Whats Happening on the ASX Is No Mystery

Stocks are up. Gold is up. Oil is up. The temperature is up. All things are in order in Australia as your editor returns from a frosty retreat high in the Colorado mountains last week.

What’s happening in the market is not exactly a mystery. But it’s probably worth pointing out that stocks, too, obey the laws of supply and demand. They are not rising because of any sympathy with the financial plight of the retiring Baby Boomers.

Scott Murdoch explains today in the Australian, “The flood of new funds into domestic equities this year could cause an expansion of valuation multiples, as the supply of shares fails to keep up with demand.” Too much money. Too few stocks. Result? Prices rise, multiples stretch like spandex on the waistline of the losers in the Biggest Loser (the non-winners).

“There will be $81 billion worth of new money invested in the market this year as the Future Fund and the superannuation changes ramp up activity on the exchange,” Murdoch continues. “However, with no major floats lined up, like Telstra last year, the major buybacks by NAB and BHP and the likely privatisation of Qantas, the supply of shares will be tight this year.”

Even to a jet-lagged, brain-dead traveler, it is not hard to see how things play out from here. With more money pouring into a smaller amount of shares, share prices will rise. But so will the earnings multiples which investors are willing to pay to get into a smaller cadre of elite blue chips. PE multiples will expand. The question is, is there a point at which they become so obscenely stretched that even a casual investor begins to worry he is paying too much today for tomorrow’s earning?

In our own personal experience, it is near the peak of a cycle that investors are joyfully oblivious to the risk of paying too much today for future earnings. The thought that things might change never occurs to them. Eventually it does, and then instead of being joyfully oblivious to future risk, they become willfully oblivious. This is the point at which you know something is not right, but prefer not to think about it, sort of the way you might knowingly file an erroneous tax return, hoping some imbecile of a bureaucrat won’t notice.

It is too bad a government’s most able bureaucrats and lawyers tend to be its tax collectors. Thieves.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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