Nifty P/E and Dividend Yield

This week lets look at 2 interesting ratios Price to Earning Ratio and the Dividend Yield of the Nifty. I have plotted the graphs from 1999-2010 taken from the NSE site.

1. Price - Earning Ratio.
This is nothing but the Market Price divided by the Earnings per Share or the Profits made by the company. This helps us identify how expensive the market is.
In the bubble peaks made by the market in 2000 and 2008, it had touched almost 28. In the bottoms made in Jan 04 and Mar 09 it was near 11 and Sept 01 around 12. Whenever the market has tumbled from P/E of 28 or rallied from 10-12 P/E it was a major top or bottom.


The market is currently around a P/E of 22.05. In Feb 01 when market tumbled from a P/E of around current levels it came to a P/E of around 13 again. On subsequent occasions it stopped its fall in a range from 12 to 15.
Now the EPS is Rs 234, after another 2 sets of quarterly results by July, assuming a gain of 6 pc, the eps should around Rs 250.
This gives a Nifty range between 3000 and 3750. This would coincide a retracement of 50 to 76 % of the rise. The figures would look speculative right now but the graph gives a perspective of P/E range.

2. Dividend Yield
Dividend yield is nothing but if we take dividend as a percentage of market price.High dividend yield means the stock price is low and vice-versa. This is inversely proportional to price of Nifty. When nifty is at highs, dividend yield is at lows and vice versa.


In 2000, the yield bottomed at 0.62, in 2008 at 0.88 and currently we are 0.93. Remember in 2000, we were in the dot com boom, hence IT stocks which give low dividend compared to price were at the top. For a dividend yield of 0.88, market would trade at around 5550 or 18500. We are not very far from that.
The yield tops out at 1.7 to 2. The dividend earning now is at 4919.Assuming a earning of Rs 5200 by the time we bottom out, Nifty would come to a range of around 3100

Both the above studies, simply indicate we may be near the top and give a range of the fall to follow.Of course, we could simply discard the 8 year cycle go on to make another peak at Nifty P/E of 28 translating to Nifty 7000 and then crash big time.

Lots to ponder about. Its your money, make informed decisions.

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P/E:An update

The Nifty P/E is at 22.89 as of 01st October.

It has exceeded these levels only during the bubble crashes of 2000 and 2008. In 2004, it briefly flirted above this level before falling.

We have 2 scenarios now:
1. It keeps rising to about 28 creating a bubble like scenario. It would break the previous high or thereabouts and the a mega fall.

2. Correct from anywhere here to 5200 zone. Every time it corrects, it comes down to a P/E of 14-16 which would be equivalent to 3200-3600 range.

Right now, the liquidity is gushing with FIIs pumping in 1000 crores daily. I have not seen even in the earlier bull run.

We have the dollar carry trade like the yen carry trade with hedge funds borrowing at low interest rates in the US and leveraging these dollars in India.

These positions will be unwound when the dollar strengthens, (it would take more rupees to buy the same dollars invested) or interest rates rise in the US.

The dollex is showing some signs of rebound on Bernanke comments. Interest rates rising in US will take some more time.

Troubles in China or at home in US could reverse the flows.

Time not to invest aggressively and keep taking profits with trailing stop losses. I would keep a stop loss of 4900 for my investments.

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Markets: How high can they go?

The Markets keep rising. All the prophets of doom and gloom are decreasing. The bears have gone into hibernation.Happy times are here again.

Lets check out the fundamentals. Domestically, the things have improved definitely. Forget the IIP numbers which are overcooked by the government anyway. I look at the Auto Sales numbers as a key measure. Maruti is producing at peak capacity. They are now only constrained by Production limitations.
Indian IT companies are again bagging orders. The freeze is beginning to thaw. Domestically, things are beginning to look bright. My sense is that the next downward trigger will not come domestically unless its a Mumbai style Terrorist Attack. This time, India will not be expected to give a muted response.
Globally, things are seemingly looking up. The US and so the world markets are at new 2009 highs. It seems pumping in cash has done the trick. I will keep a watch at China. They are often the leading indicators of things to come. It seems a dichotomy that Chinese Markets are tanking when Global Markets are partying.
How does China become so important?
They hold a large amount of US Treasury bills, they are largest purchasers of US debt and FIIs for BRIC countries look at China for direction.
The US data looks towards a stabilizing of the job markets. The rate of decline has reduced.
The nifty has gone up 6.75 % in September. This has primarily been due to FII inflows of almost 8000 crores. DIIs have put in just 800 crores. The Party will continue till liquidity keeps pouring.
The FII or the so called smart investors often so a herd mentality. When they stampede towards the exit they do not give an opportunity to exit.The Nifty is at a P/E of 22.31. This is historically where it takes a dip to at least 19.

So what should you as an investor do?
If you are already invested and looking to book profits, keep booking at every rise of say 200 nifty points or keep a trailing stop loss of 20 EMA which stands at 4777 as of yesterday.
If you want to invest money look for dips to buy. Again, one could look at dips to 50 EMA to buy which comes to 4601.

Remember, if the crash comes it will be swift and brutal. So, you will know that it is not time to enter.

The markets had come 50 EMA levels last around 18-19th August, nifty 4353 which was a buying opportunity.

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Elections over: What next?

The public has voted. All the votes have been counted and the winners take away the spoils. It was the best possible verdict (other than clear NDA victory).

The people who held the country to ransom have been shown the door. Manmohan Singh has proved to be a much better politician than most. First the nuclear deal and then this. If we break the results down, the Congress has won mainly because of UP, Kerala, WB, rajasthan and AP.
The real surprise has been AP and they deserve to win, they saved Satyam. Satyam going down would have been real bad news for Indian IT.

The real worry is now that the Congress should not fritter away this mandate like they did in 1984. The next big event lined up domestically is the Budget and the Monsoons. Busget will take at least 2 months to be prepared, and good monsoons should be here in a months time.

Domestically, things seem to well settled now. The Budget would be interesting because all the freebies will have to be balanced out.

The only missing puzzle are global cues. This rally has been fueled by FII money and till they stop pumping in, the markets will keep rallying.

Monday, the markets will gap up 700-800 points. Now, what do you do at this point?

Typically, it is classic sell on news. The smart money had already poured till this stage. At 13000 sensex, nifty 3950, the trailing P/E would be around 19.

Just look at the charts after the Nuclear deal vote of confidence, the markets peaked the next day. We still have not reached nifty 4620 after that.

It would be best to wait for markets to cool in. It would now be retail money jumping in. They are typically the last to get in. There would be definitely corrections on the way.

If the global cues, remain good we are headed to 14500 by July (factoring in good monsoons, which they should be, after all monsoons have failed only only 1-2 times in last 20 years).

If I had bought at lower levels, I would book some profits.If I have not bought, I would sit quietly. The markets always remain here. They do not go anywhere. Markets always give everyone a chance to buy.

There would be a dip after the euphoric rally on Monday.

I would wait for that dip to buy.

Remember the primary goal of investments should be capital preservation. At 13,000, valuations would look stretched. (8K to 13 K in 2 months)

For the moment, time to celebrate.

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GM Results, Stress Test results and Great Expectations

This was an eventful week in the US. This week probably sowed the seeds of a bear market rally in the US for at least till the end of June.There are several factors for this.

The Stress Test results were out. It portrayed a hunky dory picture for the US banks. Obama is doing well to play up the sentiment. The banks need help but not too much. We are on our way to recovery. Throwing money at Banks has helped. There is always a free lunch out there. We just have to print US dollars and the only cost to pay is the cost of printing those notes. That's Obama's message for the world.

The Stress Test results will buy time till the next wave of failures. I don't see that happening very soon. The Banks managed to show good results by accounting jugglery. Wells Fargo for instance, saw NPAs jump by 40 pc but Reserves to accommodate the same were increased only by 5 pc. This especially at a time when the NPAs are increasing.
If the value of the banks debt decreased from 100 cents to 60 cents and banks took a gain of 40 cents on their books.

The Investors are not really bothered by all this. It time to herald a new dawn and keep buying the shares of banks. The only fly in the ointment is that banks make money from their customers. The Customers are the US citizens who have lost their jobs. GM just made a loss of 6 billion dollars last quarter. Even Toyota made an annual loss. These jobs are going to disappear and they are not going to come back. Who will pay the loans of these people. Who will hold the bucket for these losses which will come later on. Remember the US unemployment is now 8.9 pc highest in 25 years. Bankruptcy now looks inevitable for GM. You cannot keep losing billions of dollars every quarter.

The 1 part of the problem of credit availability has been solved but the second part of demand creation remains. Till jobs are created there will be no demand creation.

For now, it is time to party. Recession is ending and get in before the Dow moves to 10000 seems to be the feeling.

The real problems will start a few months down the line. The next results in July and August September onwards. Things can get nasty if institutions start failing. The whole so called solution till now is print more dollars. This will work only till the dollar remains attractive. The 10 year T bill is already upto 3 pc which is bad news as everything from Mortgages to credit card debt is linked to the T-Bill rates.

As and when Inflation rears its head, the central banks will have to start raising interest rates. The main problem the US faces is the lack of jobs for its citizens. That has to be fixed. Obama's tax plans to curb of shoring will back fire in a big way. If the companies dont move jobs to low cost areas they become unviable and leading to more bankruptcies.

Obama is like a typical idealist. he positions himself like a Robinhood, the defender of the common man. All that has come about now is lofty promises.

In India, the elections hold the key. Looks like UPA + Left support and a Pranab Mukherjee or Shiela Dikshit as a probable PM. I would buy on dips if the market dips post results while a government is being formed.

Last time all Opinion polls were wrong and who knows this time. NDA might just squeak in. Prakash Karat has now started talking of supporting Congress led government.

I would buy because the global problems have taken a pause for now, monsoons look to be on time.

Its a traders market not an investors market. Till we get clarity on the long term, buy low and sell high.

Cheers,
Nishit

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