Month: July 2013

XFN, Capped Financials, again

Hamilton

XFN july 19 2013

This ETF contains both the banks and insurers. The banks really shot up during the 1993 to 2000 period after which the insurers started to do the same as a result of their de-mutualisation. The top in 2006 therefore marks the end of a lengthy period of prosperity here in the Canadian financial sector. The question now is , was this an extreme or part of a normal progression. In the States there is hardly any doubt that when banks accounted for , give or take, 40% of all corporate earnings that they had grown a bit too much. Here the numbers were not that extreme but nevertheless it is difficult to understand why these institutions collectively trade at $26, just $2 below their all time peak , unless one assumes that their oligopoly position will continue to allow them to extort unlimited “rents” in the future. Here are a few points to contemplate;

1. Contrary to public perception the Canadian financial institutions did receive comparable bail-out packages even if the word bail-out would be somewhat of a misnomer. A total of $125  bln. was pumped into the system, rates were dropped sharply (initially good for lending institutions) and , over time, the CMHC ended up insurer about $600 bln+ of mortgages , which is about as much as the entire public debt and on a par with Fannie and Freddie in the US. This will end.

2. Regulation is increasing and the rules for certain financing activities have become less relaxed. Clearly this should have a detrimental impact on future business and the cost of doing business.

3. In an environment where borrowing is considered to be the cause of much of world’s setbacks it is difficult to see how banks, Canadian or otherwise, can grow that part of their businesses. Fee related things like credit cards etc. will be the name of the game.

4. It is doubtful that things like “wealth management” or going overseas are going to pick up the slack elsewhere. Going after insurance business and or car financing often cannibalizes other players in this group.

5. Trading is no doubt becoming more difficult, particularly if you are not part of the “inner circle” as with JPMorgan, Goldman etc.

The list goes on but the point is essentially that there is no good reason why these institutions should trade $2 below their peak. The EW count suggest they won’t and could, in fact, go down dramatically any moment now.

CMG , Chipotle Mexican Grill Inc., update

Hamilton

The usual then, 19th Oct., 2012, and now charts;

cmg oct 2012cmg 19 july 2013

At the time the initial 5 waves down was incomplete so we were looking for a further drop to perhaps as low as $220. It did not quite make that but did get close to $233. Had you bought somewhere around that level (by the way you can almost always buy at the end of 5 waves down!) then you would have done quite nicely. We did not calculate a target but had we done so it would have been at the 50 to 60% retracement level which equates to $110 to $130 up, roughly, from the lows. That would be $334 to $366. Now that we are well above those levels it is again time to sell if you have not done so already.

Are we there yet? Russell 2000 update.

Hamilton

rut july 18 2013

The answer is yes, we are there!

At the low in March 2009 this index was at 350, roughly. Today it exceeded 1050, which, if I am not mistaken is a factor of 3x in 4+ years. The Russell 2000 is,by the way, the quintessential small cap. index. Bernanke should run a banner all across the Fed. buildings announcing mission accomplished. But today we hear nothing of the sort. In fact should unemployment drop below 6.5% the Fed. may still continue to spike the punch-bowl if there are too many people leaving the workforce, which so far has been a primary source of dropping unemployment. This will never end. Even if budget cuts etc. cause the economy to grow at a lesser pace than otherwise, the Fed. reserves the right to increase stimulus. This is pretty circular as government spending at roughly a trillion above what is taken in each year is already excessively simulative so why the Fed. should feel obliged to step in is not at all clear. Taking both the deficit spending and the monetary stimulus combined one could argue that the US is now on a super-Keynes trajectory. That is if you leave out one of Keynes pet concepts, that of the Marginal Propensity to Spend (or Consume), MPS in short. The whole idea is that poorer people spend a larger proportion of their wealth/income than do richer people, therefore the government should redistribute income to the bottom which will then lead to a higher multiplier (bang for your buck) and with it correspondingly higher growth. A glance at a chart showing the wealth distribution in the US from TheUnderstatement.com shows how well this works;

Wealth distribution US

According to this source the top 1% own 43% of all wealth. This is 2011 and their are other stats that put this number well north of 50%. 73% is owned by the top 5%. By stimulating the stock market and housing, the Fed. has made the rich richer and as a result of the very low MPS growth is gone. More stimulus, less growth. All pure Keynes.