The vote was cast after the finance ministry explained how money would be printed and distributed in the economy to save the economy. It took less than a day for the young throbbing Goldman brains to realize that some of the promised money had already been spent, the rest of the money was in some form of intangible, and with the balance the average citizen would be better off riding a bicycle home.
Sobering for an economy that had been predicted to increase 7 % a year from 2.7 trillion (UK and Canada) to 5.00 trillion (Japan) in pursuit of China (13.6 trillion) which would quake with fear of the approaching elephant hooves (think elephants have hooves or just really big and loud feet).
Capital market actors are understandably in denial and refuse to apply the brain housing group to what the reverse in the big numbers, GDP, means for earnings per share of the smaller numbers, an index of 50 Native companies.
The magic of the market is the multiple or what actors are willing to pay for one dollar of earnings taking the auditors word that the earnings are there. For those of us who spent math class admiring the trajectory of wedges from 90 yards there is a shortcut to the fair value of the multiple and it is the inverse of the bond yield multiplied by 100 (in the days when bonds actually yielded).
Thankfully the Natives have a bond yield of 6%. In other words, buy a Native 10 year Government Bond today and the Government promises to pay 6% a year plus returning the principal in ten years. That cash flow, the 6%, is considered to be risk-free in the Native economy or that the Government will make the payment or is a better choice to make the payment than Vijay's Autobody.
Think of corporate earnings at Vijays as a yield in the same way. Say the earnings were $6.00 and the value of Vijays shares were 100. Then the earnings yield would be 6% (6/100) or the earnings multiple (price to earnings ratio) would be 17 (100/6, price divided by earnings)
Magic. The fair value of one dollar of earnings in the Native market at a 6% bond yield is 17. So if earnings are 100 then at 17 times 100 the fair value of the Native Index is 1700. If earnings are 450 (the recent trailing earnings) then at 17 times the fair value of the index is 7650. The recent high of the index, 12400, was 27 times earnings or 1.6 times more than the fair value (27/17 = 1.6). And, interestingly the average multiple for the last ten years has been 17.
So since none of the Native analysts have walked the plank of downgrading earnings estimates for their conflicted clients we ventured forth to opine that if an economy was expected to grow at 5% then corporate profits should grow by 15%, a three to one ratio we plagiarized from a highly educated World bank economist who did not seem to mind though we are not sure he knows we plagiarized, until now. Thinking that inverse conditions should be treated the same way, -5% GDP equals -15% earnings.
With tongue outside of cheek we propose to start with earnings of 450 a share and adjust the next two years forecast in the trail of the well paid Goldman brains. The inconvenient math is that index earnings should be -9% and -15% the next two years or 409 and 348 a share.
Ignoring the question of multiple to be applied to growing future earnings when those earnings are declining, not for polite boardroom or bathroom conversation, we grant the market the inverse of the bond yield (famous economist pet trick of Ceterus Paribus, Latin for ignore it if it can't be explained or even considered, and a term more used by again those educated economists at the World Bank than, say, supply and demand) we apply the inverse of the 6% bond yield or 17.
The Native Index today is 9000 and should find willing buyers at a fairer value twenty-five percent lower.
| eps | mult | fair value | ||
| now | 450.00 | 17 | 7650 | |
| then | -0.09 | 409.50 | 17 | 6962 |
| thereafter | -0.15 | 348.08 | 17 | 5917 |
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