Year: 2009

Economics made simple, very simple.

Hamilton

Earnings

Here is today’s chart of the day. Any student of economics has , at some point in their lives , come across the “discounted cash-flow” concept. In its most simplistic form it states that a stream of income in the future has a value today (PV) equal to that stream adjusted by the discount factor. Given that few market participants look further than 10 years , that rate is a reasonable proxy for the discount rate. The math, for those of you who were not wholeheartedly attracted to calculus, limits and other such wonderful concepts, can also be simplified. We get PV= Stream/ 10year rate. Using the US government 10 year note, 2% just a month or so ago we had PV=100/2= 50 (notice that when rates drop to zero, the value of anything and everything starts to approach infinity – a phenomenon either very well understood by the FED or not at all. Now with the 10 year at about 3% and earnings at 40 we get, PV=40/3=13.3. Simplifying the math tends to take out the compounding and therefore exaggerates the result, lets call it 20. From 50 to 20 is a drop of 60% (do I detect the invisible hand of Fibonacci, that guy from Pisa?). Applying that to the S&P which topped at 1576 gives us 630; we are at 860 today! This , of course , assumes that profits do not drop further and or rates do not rise more.

WMT update Feb6 (by special request)

Hamilton

wmt feb6 1

Pretty clear pattern, 5-waves up from 0 to $65, probable a FAILED 5th wave. Do not like that but does fit best with reality.

wmt feb 6

The triangle (usually a 4th) is clear as daylight, the 5th wave thrust falls short by about $5 from making a new top. Assuming this interpretation is correct than completed bull cycle is being corrected. Normally this takes the stock down 50-62% no problem, which puts the target firmly in the 30/20 dollar range. Wave 1 down was clear, and 2 retraced the anticipated 62% plus a little. Now in 3 down, where in 3, not sure.

PD.UN Feb 4 update , are we there yet?

Hamilton

pdfeb4

Here is Precision Drilling again. May just be getting there. I saw this young lady on BBN talk about it and  even though I do very much respect her professionalism , I marveled  at her opinion that they have a few issues  (as in too much hay on the fork)  while at the same time suggesting that if you “rode it down” and lost most of your money in the process, you may want to stick with it today, as it will probable go up some day. Well, that day may just be NOW @ $5 or below.