3 September 2009

Dear Fellow Investor

What a difference a year makes.

About a year ago the markets were still fairly expensive, in March this year very inexpensive, and today about fairly valued.

The following table shows the price/earnings ratio and dividend yields of the main indices worldwide.



Price / Earnings

Dividend Yield %

FTSE 100




FTSE All Share








Dax Mid-Cap




DJ Stoxx 50




DJ Stoxx 600




DJ Euro Stoxx 50








CAC 40 Index




Dow Jones Industrial




S&P 500




Nikkei 225




Source: Bloomberg on 31 Aug 2009 For method of calculation see end of newsletter.

As can be seen on a price earnings basis the indices are quite expensive.

You can argue that the earnings used to calculate the ratio is below normal but my question is what is a normal level of earnings in the current macro economic environment?

Even if you assume earnings will increase 30% in the next year the markets are still not cheap.

Dividend yields in comparison look attractive especially in Europe.

However as a large number of companies pay dividends annually dividend yields may be overstated as the numbers refer to last years dividend payments. Decreasing dividends may already be reflected in US indices as a lot of companies paying quarterly dividend.

Also with an uncertain earnings climate companies may choose to lower dividends further this year to strengthen their balance sheets.

The idea that markets are fairly valued was also the topic of, the highly respected fund manager, Jeremy Grantham’s second quarter letter titled Boring Fair Price! (pdf):

?A year ago, it was very easy to know what to be: a risk avoider. It was not so easy reinvesting when terrified, but most of us knew that we should have been doing more. But today? It’s difficult to be inspired at fair value.?

So who is buying and pushing markets steadily upwards on unusually low volumes, even for summer holiday months in the northern hemisphere?

It is definitely not insiders or share buybacks supporting share prices. According to Charles Biderman, CEO of investment-flow research firm Trimtabs ?Insider buying is non-existent?.

He also mentioned that with no corporate buying in the form of of buybacks to acquisitions

?I have no idea where the money is coming to keep prices from plunging?.

The Financial Times in its article Cash-rich fund managers ignore correction fears may have the answer:

A survey by Bank of America Merrill Lynch reveals that the level of cash balances of the 204 equity fund managers polled plunged to 3.5 per cent in the second week of August, hitting their lowest level since July 2007.

?This is the strongest market sentiment in two years and it represents a big turnaround from the apocalyptic bearishness of March,?

wrote the survey’s authors Gary Baker and Michael Hartnett.

All I know is that the world economy looked a lot better in July 2007 compared to today.

I do not want to be fully invested with the market fairly valued and an uncertain economic outlook.

Looking at markets overall is one thing but are there any segments that are still attractively priced?

Jeremy Grantham, in the letter mentioned above, thinks so:

?The easy winner of the cheapest equity sub-category contest is still high quality U.S. blue chips. They were really trashed on a relative basis by the second quarter rally in junk. I understand a rally in junk after the record decline, but this was excessive and based apparently on unrealistic hopes for a strong, sustained economic recovery.

Such a recovery seems most unlikely, whereas a temporary, weaker recovery appeared very likely three months ago as the substantial size of the stimulus package was revealed. The latter scenario still seems probable.?

This is also what I found. There are still attractively priced good quality companies not only in the US but also in Europe.

Telecommunication companies in Europe for example hardly moved up in the rally and only started moving up in the last month. The Financial Times shows that Vivendi the French Telecom and computer gaming company currently trades on a price to earnings ratio of 9.8 and has a dividend yield of 7%. Deutsche Telekom has a dividend yield of 8.6%.

So even with fairly priced markets if you look on a individual company level there are still attractive opportunities left.



It looks like summer is starting to leave us here in Hamburg as the days are getting shorter. For my first six years in Germany the winter never really influenced me. However last year I started to not look forward to it at all, and this year is no different.

Hamburg is a beautiful city with a huge lake in the middle of the city. But the winters are dark with a rainy wet cold. As the city is very far north, north of New Foundland, when compared to North America daylight hours in winter are from about 9:00am to 4 pm. Not something to look forward to.

Your enjoying the last days of summer analyst

Tim du Toit

Disclosure: I do not have a position in any of the securities mentioned in the article

Table Method of calculation

Price / Earnings ratio

The price to earnings ratio, which equals the current security’s price divided by the earnings per share. Indices use an aggregate P/E ratio weighted to reflect the P/E multiples of the underlying index members so that the index level P/E calculation is consistent with the index level calculation.

The index P/E calculation multiplies the trailing 12 month earnings for each stock by the stock’s weight in the index. To obtain the index P/E, the value of the index is divided by the total of these weighted earnings for all the stocks in the index. Equities use 12 month EPS before extraordinary items.

Dividend Yield:

The annual dividends of the component shares during the past 12 months divided by the index value, expressed as a percentage.

The trailing 12 month dividend per share is multiplied by the current number of shares outstanding, then divided by an index divisor. The sum of these shares is divided by the current price of the index.