Comments on: What’s Driving the Boom? http://www.dailyreckoning.com.au/total-market-cap/2006/12/18/ An independent perspective on the Australian and global investment markets Sat, 21 Nov 2009 10:39:45 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Ilmar Saar http://www.dailyreckoning.com.au/total-market-cap/2006/12/18/comment-page-1/#comment-382 Ilmar Saar Thu, 21 Dec 2006 04:38:41 +0000 http://www.dailyreckoning.com.au/total-market-cap/2006/12/18/#comment-382 Maybe it is just the foreigners buying stock with their Dollars rather than exchanging them for Euros or something else? Maybe they would rather own a piece of America with their relative value intact than cause a rush on currency markets and left holding the bag? Maybe it is just the foreigners buying stock with their Dollars rather than exchanging them for Euros or something else? Maybe they would rather own a piece of America with their relative value intact than cause a rush on currency markets and left holding the bag?

]]> By: Joe Monage http://www.dailyreckoning.com.au/total-market-cap/2006/12/18/comment-page-1/#comment-349 Joe Monage Mon, 18 Dec 2006 04:00:33 +0000 http://www.dailyreckoning.com.au/total-market-cap/2006/12/18/#comment-349 This graph looks interesting, but I am not sure that one can relate the capitalised value of publicly traded companies with GDP. Firstly, GDP of actual productive activity is in some sense lower than what is recorded because much of what passes as goods and services (particulalry services) arises from government activity that would not be produced and would be over-priced and have very little if any real value. Secondly, the value of businesses participating in the economy is much higher when you count all those businesses that are not listed on the stock exchange or are run by government. Finally the capitalised value of publicly listed firms is some multiple of forward earnings with that multipe now around 16, and varying over time (from about 8 to 28 in the USA). If the multiple can be sustained by future earnings than share prices are OK. Also, it should be noted that value investors such as Buffett consider the residual value of firms after taking account of projected earning over a 10-15 year period. That residual value can be very substantial, and make the share price reasonable, even when the current PE looks excessive. I am not sure what is a reasonable level of total market capitilisation to GDP. This graph looks interesting, but I am not sure that one can relate the capitalised value of publicly traded companies with GDP.

Firstly, GDP of actual productive activity is in some sense lower than what is recorded because much of what passes as goods and services (particulalry services) arises from government activity that would not be produced and would be over-priced and have very little if any real value.

Secondly, the value of businesses participating in the economy is much higher when you count all those businesses that are not listed on the stock exchange or are run by government.

Finally the capitalised value of publicly listed firms is some multiple of forward earnings with that multipe now around 16, and varying over time (from about 8 to 28 in the USA). If the multiple can be sustained by future earnings than share prices are OK. Also, it should be noted that value investors such as Buffett consider the residual value of firms after taking account of projected earning over a 10-15 year period. That residual value can be very substantial, and make the share price reasonable, even when the current PE looks excessive.

I am not sure what is a reasonable level of total market capitilisation to GDP.

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