Month: July 2010

FN.un, First National Financial Income Fund

Hamilton

When I wrote about Home Capital Group the other day a friend of mine reminded me that there are others in this broad field of mortgage financing, specifically FN.un. This is quite a mouthful and it is not the old Franco Nevada gone income trust, nor is it the Canadian branch of First National Citibank. It is a company that makes its living securitizing residential and commercial mortgages through an operating company that is created as a limited partnership.  The holding company did its IPO in 2006 at $10. This is a pretty complicated outfit so I give the website for further detail, www.firstnational.ca . Here is the chart;

fn.un fn.un 2

The stock jumped up and down between $22 and $8, the second top actually exceeds the first but for all intents and purposes this is a double top ( a good place to sell). From an EW perspective, if the second top is the “real or orthodox” top then a drop to the 4th wave of previous degree should be anticipated, that is to $8. If the first top is the real top then the move back to $22 from $8 is probable a B-wave, in which case the whole thing should become a “flat” A-B-C implying that the next big move is back down to $8. All this is, of course, tentative but , considering that we started the process back down with a very clean and distinct 5-wave structure, this may turn out to be the correct interpretation.

HCG,Home Capital Group (housing market in Canada)

Hamilton

hcg june 2010

The above long term chart is of Home Capital Group, a company that came into existence sometime in the mid eighties. The company has grown in leaps and bounds and presently has a balance sheet just shy of $8bln or so. Its goal in life is not to compete with the big boys but to wait for the crumbs to fall of the table. By being innovative and actually making credit assessments they have thrived  and have done so in harmony with the big banks ( who themselves were not allowed to do mortgages until the end of the eighties) The big Canadian banks, in contrast to HCG, prefer not to make a serious credit assessment, preferring to throw their immense weight around and asking for, and getting, a lien on your first born, the right of offset wherever that may be available and a variety of other securities. Oddly enough, when you do go a little “sub prime” so to speak, you can actually end up with a better security by way of the , required, backing of the CMHC (Can. Mort. and Housing Corp. ala Fannie and Freddie) Interestingly HCG is the only (publicly traded financial institution) that I can think of that actually made new highs by a fairly substantial margin; a feat not even the cream of the crop, the Royal was able to do.

Looking at the chart through a EW pair of glasses I tentatively conclude that the most recent high was the end of a 5th wave and not a B wave as in most other stocks. If so a fairly large drop is in store for the company, which , by the way, is not a reflection of their management but simple because that is the way it is given the macro-economic forces bearing down on mortgages.

This brings me to the point I would like to make. We all know that the Maestro could not see a bubble if his life depended on it. I was therefore pleasantly surprised to see that Businessweek (now Bloomberg Businessweek) was able to suggest that we actually might have a bubble in the Vancouver area. I travelled there in 1986 and noticed that there were some nice properties on the island that could be had for $250.000 or so. Now a shack will put you down a million+. The article explains that the most favored instrument is a letter of assignment sold by developers. Something like an unregulated futures market and all of this in Canada! Perhaps things are a tad overdone and things will get a little more difficult, HCG certainly suggest that this may indeed be the case!

AEX, Amsterdam (the oldest stock exchange)

Hamilton

aex july 2010

The AEX is a reasonable proxy for most other exchanges. The CAC, the S&P, the FTSE, the STOX 50 or 100, Nasdaq and at least another half dozen exchanges that I am aware of. The ONLY clear outlier is the DAX; do not know why. All patterns are a first wave down followed by a wave 2 retracing a good portion of the first wave. (In the DAX essentially 100%) After that another wave down that is probable a first 5-wave down of the next wave 3. This promises a lot of downside to come. Because the DAX is the only aberration and all others point in this direction, I would favor that interpretation as the correct one.

Schematically wave 3 (of C ) should look something like this.

aex july 2010

Not shown are wave 1 and waves 4 and 5. At this point this is just a best guess EW scenario, time will tell if it occurs. In the mean time more and more evidence is surfacing that would indicate that it is at least possible.

DR.un, Medical Facilities Corp.

Hamilton

This company has a complex structure as it operates in the States but is traded here. It is comparable to an income fund US style with IPCs and other wonderful instruments. Anyway, from an EW perspective none of that matters. Here is the chart.

DR.un july 2010

The move from the lows is clearly corrective, most likely an a-b-c. The implication, of course, is either that we are going to get a much longer and/or more complex correction, or this was it. Either way , some day we should make a lower low. However, in the meantime this may be a good trading vehicle. At around $8 the stock is a buy with a target of at least $9.50 or so. The important thing here is that you are paid well during the carry and perhaps this analysis is wrong and we go much higher. Use a tight stop.