Wry & Dry

Valentine's Eve massacre

This week's share-market mess takes Wry & Dry's mind back to 1929 and the Prohibition era in Chicago.  Al Capone's South Side Italian Gang organised the murder of seven mobsters from the North Side Irish Gang of 'Bugs' Moran. And on 14th February, St Valentine's Day.  Very, very nasty.

And so too this week's share-market sell-off: on the cusp of Valentine's Day. A latter-day massacre?

Its getting messy


As First Samuel explained to its clients in this special edition of First Hand yesterday, an over-valued market will correct.  Any number of reasons will be given, relevant or not.  So this year W&D has heard the sell-off/ correction being blamed on some or all of these 5 factors:

  • price of oil
  • price of iron ore
  • slowdown in China's GD growth
  • US interest rate rise
  • possibility of, aaagggghhh, President Trump

All of this is nonsense.  The US market was overvalued, with a P/E of approaching 18.  The Australian market was overvalued, with a P/E over 16.  Too expensive!

Had these market P/Es been, say, 14 and 13 would any of the 5 factors above cause a sharp market correction?  W&D posits that, in any market, only the election of Donald Trump would.

So, W&D's Valentine's Eve tip to investors, "Get over it.  Stop your bleating".  Markets go down when overvalued.  And will correct until the current share prices fairly reflect the expected future profits of companies.  Last night the S&P500 (the most wisely watched indicator of US stocks) dropped to a P/E of about 15, getting close to fair value. And yesterday, the All Ords Index also dropped to about fair value.  

But readers know that share-markets always swing too far, either up or down.