Month: December 2013

MA, Mastercard

Hamilton

ma dec 25 2013 1ma dec 25 2013 2

The standard interest charged on these cards is somewhere between 19 and 22 percent, depending on the particulars and other byzantine things like “rewards” etc.etc. With the cost of funds for these card companies dropping close to zero they make out like bandits, especially when the actual credit risk is transferred back to the merchant or the bank that sponsors  the card. The question here is simple when is this stock in a bubble. The answer is fairly simple in most cases, when the stock goes parabolic, that is vertical on a normal chart. You can see this starting to happen in the arithmetic chart on the left, not quite there yet but pretty close. The semi-log chart will show as a perfectly straight line which, theoretically, could continue forever. Another year like this and the stock will be at $1300. We are about to re-enter the old channel  and this is often as good as it gets. A sell in our opinion, even a short if properly done.

RY update #50

Hamilton

ry dec 25 2013

So how does the Royal Bank look by comparison to the Swiss index? It has moved up from $5 to $72 in about 24 years (not including a dividend of 3 to 5 % along the way!) for a total gain of $67. To make the no-slide-rule-math simple we will call that $64, which then conveniently equals 2x2x2x2x2x2 which means that the stock must have doubled every 4 years (24/6=4). Using the rule of 72 that equates to a return of 72/4=18% over the entire period, compounded.

During this entire period RY benefitted from the reverse take-over of the far better managed Dominion Securities (1987?), the entry into the insurance business and a substantial expansion of the wealth management business. Interestingly it is exactly that which caused the downfall of one or two of the Swiss competitors. From here on it will mostly be less, or less profitable,  mortgage business, Basel 3, the Volcker rule and someday, perhaps, a less ironclad oligopoly as Canada attempts to grow up with the rest of the world. All that is left is Janet Yellen.

We just cannot see this continuing much longer. By clicking on the charts you can enlarge them and move them around to make the comparison with the Swiss index more expressive.

Is the market overvalued?

Hamilton

2014 in 2014 is the latest prediction and we will be hearing much higher levels soon. However, not everyone agrees. A good example,short and sweet and very much to the point can be found at  http://www.crestmontresearch.com/docs/Stock-Nightmare.pdf  Properly titled “Nightmare on Wall Street” and written by one Ed Easterling, this is well worth reading.

We will try to make the same point using EW (and other technical approaches) on the SMI, the Swiss Market Index. The choice is random but it seems to work very well using the famous “gnomes of Zurich” operating from a country that nobody has ever accused of being cheap. The index consists of the creme de la creme of bluechip stocks, Nestle being the most prominent. Here is the chart;

smi dec 25 2013 2

Like most other indices the SMI has had 3 tops over the past 15 years or so. In this particular case we will chose the mid top as the top. The simple reason is that it looks good and saves me the trouble of having to find an excuse why the highest point might not actually be THE top. From ‘91 to ‘98 this index, like so many others, grows 8-fold prompting the Maestro to utter the now famous “irrational exuberance”, despite later claims that detecting a bubble in real time was impossible. Today, we are at these very same levels, now roughly 21+ years later. To get from 1000 to 8000 in twenty-one years the index has to double every 7 years (that is 3 times or 2x2x2=8).  The rule of 72 tells you that this can be achieved only by 72/7= 10% per annum, compounded. This is rough math as I have lost my slide rule. So despite not doing anything for the better part of 14 years this index has nevertheless achieved a respectable return of 10% for 21+ years. So where is this going in the future? Down.   In EW terms we have completed a B-wave (as in so many other indices, see CAC , DAX, etc.etc.) so C is next going towards 3000 where the 4th wave of previous degree resides.  Also, it is a well known fact in EW that after an extended wave, the retracement typically goes to the top of wave one of that extension, here just a little above 3000 as well.If you adhere to the Head & Shoulder structure 3000 is your target as well. Regression to the mean would point to even lower levels if you stop to consider that it took 100 years to get to 1000 to begin with.

For the record, we have not changed the outlook from a year ago, just tweaked it to clean out a few minor imperfections, see chart below from precisely a year ago. Also another 1000 points or so is not entirely impossible but that is where the above article comes in. In the Head & Shoulder structure things would be more symmetric if one assume that wave 3 coincides with the LS. This can easily be achieved if the entire a – b – c wave 4 is deleted and the diagonal changed to a simple zig-zag a –b – c down. In this scenario wave 3 of 3 would be the extended wave up and the target would remain unchanged at 3000, or possible even lower, at about 2000:

smi dec 20 2012