07 May 2009

All Ordinaries Fair Value 1,700 to 2,300

From the latest Leithner Letter:

Given how we came to this pass, where Australia now stands, what the government is doing to us and what may lie before us, it’s difficult to conclude that stocks are cheap and easy to believe that they remain dear. True, the AOI is less overvalued now than it was, but “less overvalued” is not the same as “undervalued.” Accordingly, Leithner & Co.’s plans include the possibility that an environment marked by recession and stagflation (like the one that plagued the early 1970s to the mid-1980s) prevails during the next several years. In such a climate, the fair value of the All Ordinaries Index would be ca. 1,700-2,300. That implies a fall of ca. 70% from the Great Bubble’s maximum and the harshest bear market in Australian history. Furthermore, taking 2,000 as the AOI’s “bottom” and assuming a long-run growth rate of 7.5% per annum, ca. 17.5 years will pass before the Index returns to its Bubble maximum of ca. 6,850. If so, this will be the most fraught recovery in Australian history.

The newsletter is worth reading for the detailed analysis behind that conclusion - it is not just some number picked out of the air or drawing some trend line on a graph. It is not coincidental that the Directors of Leithner & Co are Austrians (as in economics).

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