inspires a bargain hunter while a PEG of greater than 1 raises the eyebrows, or at least that’s the basic theory.

 So I decided to duplicate the Seeking Alpha idea, but add a little bit of twist to it.  I kept the PE numbers from the original, but used GDP (real) growth forecasts from economist.com.  “Real” means “adjusted for inflation.”  Also, I included forecasts for the next 5 years, then annualized the growth estimates.  Next, to account for the fact that a forecast for 2012 is much less accurate than a forecast for 2008, I also did a time biased growth estimate:

• 2008: 100%
• 2009: 90% (-10)
• 2010: 75% (-15)
• 2011: 55% (-20)
• 2012: 30% (-25)

 There’s no particular justification for the biasing, just a crude attempt to reflect the increasing speculative nature as the horizon moves out.

 Below is the chart containing both the straight annualized and time biased national PEGs.  I’ve highlighted in green those countries who’s PEG was noticeably improved by the time biasing and yellow those who were hurt by time biasing (meaning they were relying on higher growth four and 5 years in the future).

 The average straight annualized PEG is 5.04, the average time biased PEG is 5.14.  So, these PEGs aren’t really working on the same scale as normal corporate PEGs (which is centered on 1, in theory), partly because corporate growth forecasts aren’t usually adjusted for inflation, while real GDP is.

 I’d be interested in ways that this might be improved, if anyone has any ideas.

Good times,

leap day