Saturday, March 24, 2012

Market to GDP Ratios - Can Australia Soar?

The Australian market could soar based on its current Market Capitalisation to GDP percentage ratio. Australia's ratio is the closest to its medium term minimum of 21 markets considered at GuruFocus' Global Market Valuation page (

The whole page is worth a read as it considers GDP growth, dividends in addition to the historical range and current Market to GDP before projecting a growth rate for the stock market over coming years. While I think there may be significant diiferences in outcomes to those projected, the methodolgy and inputs are worth consideration.

The chart on historical GDP growth alone is worth a look:

Does Market to GDP compared to the prior low show Australia will soar?
Here is our current interest, the current ratio of Market to GDP ("M/G")  compared to medium term historical minimums of that percentage. Colours generally help identify the 6 highest and 6 lowest in each column. In the "Years" data column it shows those that might not have a single full cycle and those that clearly have multiple cycles, although only the US data has 1974 and the first oil shock.

From the table above, Australia is the country with the lowest  ratio of current M/G to historical low M/G in the years covered by the data. (Column "Now / Min")

11 countries are closer than Australia to the highest M/G ratio (Column "Now / Max") they have had in the years covered by the data and 9 are further from the historical high so Australia is near middle of the range on this measure.

We should note however that Australia has the second highest historical minimum after Singapore and so could be being rerated internationally because of concerns re housing markets, near extreme high resource prices and currency about 2 standard deviations above long term trend against USD.

If you are looking for a country that has likely above average GDP growth and a low M/G ratio compared to its historical low and in relative terms, China is worth watching.

If you think that Europe will move over time to improve its outlook and grow then Italy and Spain are near their historical lows.

Or Is It A Warning?
One could take the view that the countries regarded by the international investing community as likely to have worse problems  in the near future are the ones with the lowest "Now / Min". If China has a hard landing it would certainly have a bad impact on Australia, and we already know that Italy, Spain, Belgium and France have problems already and they are likely to have shrinking GDP or zero growth if austerity is maintained.

As an aside, if the low M/G is a warning it seems that few believe that US will impose austerity in 2013 as is  the outcome of budget deals already done, defaults on reaching deals and expiring Bush tax cuts. The table below from the Congressional Budget Office shows the dramatic austerity based on current settings. I have little doubt that budget outcomes like these would cause a recession in the US before mid 2013 which would last till at least mid 2014 and that there would be little the Fed could do to alleviate it. If imposed it would be a "recession we had to have" to get debt under control.

                       2011    2012     2013     2014
Revenues        2,303    2,456    2,968    3,283
Outlays           3,603    3,627    3,580    3,668
                     _____    _____    ____    ____
Total Deficit   -1,300    -1,171    -612    -385

And of course, if the US goes into recession other countries either have to stimulate through increased budget deficits or will likely also have to endure recession (and have the automatic stabilisers increase deficits anyway.)

Note on methodology
Because of the differing ranges for differing countries and the apparently different average relativity of the Market to GDP (see Italy which is low at 22.5 and Singapore which is high at 254), I felt it was more likely to be meaningful to look at the ratio now compared to the low point in the ratio. On this measure Australia is the closest to its lowest ratio of Market to GDP based on the last 12 years data (which includes the lows of  of 2002 and 2009 (a dramatic low) and the highs of 2001 (a modest peak) and 2007 (a dramatic high in terms of 5 year growth and compared to GDP).

Notes re years of data 
The data for Australia does not capture the lows of 1974 or 1987 which might have had lower Market to GDP ratios, but these years are captured for some other countries, so some caution is warranted. The Data for all countries other than Belgium captures the 2007 high and 2009 low. The data for all countries other than Italy, Russia and Belgium captures the full cycle from the 2002 low through the 2007 high, 2008/9 low to this year.
The exact date of the last update of GDP figures is not known and so the potential variation is significant for countries that are contracting like Spain or expanding quickly like China.
The last update of the market capitalisation is not known and it is not known whether it is based on the ETF referenced or the total capitalisation of all publicly listed stocks.

Monday, March 5, 2012

Coppock, MACD and Dashboard Update

The month end summary is:

1. Coppock says not yet for All Ords
2. Coppock now says BUY for Nikkei 225 in Yen
3. MACD says BUY for All Ords
4. Modified Turtle says not yet for All Ords
5. Virtually all moving averages say BUY for All Ords
6. 2 Month growth SMA's say pause or fall likely for All Ords

My interpretation is that for a medium term investor, don't buy more until the All Ords breaks 4470 and at present there is a significant risk of a fall of 10% as 2 month growth rates reached rarely sustainable levels (84th percentile at daily peak) and the 10 day and 30 days SMA's of 2 month growth have rolled/are rolling over.

Here are the tables:

Coppock and MACD (some Major International Markets):

Note that only the Nikkei has a positive BUY (for Yen or hedged international investors). All other Coppocks lost ground and the early March figures already show another fall other than for Nikkei, so the end of month figures weren't mere window dressing. The falls for S&P, Nasdaq and FTSE are technically meaningless as the only true Coppock signal is turning up from bleow zero and these indices had Coppocks aboev zero at 29 Feb.

The other major note is that all long term MACD's have already shown buys, but this is a slightly more volatile indicator. Will Coppock follow? Time will tell.

All Ords Dashboard:

The SMA's are generally indicating an uptrend has commenced both on direction of their trend and on most crosses.

Growth percentiles indicate the market is not likely to be overpriced. The 3 year growth and percentile is an artifact of the 2009 bottom and will shortly start to revert as we move more than 3 years from the 2009 bottom, but the 4 year figures will start to look higher as the 3 year figures fall.

2 month growth is slightly elevated above median but is falling from recent highs. It's cycle could indicate a fall of around/near/more than 10% as it's 10 and 30 day SMAs have/are rolled/rolling over.

1 and 2 year performance continue to indicate we are near a median bottom (at Sept 2011) based on data since 1984.

Performance against  GDP also suggest that the market is not overvalued.

Earnings Yield against 10 year Bond Yields indicates the market is cheap compared to most of the modern (post 1960) period, but it should be noted that in the US the Dow (DJIA) went for very long periods where investors demanded higher yields on shares than bonds out of fear of losses based on recent experience, uncertainty and patriotism.


The pattern of recoveries since 1984 also indicates we may well be in a continuing major up trend but there is one major fly in the ointment. The recovery from the bottom in 1987 was terminated by a loos of almost all the gains as we moved to 1991. The 1987 fall takes some relevance as it was the last fall of 50% in the All Ords prior to 2008/9.

The range of possibilities for the future is wide (less so if reindexed to the current day past the bottom and most recoveries continued largely positive from this point, other than the 1987 descent to 1991.

Modified Turtle
My modified Turtle breakout indicator has not yet been broken. I have modified the rules and numbers to reduce chance of being whipsawn, but it comes at a cost of likely lower returns for having missed a section of upturns and selling later in any major fall. The chart above shows the sideways pattern for the last few months and that the All Ords faces stiff resistance around the 40% above the bottom mark which as the following chart shows is at around 4400.From my dashboard above you can see that my modified Turtle says I should have been out for months and not get back in until 4470 (based on being interested in medium term cycles, not trading.)

As volatility has decreased so has the distance between the buy and sell lines. The upturn in various SMA's of the All Ords can also be seen in the chart below.

Being loss sensitive because I am in drawdown phase I am waiting to see if the current peaking of the 2 month cycle leads to declines, waiting for a Coppock BUY signal and waiting for a modified Turtle break out.

Friday, March 2, 2012

Building Approvals Review

Building Approvals by Value jumped dramatically in January 2012. The jump is in the 99th percentile of monthly growth since 1974.

There are also some concerns about the YOY and MOM jump in value in Victoria and SA.

NSW Vic Qld SA Total
MOM -9.1% 75.3% -6.2% 1043.8% 51.0%
YOY -3.2% 85.6% -0.7% 774.2% 61.5%

MOM -27.5% -23.2% -34.2% -64.9%
YOY -15.1% -46.1% 76.8% -48.2%


The main point of this article is to look at the trends and whether we are looking at an employment recession, particulalry in Victoria and NSW.

The chart below is deflated at 7.5% . This is 3.5% for inflation, 2.0% for population growth and 2.0% for increases in real wealth (which leads to bigger more expensive buildings and more space per person in a building. The result of choosing these deflators is that the use of a 7.5% total deflator gives a virtually horizontal linear trend, putting slowdowns in sharp relief.

From this chart of deflated building approvals, the current 12 month moving average is about the level of the 2001 bottom. 2001/2/3 was a period of very slow growth in Real GDP.

Jun-2001 0.6%
Sep-2001 1.6%
Dec-2001 0.8%
Mar-2002 1.4%
Jun-2002 1.1%
Sep-2002 0.5%
Dec-2002 1.0%
Mar-2003 0.3%
Jun-2003 1.2%

While GDP might be supported by the resource boom, there is a real chance that employment in the most populous states will not as older more experienced workers with construction experience will be less mobile, while younger, more mobile workers will have less experience and it might not be regarded as sufficient for more complex resource project construction.

The possible solution to lower employment in Sydney & Melbourne will be fly in, fly out (FIFO)but with lower wages than might otherwise be the case as construction unemployment bites harder. FIFO will bring its own problems for families and resource companies but would ameliorate the labour and employment problems that will otherwise exist.

Now is the time for construction workers in Sydney and Melbourne to be increasing skills relevant to resource construction and operations, including vehicle and equipment licences, specialised welding skills and the like.

Could the Reserve Bank be keeping rates high to encourage savings to fund the resources boom and to cause concern for developers to allow some unemlpoyment in construction to assist in providing labour for the resources boom, or is it just a happy congruence of events?

Thursday, March 1, 2012

Is This Why Whitlam "Had To Go"?

Maybe it was a backlash against rapid social change, maybe it was a reaction to some very poor/naive ministerial thinking like the Khemlani Loans Affair, maybe it was because of the proposed "buying back the farm" (well mining projects actually) by RFX Connor, maybe it was because of the destabilising effects of inflation, or maybe it was because the owners of businesses could see themselves going backwards compared to nominal GDP growth.

Since about 1960 to now the Australian All Ords has grown at just over twice the rate of GDP. But it grew far slower than that during the Whitlam years. In fact GDP went up by 95% from September 1959 to September 1974 and the Stock market was back at it's 1959 level.

From June 1972 to September 1974 the All Ords fell from 414 to 194 (over 50%) while GDP grew by 6%.

It looked terrible for owners of shares. But from 1975 to 1987 were the golden years for shareholders as PE ratios were rerated from 5.4 to 20.1. Since 1987 PE's have fallen back to about 15 but that has been offset by GDP growth over the period.

The Whitlam years coincided with some of the worst years ever for shareholders in terms of shareprice growth compared to GDP growth. Look at the increase in cumulative under performance from late '72 to '75. December 75 was -100 on the chart. It didn't get much worse than during the Whitlam years. (I am not arguing causation, as that must be considered in light of the first oil shock.)

(When the edge of the purple area is sloping down to the right shares are getting a lesser share of GDP growth over the last 10 quarters, when the edge of the purple area is sloping up to the right shares are growing much faster than GDP over the last 10 quarters).

The chart also provokes the question, "In a just and equitable society should", or alternatively "Does efficient capitalism really demand that" equity holders get a return that grows at twice the rate of GDP?"

"In a self centred society are workers entitled to use whatever means they can to maximise their share of production, income and wealth in the same way owners of capital are so entitled?"

Or as Ayn Rand might say the proper moral purpose of a one (worker)'s life is the pursuit of one's own happiness (or rational self-interest), ......even if it means forming unions and demanding an unsustainable share of the fruits of production and service.

Dangers in Periodic Growth Measures - But the Medium Term Outlook Could Be OK

As we approach the 3rd anniversary of the 6 March 2009 bottom of the Australian All Ordinaries let's look at actual and projected growth for the All Ords.

Consider the following tables. Each table includes a column which shows what percentile of performance since 1984 each period's performance falls within. For comparison, the right hand column shows the median percentile for each period taking into account all tops in the All Ordinaries since 1984. The performance which might cause concern that we are near a market top is highlighted red in the percentile column. We will see how it advances year by year because of the change in the market levels which are falling out of periodic performances as time goes by.

At 6 March 2012 if the market is at about present levels (I have assumed 4400):

All Ords 4400 6/03/2012 Med Top
Perf Over % Percentile Percentile
1 year -10% 14 68
2 years -8% 16 83
3 Years 40% 76 77
4 years -20% 4 54
5 years -23% 0 79

Three year growth looks quite high in percentile terms. You might feel that, based on that measure, the market shouldn't go much higher. But on each other period the market is at quite low levels of growth and could easily be higher.

Also, what will happen to 3 year performance after 6 March 2012 if the market stays at about current levels? It will fall significantly!

But, 4 year performance which is presently near all time lows in percentile terms will start to increase significantly!

This happens as the relatively high market levels of 2007 and early 2008 fall out of the calculation and are replaced by the lower values of the current market, even if the All Ords stays around current levels.

So lets look at a scenario for 6 March 2013. We will see that 3 year performance goes back to well below the mean (50th percentile) at 16th percentile, whereas 4 year performance is now in the 65th percentile and well above the median 4 year performance for market tops since 1984.

All Ords 4400 6/03/2013 Med Top
Perf Over % Percentile Percentile
1 year 0% 29 68
2 years -10% 12 83
3 Years -8% 16 77
4 years 40% 65 54
5 years -20% 0 79

So now we can look at 2014 and 2015 and you will see how the percentile performance would continue to change each year. These tables continue to use 4400 (around current market values, rounded for convenience) at 6 March 2014 and 2015.

First 2014:

All Ords 4400 6/03/2014 Med Top
Perf Over % Percentile Percentile
1 year 0% 29 68
2 years 0% 25 83
3 Years -10% 14 77
4 years -8% 12 54
5 years 40% 38 79

And now 2015:

All Ords 4400 6/03/2015 Med Top
Perf Over % Percentile Percentile
1 year 0% 29 68
2 years 0% 25 83
3 Years 0% 22 77
4 years -10% 9 54
5 years -8% 1 79

 It can be seen that by 6 March 2015 without further growth the All Ords would be well below median values for each performance measurement period, would be near all time lows in growth percentiles for 4 and 5 years and dramatically below the median levels of performance for each period at prior market tops since 1984.

In fact the All Ords could grow by 12% pa for each of the next 3 years (from my assumed level of 4400 at 6 March 2012) and all performance measurement periods would be below the median levels for the market tops since 1984. In the table below the rows are in descending order from 1 to 5 year performance. The top half of the table is percentage increase over the relevant period of years. The bottom half of the table shows the percentile since 1984 into which that performance falls, again in descending order from 1 to 5 years. Every percentile in 2015 is less than the median percentile for that period of performance for the market tops from 1984 to February 2012.

6/03/2013 6/03/2014 6/03/2015 Med Top
12% 12% 12% 15%
1% 25% 25% 37%
3% 13% 40% 41%
57% 16% 26% 33%
-11% 75% 30% 70%

61 61 61 68
26 70 70 83
26 38 77 77
83 33 44 54
0 85 26 79

The moral of the story is that after booms and busts, when looking at relative performance compared to historical records, care has to be taken to ensure an understanding of what is falling out of the periods as well as what is coming into the periods from recent changes.

This is not a prediction of market rises for a particular length of time or even at all. It is just to ensure that we understand how the performance of the market over time periods is affected by the index values falling out of the period being examined. It also gives some idea of what could be possible if past patterns were to repeat, but past performance is no guide to future performance. Remember Japan and look at China and consider our private debt levels.

Since 1985, the longest period of negative 1 year growth being maintained appears to be from January 2008 to September 2009. The shortest significant periods seem to last about 12 months. But to get back to 0 growth over 1 year the market has to have turned up from the lows which would seem likely to have occurred by 6 months after 1 year growth first went negative. If the 1 year growth went negative in around July 2011, then by December 2011 you would be expecting to see an upturn in the market, with 1 year growth getting back to positive by July 2012.

There are a lot of things indicating that unless this time is different, the current upturn is likely to be sustained for a year or two.
1. Coppock is looking like turning up from below 0 and has been down to 13th percentile
2. 1 year performance has been negative for almost 9 months and has been down to 14th percentile
3. 2 year performance has been down to the 8th percentile, currently 13th percentile
4. Market has been to a median bottom based on various measures such as percentage fall of 20%, sum of growth over 1 & 2 and over 1, 2 & 3 years and has recovered more than 10%
5. 10, 30, 50 and 100 day moving averages have all turned up.
6. The 3 quarter market performance compared to a long term average has started increase. It rarely breaks down again until getting well into positive territory (ie getting 3 quarters at significantly above 7% pa increase in All Ords)
7. RBA has moved away from forecast tightening to having eased and being aware of the contractions in the real, non-resource, high employment sectors of the economy.

So statistically speaking the probability is for the All Ords to rise over the medium term (unless we were to have a performance like Japan where the performances and percentile cureves changed dramatically during the unwinding of the 1990's bubble.)

The Caveats to this are:
1. Things can always get worse as they did leading into 1991 which fell back almost to 1987 lows.
2. China could have a hard landing
3. Greece will still probably default eventually and Portugal and Ireland are not out of the woods.
4. There are still some calls out for a US recession based on "ensembles" of data (ignoring monetary data which has been grossly distorted by FED intervention, although Hussman seems to have let his timeframe drift out from 8 weeks to 18 months and ECRI seem to have gone very quiet. The Conference Board revised its Leading Indicator series but it suggests that the danger may have passed.
5. Oil prices are back near recent highs and there is uncertainty regarding Iran supply.
6. There is virtually no growth in Australian employment and this often leads to recession, but the savings rate seems to have stopped rising so as incomes increase even at low rates it might now flow into spending.


Assigning probabilities I would say 70% chance of a reasonable period of growth continuing for up to 1 to 2 years, with the chance increasing to 85% if we get a positive Coppock signal and the market breaks out above previous resistance around 4500. The Coppock did not give a signal at the end of February, 2012.

12% pa growth from current levels for the next 3 years would not look extraordinary for 1,2 or 3 years, although the 4 and 5 year growths would look quite high in separate years as explained above.

An All Ords of 5300 in 2015 would look quite reasonable on most "growth over period" measures.

Whether that growth would be evenly distributed or would be higher in currently depressed sectors is a matter of conjecture.