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Forbes – 26/11/07 + 10/12/07
December 8, 2007, 2:47 am
Filed under: current affairs

Forbes – 26/11/07 + 10/12/07

Insight into the Chinese stock market boom

  • Some companies have taken stakes in stock brokerages.
  • This creates a circular relationship that inflates stock prices.
  • When investors pay more and trade more, these companies have increased earnings due to the increased profits of the stock brokerages they have a stake in.
  • This increases the price of the company which in turn encourages people to trade more.
  • It doesn’t help that liquidity is pretty much restrained by the government; Chinese investors cannot invest their money in overseas markets.

P/S ratio

  • James O’Shaughnessy says that the price-sales ratio is a better measure than the traditional price-earnings ratio.
  • The idea here is that a low P/S ratio is an indicator that the stock is relatively cheap and poised for higher returns. Investors tend to overpay for growth and glamour and underestimate businesses’ tendency to regress to the mean; buying low P/S stocks capitalises on this.
  • P/S ratio should not be more than 1.5, which is the average for the S&P500, and there must be an upward trend for earnings.
  • Earnings can be easily manipulated and companies on the rebound may have earnings that are temporarily depressed.
  • Price-book value ratio is most useful with companies that have hard assets, but does poorly when measuring companies with intangible assets

Ken Fisher’s Portfolio Strategy

  • Continue to buy stocks at good prices; events like the credit meltdown, American elections and Iran will either not happen or have little effect.
  • What he is concerned with is the possibility of the yen rising, because American and European markets are being propped up by speculators borrowing in yen.
  • Interestingly, he recommends Flextronics from the Singapore market.
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