Thank goodness that the building operations that have been going on right outside my window are nearly at an end. It seems that to add a few new layers of parking to a shopping centre involves empowering a lot of people with angle grinders and hammers. One day I must ask a civil engineer why a concrete slab, once cast, must then be sliced into small squares. The uncivil answer is that it makes a pleasing racket. However, today there are just some fellows painting white and yellow lines to demarcate the parking bays. Much quieter.
Wouldn’t it be useful if there were yellow and white zones for the share market too? Shares in the white areas would be a hold while anything in the yellow would be a sell. And the brokers would just be like those informal parking attendants with a rag (lappie-swaaiers) waving you into the bay.
Actually, I do have a technique that attempts to distinguish white from yellow. And when I ran it this week, it suggested that the market was getting pretty close to the no-parking areas. Briefly described, the method looks at historical price earnings (pe) ratios - no rocket science here!
I was surprised to see that for the All Share index, the ratio had risen from about 8 to about 15 not just because the p (price) has increased 40% in the last 12 months but also because e (the earnings) had declined by about 12% in the same period. This last figure is not a surprise to those who have been following company announcements about the pain of a strong rand. But it does mean that prices could remain static (let alone go down) until those earnings recover.
Now I am not an accountant and I don’t really understand (trust?) earnings, I look also at dividends (I just love things that are tax free) and particularly the so-called dividend cover ratio. Dividend yields themselves are already on the slim side, but not yet below the 2.5% danger level. However, to my horror I found that for the index, the cover ratio (a crude indicator of the ability of a company to pay a dividend) has plummeted to a multi year low. That means to me that dividends are unlikely to grow much any time soon even if earnings do pick up.
But of course, this is (almost) Sandton, and everyone parks on the yellow lines here!
Have a safe Easter weekend.
