STOCK MARKETS AINT MY BAG!

 Phil Anderson
Phil Anderson

I admit to not understanding the niceties of stock markets. At times this has been a source of frustration to my friend, Phil Anderson, whose knowledge of its workings are unparalleled.

I’ve struggled to ingest the detail as Phil has patiently explained some technical aspect or other of the ASX to me. His subscribers obviously derive great value from Phil’s incredible share market skills.

Still, my more real estate-oriented mind does occasionally seize upon certain of his insights; such as that the share market has already factored real estate market happenings into its prices well before the real estate market itself will. And I’m sure that’s usually correct, because that was the sequence of events when the US ‘subprime crisis’ hit. Although share market prices dived, residential real estate was first characterised by a drop in turnover before, after a short delay, prices reacted.

At least in the low to middle ranges of the Australian real estate market, we are currently in a somewhat longer hiatus between a fall in turnover and the price drop. The more limited, prestigious end of market has already experienced price declines at several top addresses, and margin calls against highly-leveraged property will account for more than a handful of these.

Similarly, my investigations into real estate sales in the early to mid 1920s in Australia and the US led me to conclude that it was not the 1929 United States stock market collapse that brought about the Great Depression, but rather the real estate boom that had preceded it. This isn’t widely understood, because it was October 1929 that grabbed all the headlines.

Phil Anderson’s excellent new book “The Secret Life of Real Estate” confirms this thesis. His foray into real estate cycles in the US over the last two centuries had me sitting up and paying attention, so I can recommend a read of “Secret Life” for anyone wishing to lay bare the workings of the real estate market and to understand how it impacts both upon the share market and the economy. Phil’s research into US real estate market cycles is painstaking, illuminating and enjoyable. I wonder whether you would differ from my layman’s approach to the following, Phil?

Last week I came across this “Chart of the Day” measuring the US stock market in terms of the S&P 500 price to earnings ratio. The recent spike leapt off the screen at me. It suggests that the P/E got as high as 144 in what I have assumed to be the recent ‘dead cat bounce’. The text accompanying the chart says that it still stood at 129 at the end of the June quarter. The poor profits reporting season obviously played a large part in these incredibly high ratios. By comparison Australian P/Es are far more modest as they struggle to break the 20 barrier.

If the “Chart of the Day” is accurate, it has similarity to the sub-3% yields experienced in the Australian residential market over recent years. Most people know that for the sake of commercial reality these anomalies must ‘correct’ back towards the long term mean – and if it happened to be 8 years after S11, or 80 years after the 1920s crash, I guess there’d be some sort of symmetry.

Stirring times!