RIM, Research in Motion

July 4, 2012July 4, 2012 Hamilton

Last time we got out of RIM at $17 and suggested that it might be a buy again under $10. Here we are , well under that so is it a buy? Well above are two different charts of RIM, you can enlarge them and move them around to better compare them. These are what are known as fractals. Not necessarily perfectly identical but very similar structures at different sizes. EW is essentially predicated on the evidence based recurrence of self-similar structures, the most basic of which is the 5 up 3 down cycle. This concept can be helpful at times to verify the validity of a EW count.

On the left chart the stock rises from next to nothing to about $43, then crashes, rebounds and crashes again in a clear a-b-c, ending at about $2.30, a loss of 94.7% On the right the stock does something very similar, peaking at $150 or so. If it does the same proportionate drop the stock should bottom around $7.95, give or take (this is not like cutting a camshaft at tight tolerances on a lathe). Today we are at $7.40;

The new CEO is , no doubt, viewed as a lightweight in North American circles. He is soft spoken, very knowledgeable and when he says “Nothing is wrong” he means it. Here we prefer backslapping, gregarious loudmouths that bluff their way out of every situation. If one can bridge this great cultural divide, it is easier to become a little more constructive. There is 2.2 bln in cash, 75 mln subscribers, a lot of proprietary know-how and patents and their own network. The new product may be late in coming but perhaps it will be fantastic. Who knows, but we would lean toward buying this stock. Even Nortel went from $3 to $12 before it died and just think, if one had bought this stock between these fractals, you would have made 65x your money.

This chart shows how the two fractals fit together;

DJTA, Dow Jones Transportation Average a.k.a the Rails, OSG

July 3, 2012July 3, 2012 Hamilton

The DJTA has outperformed the Dow Industrials, it is also the older of the two. Why has it done so well when shipping companies are down so much? Simple because not that much is transported by Americans , stock listed companies, in America by water. Of the 20 companies in this index only two are classified as “maritime”. One , ALEX, Alexander & Baldwin is a Honolulu based land-owner active in agribusiness, sugar cane etc. At best it runs a few ferries between the Hawaiian islands. The other is OSG, Overseas Shipholding Group. It too has gone down like a rock but as this index is cap-weighted its significance in the index is fast approaching zero. Here are the charts;

We give all three, big , medium and small. We are 100% confident about the big picture, it is nearly there. We are not certain about the triangle , it may not be wave 4 but just part of it, but the final result should still be a little lower. Should be a buy if and when it gets to about $6

Ship versus Rail transport.

July 3, 2012July 3, 2012 Hamilton

Clearly the railway companies have , in the main, enjoyed pretty good times since the second great recession. Shipping companies have not. There are a few obvious reasons that may explain why two different sectors of transportation have such different experiences. One is that railway companies usually own the track, a very costly proposition in terms of investment in land, and an obvious cause of reduced mobility. Railways are to some extent always regional monopolies. Secondly the investment in rolling stock is, relatively small compared to the whole.

Ships operate on the open sees and can change their route mid-stream if they care to do so. Relative to the infrastructure, mostly owned by governments and not the shipping companies themselves , the cost of the “rolling stock”, that is the ships, is enormous. Consequently shipping companies are far more sensitive to prevailing interest rates and the hog cycle. This cycle occurs in most businesses that have alternating over- and underinvestment as the result of too rosy or too gloomy outlooks, more so now with low rates to stoke the fires. Mitsui & Co. is a good example, the largest and from Japan.

After a 14 year triangle we get a moon shot followed by a shot in the head. Schumpeter’s creative destruction is at work here. These boats do not come cheap and getting rid of them kills your P&L. And the freight rates, expresses very eloquently by the Baltic Dry Index, which has nothing whatsoever to do with the Baltic.

It is now,as expected (see previous blog) at a new low and almost at the lows of late 2008. Frontline FRO and TNP are two other shipping companies. FRO (see prev blog ) is working itself down to equality between A and C in a large A-B-C correction. It is getting close. TNP, Tsakos Energy Navigation Ltd is one of the bigger operators, Greek as so many are, registered in Bermuda. It seems to need one more leg down but yields 11%.

The trade to do might well be short the rails and long one of these ships.

GLD, Gold update and K, Kinross

July 3, 2012July 3, 2012 Hamilton

We have seen some very incorrect wave counts that would suggest the GLD is presently in a one year long contracting triangle as opposed to some form of a 1-2,1-2. Assuming, for the sake of argument that this is an acceptable count, the above labelling would be the most plausible. This would have to be a 4th wave and, given the duration, probable one of high degree. A thrust should follow soon and swiftly take the GLD to just above the old high of 192 or to a new high of 225 or so. An almost immediate return to 150 would follow.

The problem with this count is that it has no counterpart anywhere! Not a single large cap gold miner has a pattern that comes close. Nor does that other precious metal silver which already has retraced 50% from the recent peak. K, Kinross is a good example even if some would cry foul given this stock idiosyncratic problems. Here is the chart;

No count is ever certain but as more pieces fall in place confidence in the accuracy increases. So this stock drops from $45 to $1 in what has to be a 5-wave move! This is confirmed by the wedge or wedges that are always 5 waves (or Cs). 5-wave moves do not stand alone, there always has to be a second one (as in a flat or zig-zag). In between there is invariable a 3 –wave counter-trend rebound that often retraces 50, 62 or even more % of the preceding drop. There is also a tendency to go to the level of either the 4th wave or the 4th wave of 3. It more or less did all of this! Therefore it is safe to assume that we are in the second 5-wave leg down which should terminate <$1. At about $10 we will get overlap. Should this second 5 wave leg develop as a wedge, that will not matter. In the event that we are actually in a double zig-zag (in blue) overlap at this time would also not matter. Given that this stock is already down some 75% or more, the outlook on GLD shown above is downright impossible, but then impossible things seem to happen more often lately..

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