Chart Check-up

Aurum Weekly Access - 11/8/13
By Michael McKeown, CFA, CPA - Director of Research
 

A picture is worth... you know how it goes.  But we will just add a few bits of our observances on the graphical displays of data.

 

The spider chart below does not include data from today's strong labor report, but it shows what matters – the trend improving in leading indicators, especially payroll related.

spidernov

The bull market over the past five years brings us back to loftier valuations.  Price is what you pay and value is what you get, as they say.  Values today are more expensive as measured by the Graham Dodd Price to Earnings ratio (also known as the Shiller PE).

 

gdpe2013

This single metric, which smooths out the business profits cycle, explains nearly half of future returns over the next ten years (R-squared of .45).  Investors need not run for the hills but should temper expectations from this price level since real returns maxed out at 6.5% and were as low as -3% in the past.

 

A cheaper area today is emerging markets, but it is so for a reason.  Many country interest rate structures are inverted; meaning short dated debt (a few months to 2 years) has a higher interest rate than long dated debt (10 years). This is a telltale sign of recession or dramatically slowing growth.  In turn, it feeds into corporate performance and increasing negative Earnings Per Share (EPS) surprises.

 
em_eps

While many people cite the problems of debt here in the U.S., our counterparts in other Developing Markets (DM) and now even Emerging Markets (EM) over the past couple of years were not shy about leveraging up.  DMs actually paid down debt.

em_dm_bank_credit

A bright spot over the last quarter was Europe.  Investors finally recognized the improving local economies and the attractive valuations.  The European Central Bank’s interest rate cut this week could add fuel to the fire, though it did put a stop to the Euro’s ascent so far this year.

 

europe_shiller_nov13

Hopefully this quick trip around the world gives a feel for what we read in the data.

 

 
 
 
Important Disclosures 
  
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.
 

 

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