Wednesday, August 22, 2007

Safety first

Dan Denning comments on the recent rush for cash and safe bonds in The Daily Reckoning Australia today. He also repeats Marc Faber's point about an "earnings bubble" that skews p/e ratios:

Be careful about using low P/E ratios as a buying indicator. We read in this morning's paper that the average P/E on the ASX 200 is the lowest its been in 12 months. That doesn't automatically mean stocks are "good value." In fact, in the past, low P/E ratios have been a sign of the market top. Why?

At the height of an economic cycle, corporate earnings are high. When earnings rise faster than share prices, the P/E ratio will look low, flashing a "buy" signal. But this may be just the time that earnings themselves have peaked. That's definitely not the time to buy a stock.

And even commodity shares have to be chosen with care, when you factor-in rising costs.

No comments: