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A Lion’s eye on the Bulls and Bears

“In India, companies may fall sick, but promoters rarely do!”

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March 19, 2009

A Yellow Broking House Screams Yellow on using P/E and P/BV Valuation Metrics to make Macro Valuation Calls !..Absurd and Rubbish they say ! Not really, we say !

There’s this Yellow Coloured Broking House,that’s been screaming Yellow ! for some time Now…Last Week they used Slumdog Millionaire Analogy and Two days ago they have slammed Valuation Metrics of P/E and P/BV to value our Stock Markets !…This House continues to court controversies and it’s head SS continues to confront SEBI !…. Atleast I have to concede that his reports are entertaining…I asume they are his,as they are written in first person ,but no credits have been given !…one need not agree….but even to disagree,you need to know what he’s playing the Devils Advovate about !

They’re rough on Living Investment Legend and Value Investor,Warren Buffett and   expect the S & P 500 to correct yet further to 450 from current 650-700 levels !…In short they continue to spew stark yellow,yellow,dirty fellow Bearisms all over their Yellow Reports

They are entitled to their Views….I’m not saying I’m Bullish ,but I can’t help but strongly disagree with their ‘analytical and conceptual rigors’,as they put it!

They thrash P/E and P/BV,asserting strongly that it is foolish to compare these metrics between different years….as skewness in individual constitutents earnings,ROE,COC,Inflation etc influence performance…and factors for skewness and replacing constitutents in the Index are not considered….Relative Valuations Comparisons over Different Periods are therefore not Apple to Apple,and to make them so,is really an improbable task.

Darlings,Comparisons do tell a story…all your arguments are already build into the Pricing,sometimes laggardly as Eugene Fama’s Hypothesis of Strong,Semi-Strong and Weak Markets would decide …moreover Suitability and Selection of Constituents is an ongoing process so that these represent best proxies and the best mix and therefore ,with a few exceptions,the aggregate EPS can be used as a denominator to Index level and this Multiple can be compared between periods to make macro valuation calls…This should answer your argument on skewness of Earnings and the hypothetical illustration you give where in three Seperate scenarios the P/E wll be 10 as Market Cap of all constituents is 500 and aggregate earnings is 50….but the skewness in earnings  of the individual constituents varies from stable to extreme.

You have tried to obfuscate,what really is a simple comparative issue,by putting up a P/E Formula…use Graham & Dodd (1934)or even the perfected Gordon’s (1962) model to incorporate Growth…..Simply P/E =Market Price /EPS….so when Market Price begins to runaway ahead of fundamentals,the P/E too goes berserk…..Check out History…In 1992,at the peak of Harshad Mehta’s reign and his frenzied Market Buying ( Remember ACC crossing Rs 10000 and Crackers on Dalal Street ! based on Harshad Mehta expounding the Replacement Cost Theory !)the Sensex P/E was an absurd 70….Even in the mid 1990s, when CCI was abolished and IPOs were like white ants coming out of the woodwork at obscene premiums,the Sensex P/E was 30+…Then in Ketan Parekh’s ICE age in 1999/2000,the Sensex P/E again crossed 30 as Panic Buying set in and Prices tried to reach the Moon !….These were times of excess and Markets were clearly overvalued…In 2001-2003 the P/E slumped to below 10 as Share Prices seemed to revolt against man made excesses !…clearly moving markets back towards sanity read more

Inflation at Record Low of just 0.44%….Good or Bad !?

The Common Man should be happy that Inflation is just announced at a record low of just 0.44%….but he’s not !….Where have consumer retail prices come down really ?…Food Costs are yet high

It’s the base effect working…We’re coming from High Inflation rates of over 10%  in the second half of 2008 when Oil had rushed to cross US $ 140/b…but has now receded sharply to below US $ 50/b

So what will such a low Inflation rate lead to?…..Clearly Interest rates and GDP Growth rates too will ease out…… Staring at us and growing stronger in focus are the danger signals of deflation and ebbing demand,atleast in the short term

You’d have to be godly optimistic to believe that stock market rallies will sustain   

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