Jordan Wealth Management Group - ScotiaMcLeod Truro

Since the last time…

We are currently at the early days of “earnings season” where companies report their quarterly earnings. These periods often move markets because this is where earnings get compared to what had been estimated; with sometimes big moves to reward or punish those that surprise on the upside or downside. Equally, if not more important of late is what these companies provide for an outlook for future quarterly earnings.

The period we are in currently is inordinately important; as many prognosticators of market direction argue that expected earnings growth for this quarter and the year ahead are too optimistic – if they are right – there is the possibility – not the guarantee that markets could trade lower. As I write this, the pessimists are being given a fight, for at least today – Intel, often considered a proxy for the overall economy announced better than expected earnings. This is based on the simplistic notion that markets simply trade on a P/E (price to earnings) multiple only. So, if you forecast the companies comprising a market can collectively make one dollar this year in earnings, and that people are willing to pay, say 15 times these earnings for these companies, then the market is worth $15. You see what happens if companies only make ninety cents instead of one dollar. Fifeteen times ninety cents is $13.50 instead of $15. This value is not cast in stone, however. A stock/ the markets are worth whatever someone else is willing to pay for it on any given day. There may be buyers willing to pay 16.67 times earnings instead of 15 times – in which case the market value is unchanged.

The multiple of earnings is often a reflection of confidence - our markets over time have traded as low as 5.9 times earnings in 1949, and as high as 75 times earnings in 2009 and

46 times earnings at the height of the teck bubble in 2001. Our markets are currently trading at about 17 times trailing earnings and 14 times forward expected earnings. It is believed that the value of markets are in a “normal’ range if they are trading between ten and twenty times earnings; with 15 obviously being the middle ground.

My takeaway from this today is that the markets currently are not necessarily cheap – nor that expensive - and that the real wild card driving values will be confidence of investors. One interesting point is that there recently are some money managers feeling more positive about prospects for the markets – simply because the majority of investors are feeling the opposite – pessimistic at present.

Other than the above, the following positives and negatives are known and will affect our future:

. The G20 took the stance that indebted nations need to aggressively fight their deficits by raising taxes and cutting spending – with the hope that creditor nations will ramp up their consumer spending to partially offset the slow down that cut backs will cause. Many argue (the US the loudest), that another significant stimulus package is needed by Europe or the US to avoid deflation – and if the world then gets back on track – we then need to inflate away the debt.

. China is attempting to engineer a “soft” landing for their economy – they want to stem their housing price bubble. If they get it right – this will just be a pause in the good growth that resource markets like we in Canada have enjoyed. If China gets it wrong and they tighten too much – then our markets are in for a rough ride first.

. Two thirds of American homeowners have a mortgage, and 14% of those are in arrears or in the foreclosure process. Loans have been modified to cut payments so that more loans do not go into foreclosure – but this is having limited success. So, there is the danger that many more homes may go up for sale at the same time, and that could move prices lower still – it is believed that a further ten percent price decline could put the same additional percent of mortgages “under water”. We will need to get partway through this period before we can have a better picture of the future ahead.

. Corporations in North America are sitting on more cash on their balance sheets than in a very long time – this cash can eventually be put to productive use by investments in plant and equipment, or be used to repurchase stock, thus increasing earnings for the balance of shares left, or will allow companies to increase their dividends paid to shareholders.

The bottom line advice I can give you at present is to stay invested in a range of investments, and don’t try to time the market with 100% of your investments. The markets are a forward-looking discount mechanism – and much (but I am sure not all) of the gloom and doom is hopefully already priced in to our markets.