TSX hits my target! Now what?

All the way back in May I made the bold prognostication (read: wild guess) that the TSX should be valued at between 11,400 and 11,500 - up from about 10,200 at the time. I hazarded a guess that the TSX might get to that level by the end of 2009, however it decided not to wait until the end of the year, closing at 11,496 today.

In my previous post I suggested that the market was undervalued and would be pricing in 2009 TSX earnings of about $575 per share. I then applied a long-run average PE multiple of about 20 to arrive at my call of 11,400-11,500.

Current estimates for 2010 corporate profits are in a range of 5-10% growth. My own model of corporate profits is spitting out growth of 30% (which I don't quite believe) - so lets say TSX EPS of around $630-$750. Since so much depends on the multiple applied to these profits, i've made a quick and dirty attempt at incorporating a PE equation based on short and long-term interest rates and nominal GDP growth into my Canadian economy model. The model derived PE suggests an average multiple of between 17-18 over the next year. Applying this multiple to the above range of forward earnings gives a fair value for the TSX of between 11,400 and 13,500, suggesting a market going sideways or a market about to pop by about 20%. A big range to be sure, but perhaps that is consistent with the amount of uncertainty in stock prices.

Could I have arrived at this range by pulling numbers randomly out of a hat? Probably, but what fun would that be?

SMC call causes TSX to tank!

It seems clear to me that market participants, noting my optimism as as sure contrary indicator, are now in the mood to sell. TSX down 275 368!.

Is the TSX Fairly Valued?

Canada's stock market has been on somewhat of a roll lately, rising about 35% to 10,238 from a 2009 low of 7,566. In this post I'm going to attempt something fairly pointless - trying to figure out whether the TSX/S&P is overvalued, undervalued, or valued about right.

A common methodology used to make broad stock market calls involves assigning a multiple to a forward estimate of TSX earnings. TSX composite earnings as of December 2008 were about $830 and the forecast range for corporate earnings for 2009 is a decline of between 15%-31%, suggesting a 12 month forward estimate for 2009 of between $575-$699. The former seems much more likely to me.

What is the right multiple? Hard to say. Earnings multiples tend to get compressed in recessions before increasing as the economy recovers and investors regain confidence in equities. The TSX is currently trading at around 12x current earnings, which is similar to multiples observed in the beginnings of previous recessions.

The average TSX P/E ratio since 1956 is about 20x. Applying this long-run average P/E to the range of forward earnings estimates gives a market valuation at the end of 2009 of between 11,484 and 13,980 which implies that the market is currently between 11% and 27% undervalued.

I'm more sympathetic to the low-end of the corporate earnings forecasts so i'll conclude with a market call of 11,400-11,500 by the end of 2009.