Month: February 2011

From the Economist.

Hamilton

You can find the article on the Economist’s website economist.com under Buttonwood. Betting on Ben (Bernanke). According to the article the overt interference directly in the stock markets by the Fed (and other Central Bankers), raises the question how much equity values are above levels where they would otherwise be. One way of calculating this is by way of the “cyclically adjusted price earnings ratio by R. Shiller (a 10-year smoothed p/e ratio). The chart for this is available on the internet;

PE10ratio

I have added a red and green line, the red one is where we are today and the green one is my best guess for the average over this 130 year period. The Economist calculates that the present p/e level is approximately 45% above the long term average and equal to levels at previous (interim) peaks in 1901 and 1966 (top of wave 3! and beginning of 26years of sideways trading).

Apart from the support from the central banks the article goes on to explain that the deteriorating demographics (at least in the US) will also negatively impact equities . This is a well known argument that has been abundantly talked and written about by Foot and others but the Economist uses a slightly different approach;

Economist 2

The idea behind this chart is that you can divide the world (USA) in low savers and high savers. Low savers are people between the ages of 25 and 34 and or those above the age of 65. This group is either so burdened to stay alive or actively dis-saving in order to finance their retirement. The other group is sandwiched between these ages and they do save and invest. Unlike economic variables, demographic ones are invariable quite accurate and the story here is that things are deteriorating rapidly, as the ratio is about to rise from 1.2 to 1.5 or so. Last time this happened it coincided very nicely with the 1966-1982 period of sideways markets.

The conclusion then is that if you buy equities at these levels and now, you are betting on Ben, which is much the same as “don’t fight the Fed”. But for how long? The last few years bad news seems to always be interpreted as being good for the market and visa versa. The link , of course is Fed policy where bad news allows the Fed to prolong their low interest rate policy and good news might force them to abandon it sooner. Ironically , when this market gets killed, it will probable be because of all the good news.

RSX (Russia ETF)

Hamilton

rsx1 rsx2

These charts are the same except for the annotations. They are both the Russia ETF and I want to use them simple to check the “plausibility” of my thesis that oil will not go much above $100 and that in fact the high of $103 or so the other day is probable it for the next few months. Anyway, Russia , as we all no doubt know, is the largest oil producer in the world so one would expect some correlation at the very least. On top of that, many of the larger companies in Russia, and certainly those that are in this ETF are energy related! Hence the choice.      As it happens the rise from the low could be counted in two (and many other!) ways. The most elegant of the two, by far, is the one on the left; a simple A-B-C up from the lows into (almost) the normal 62% retracement level. As there is no overlap the move could also be viewed as a 5 wave move.  Interestingly, assuming that at least one of the two is correct, it matters precious little as in both cases we should  go down first .  q.e.d.

RBC Focus List

Hamilton

RBC Focus List

This is from the Globe and Mail website. Recently this Focus List was the subject of an entry to this blog (Jan 24), but it is so interesting because it is truly the pick of the litter. The list consists of 20 stocks, chosen in such a way that they broadly represent the market as a whole so it is well diversified. Of course, diversification is the defense of the ignorant, but there are so many believers why fight with motherhood and apple pie?  This thing has been around for a long time, but in the dry swimming/daydreaming virtual format only. It’s real world version, first through First Trust, just for half a decade or so. Up to about 2006 the advertised rate of return was in the order of 17/18% per annum and had outperformed the benchmark TSE by something like 9%, or so.

Today the pattern is crystal clear, a first wave down that takes $10,000 of the value leaving you with $12,000. Then back up a precise 62% (at $19,60/unit) to $18,000. Next should be another down-leg, which , if equal to the first, would take the fund to $8000, which presumable corresponds with a 4th wave of previous degree. All this , of course, according to EW. Ironically, one of the best performers is VRX, Valeant, formerly known and detested as Biovail. Perhaps there was nothing else in that space. Note that over the past 5 years the fund has underperformed the index and its peers by an impressive margin. This is all the more surprising once one considers the high level of self-fulfilling that is ,arguable, attributable to a fund that is so much used in so many different ways.

BTE and ENB (Baytex and Enbridge)

Hamilton

bte2011 enb2011

Both these energy stocks have out-performed ,by a remarkable margin, most other energy stocks. I would have sold Baytex when it double topped at $36 and Enbridge at $54 (see Sept. 2010 entry). Both calls were wrong, dead wrong in the case of BTE and marginally in the case of Enbridge. Should you have disregarded my take on these two stocks and still hold them, I would again sell.

BTE is trading at a p/e > 40, ENB at half that but still in the upper ranges. In my view oil was going to top out at about $104 max; today it hit $103+ and immediately fell back $3/4/5. Of the two ENB has a clear 5-wave count and is also trading well above trend-line. Both stocks also are suffering from the $5/$10 to $65/$130 phenomenon, illustrated below by BIDU (Baidu) and UNH (united Healthcare).

UNH BIDU

BIDU is, of course an Indian internet stock and has absolutely nothing to do with ENB, except that the chart is perfectly identical except that one is on the $5 to $65 trajectory whereas the other is doing double that i.e. $10 to $130. It’s p/e, by the way, is about double Enbridge’s. Time will tell where they go from here, my guess is down (a lot).

In the case of UNH I thought it was a short at about $25 or so. It doubled from there and then some. We do , however know what the stock did . Below is the chart again, this time to today.

unh 2

UNH lost 76+% of its value dropping to about $15. It has since retraced 62% in a pretty articulate b-wave, probable a sell once again.