Valuation Models for Floating Currency Economies and Pegged Currency Economies

Abstract

The Respective Valuation Models of the "Earnings Driven Economy" & "Pegged Currency Economy" "Earnings Driven Economy" = ( P/E ) Price to Earnings RatioThe equities in these markets are valued primarily by P/E either by using the PEG ratio or PEGY Ratio. Earnings Growth is crucial because its taxable thus its quantified as it impacts the currency !Free Floating currency ===depends upon====> Theoretical GDP Growth ===depends upon====> Theoretical Taxes Paid ====depends upon ======> Sovereign Debt Outstanding for the Currency. Trading Dynamics:Over my 15 years experience in brokerage in the USA I have seen both analysts and the media emphasize different ratio's in different cycles of the market. In other words, while certain industries are in favor their respective ratio's and indicators are predominant in the reports; however, fundamentally the growth of earnings is the primary indicators of economic growth. Secondary indicators would be cash flow, book value of assets, etc. For Example: Biotech Stocks and Internet Stocks were not judged on earnings as much innovation. Some argued fore casted cash flows as the industries would grow into the future. The Biotech's would profit from licenses and Big Pharma, while the internet portals merged with (or evolved into) media companies. Conventional Investment Vehicles:1. Individual Loan to the Govt risk is relatively low so the yield is low:A. T BondsB. T NotesC. T Bills2. Individual Loan to the State risk is higher than govt risk therefore it pays more than Govt.A. Municipal Bonds3. Individual Loan to the Insurance Companies:A. Fixed AnnuityB. Variable Annuity4. Individual Loan To A Bank (FDIC Insured up to 250 thousand USD)A. CDB. Savings & Checking5. Individual Loan to the CorporationA. BondsB. Preferred Stocks6. Collateralized Debt Obligations (CDO) = Bundled Prime and Sub Prime Loans that are broken into three tranches, the safer tranches potentially pay less while the riskier tranches potentially pay more. 7. Collateralized Mortgage Obligation (CMO) = Bundled Loans that are broken into three tranches, the safer tranches potentially pay less while the riskier tranches potentially pay more. 8. Credit Default Swap (CDS) = Potential Insurance on mortgage contracts that are unregulated and they do not trade on any exchange.versus "Pegged Currency Economy" (P/BV) Price to Book Value The equities in these markets are valued based on assets owned. Thus Price to Book Value formula is the true measure of valuation in the local equity markets. As far as the currency is concerned, there is no sales tax that could impact the value of the local currency or GDP. Pegged Currency====> Negligible taxes =====> GDP is only measured as a nominal indicator of growth.Trading Dynamics:Inflation is a gift in this economy as the stock prices tend to climb with the rise of the value of their inventory. On the other hand its true that sales suffer with escalating prices. The stock price rallies with the price of the underlying commodity. Here is a few examples: A. Jewelry and gold prices. Fitahi B. Mining and commodity prices Ma'adenIslamic Investment Vehicles:Islamic investments range from Islamic Bonds & Equities. 1. Murabaha are held in house. They trade based on their income stream. There is no secondary market for this investment vehicle.2. Sukuk on the other hand trade in the free markets. Their valuation is also based on income stream; however, fluctuations in LIBOR will cause fluctuations in its market value. Simply because there is a secondary market for Sukuk's.3. Equities: The individual Equities trade on the Tadawul Stock Market. They are also trading in long only Mutual funds. Of course there are no option contracts. Most Sharia Complianced Funds won't allow commodities.