Sunday, June 14, 2015

2015-05 Stock Market Valuation

The Shenzhen Composite ended May at 0.38 gold ounces, up 179.77% since May, 2014.  The index was trading at a price-to-earnings ratio of 61.41.

The May close of 0.38 gold ounces was the highest price paid in the data series.  The price-to-earnings ratio has yet to catch up to the series high point of 72.97 times in September, 2007.  To repeat that, the gold price would have to increase to 0.45 gold ounces without any increase in earnings.  The price-to-earnings ratio increased faster than the gold price, meaning May's appreciation was driven entirely by higher valuations, not underlying earnings growth.

May's big news story was the decline of Hanergy, Inc.  Although not part of the Shenzhen Composite, Hanergy, Inc. is another example of questionable valuations of Chinese companies.  According to Bloomberg, "Hanergy Thin Film’s market value had at one point risen to more than HK$300 billion. That’s larger than Sony and almost seven times the size of First Solar Inc., the biggest U.S. solar company."  Considering the majority of sales the company books are to its parent, Hanergy Inc. will most likely turn into China's Enron.

The other conversation that began to happen in the mainstream was the amount of margin debt individual investors have access to.  According to Bloomberg:
"About 29 million new stock accounts have opened this year through May 22, almost as many as in the previous four years combined, according to the China Securities Depository & Clearing Corp. Margin debt on the Shanghai exchange has soared more than 10-fold in the past two years to a record 1.35 trillion yuan ($220 billion) on Thursday."
The People's Bank of China has pushed down Shibor and the yield on time deposits, which is pushing money out of savings and investment into stock market speculation.  Eventually, the correction will destroy more wealth than it artificially created.