10/08/2011
The last week has been a good one for financial clichés and newspaper headlines – GFC2, dead cat bounce, global recession – $100 Billion wiped off the Australian share market.
Short term panic leads to selling. More selling than buying sees the market fall and as we have seen recently, this can happen super fast.
For every seller, there must be a buyer, and it is likely that most buyers over the last week have been thinking the same thing – The impressive weight of human history says that the best companies will continue to make profits – and profits will be the long-term driver of share prices.
During yesterdays morning mayhem – the National Bank announced that its cash earnings had increaed to $1.4 billion, up from $1.1 billion this time last year. Cochlear announced that its profit had increased by 16%, with dividends up by 15% .This morning, the CBA announced a record profit with dividends up 10% , Coca Cola Amatil also announced a 7% increase in their dividend .
As the below graph demonstrates, the share market measures human endeavor and human consumption – it is a weighing machine for profits.
Focusing on the yellow bars and the orange line (which reflect the Top 200 Industrial companies in this country) – the yellow bars being the dividends and the orange line the share price.
This graph shows that a company’s share price is very much linked to its profitability – every time the orange line gets too far above or below – it is corrected.
Graph Source: RBA, Reuters
We have no crystal ball and we are not doubting the troubles that the US and Europe currently have – the markets’ direction medium term remains unclear. There will be further drops (though we do not profess to know when or to what magnitude) and again as occurred yesterday, buyers will be attracted to the value on offer – the future income streams payable from the best companies in this country and around the world.
Short term volatility is part and parcel of share ownership due to their liquidity – and the media tends to supply fuel to the inferno of fear….
By Robbie Kirtley
