Market Wrap - Week Ending Friday 4th July 2008

By Jason Fittler

"The facts are simple, our market is undervalued right now, companies are paying whooping dividends which will provide a great return until the market returns to fair value."

Let me repeat that, Do Not Sell. Now is not the time to panic and sell out your portfolio. Below I will explain my reasons. For most of you this will give you little comfort but the fact is our market is cheap and will recover. However if you sell now the game is over, your portfolio will not recover.

First let me say I do not know when the recovery will happen but it will happen sooner or later, my guess is later. Second, right now your emotions are in control not your intelligence. This note is speaking to your intelligence not your emotions so please keep that in mind when reading.

Below is a chart of the market since February as you can see we have passed through the 5100 level and we still have one of the toughest reporting seasons to go. Yes, I do think it could get worse but trying to pick the bottom is a mugs game. Right now stocks are cheap and if you truly have a long term view, buying ANZ for a 9% yield is better than a term deposit at ANZ.

Below the facts.


The facts
(These facts come from our Chief Economist Michael Knox quarterly presentation)

1. Oil is now 1.6 standard errors in excess of our model estimate. It has overshot the peak levels of overvaluation of 2005 but is not as high as the 2.5 standard errors of overvaluation it saw in 2000. Should oil put in a peak of a similar level as in 2000, it would begin building a top at around $US145 per barrel. Oil should return to $97.50 a barrel.

2. Our Gold model is based on the US budget balance and US headline inflation. The equilibrium price is now $US577 per ounce or $US327.8 per ounce below the actual traded price on 21 May of $US905 per ounce. We expect to see the price of Gold fall. 

3. Companies 12 month operating earnings per share are down 22.25% in the US and up 22.3% in Australia. Our market is cheap because it is cheap.

4. On 27 May, the ASX200 at 5727 points was 797 points below fair value of 6524 points. Our model explains 95.5% of monthly variation of the ASX200. The market is deeply undervalued. We expect it will rise towards fair value by December.

5. On 27 May the ASX200 was at a discount of 12.22% to fair value. This compares to a discount of 12% during the first Gulf War in 1992, 7.5% during the bond crash of 1995, 9% during the Asian crisis of 1997, 7% during the Russian bond crisis of 1998 and 20% during the tech crash of 2003.

6. The growth rate of Australian export prices re-accelerated in 2008 following the lead period by accelerating total international reserves.

The facts are simple our market is undervalued right now, companies are paying whooping dividends which will provide a great return until the market returns to fair value.

The facts are if you are in the market hold on for the dividend and return to fair value if you are out of the market now is a good time to start buying in with a 2-3 year view.

Until next week.