Q2 earnings coming in far higher than expected
And, bond yields remain low
Kashkari is very much at the more dovish end of the FOMC spectrum. These comments are not indicating he is swinging towards a more hawkish outlook.
The S&P and NASDAQ index both closed at record levels with a late day surge that has the indices going out near the highs for the day.
The major European indices are ending the session mostly higher. The in UK FTSE 100 is the exception. A look at provisional closes are showing:
BOE to unwind QE when bank rate hits 0.50%
Let us talk about the trailing P/E ratio.
Have you encountered the term price-to-earnings? It is a significant factor when it comes to knowing the value of stocks and companies. It is also known as the P/E ratio, and it may be forward or trailing. A forward P/E ratio maximizes the use of projected future earnings for the calculation. On the other hand, a trailing P/E ratio is the valuation multiple that focuses on the past year’s earnings.
Tell me more about the trailing P/E ratio.
When we read articles about companies and stocks, we often encounter the term P/E ratio. But do you know what it means? It means the price-to-earnings ratio, and it is usually the trailing one unless otherwise stated that it’s the forward. We calculate it by taking the share price and dividing it by the EPS of the most recent fiscal year. We see that we need the EPS of the most recent fiscal year in the formula. We can access it from the annual report’s income statement.
Here is the formula:
Trailing P/E ratio = Current share price/ EPS of the last 12 months
Why use a P/E ratio?
This ratio is beneficial, especially for analysts, because it is a similar valuation to relative earnings. Analysts can use this when they look for bargains that are related to the market. Some use this to know whether a stock is more expensive than another. Some companies have a high P/E, which they deserve because they have better economic moats than others. And when we say economic moats, we refer to the advantage that one company has to protect their profitability and ace the competition, which the others do not have. Unfortunately, this is not always the case. Sometimes, some company share prices are nothing special. They are just overpriced.
On the other hand, some companies have low P/E ratio are experiencing challenges financially. Others have it low because they are offering a great bargain. Now, if you are asking why use a P/E ratio, you know that it helps entities like analysts have an accurate idea about the value of a stock or a company.
Why not use a P/E ratio?
If there are reasons to use the P/E ratio, there are also reasons why we should hesitate. It has its fair share of flaws. We know that while earnings are constant, stock prices are constantly moving. This is why we have a trailing P/E ratio. It only uses the most recent four quarters instead of the earnings generated from the latter of the last fiscal year.
Trailing P/E and forward P/E
Entities use the forward P/E to evaluate a company because it shows the subsequent projected earnings for 12 months. This ratio is focused on a future earnings estimate. Hence, miscalculation and an analyst bias are always a possibility.
On the other hand, the trailing P/E is more focused on the past performance of a company that is subjected to an acquisition. It gives an acquirer an idea about how it did in the past and how it can do in the future. We usually get a company valuation based on its latest ratio. Some acquirers will always look for a way to buy a company for a cheaper amount, including an earn-out provision. They give an option that they will provide an additional payout if their goal earnings are achieved.
Should I use a trailing P/E ratio?
Many people can say that this measure is reliable because it is backed up by actual performance and not the expected future performance that did not happen. However, know that a company’s past performance can guide you but can’t predict the future. The future, stocks, and the market will always surprise us.
It is hard to sum up how the Bank of England has been in their last two central bank meetings, but they have managed to have optimistic undertones without actually delivering a hawkish reaction.So, in June Sonia futures were pricing in a more hawkish BoE.
The actual meeting itself was a disappointment in that the factors of strength for the GBP were deferred in favour of caution concerning the recovery. Yet, growth and inflation were both revised higher. The only dissenter to this more dovish outlook was Andy Haldane who has now left the Monetary Policy Committee.
Ramsden and Saunders step up to replace Haldane
However, Both Ramsden and Saunders have been betraying their bullish sentiment going into the meeting and look set to replace Haldane’s bullish shoes. So, the expectations are for a 6-2 vote in favour of continuing QE purchases as scheduled. This is going to be the focus of the meeting – will the BoE change the schedule? Will the vote remain a 6-2 split?
Tradable opportunities
If the BoE vote split changes to 5-3 or greater then look for GBPJPY strength. If the risk tone is poor (that sees JPY strength) then look to buying the GBP against the euro with a EURGBP short.
If the BoE vote split remains at 6-2 the risk is asymmetric, so that should mean the GBP stays flat/very mild selling
If the BoE vote split is a surprise at 7-1 in favour of continuing QE purchases then that should weaken the GBP.
The key thought
A bullish surprise would boost the GBP, and some will consider it worth buying the GBP before the meeting because the risk does seem tilted in favour of a bullish surprise. Also notice the very strong bullish technical signal on the GBPJPY pair which is signalling higher prices. The risk with the JPY is that worry has been rising and JPY strength has been ebbing and flowing over the last week or so.
