Month: September 2015

Volkswagen update

Hamilton

volkswagen 2 sept 23 2015volkswagen bug -

So Volkswagen stock traded as low as  Euro 102.20, coming from a high of Euro 254.99 that works out to a drop of 59.92%, very close to the 61.8% Fibonacci target. However it does not look like this is over. The bounce, so far at least, looks to be corrective. In addition the drop over the past few days is almost certainly, as we pointed out earlier, a 3d wave, implying that there must still be a 4 and 5 to come.

The company’s CEO is most likely going to lose his job. I cannot judge whether that is deserved or if he is just a scapegoat. No doubt he will be paid well if he leaves. The company has set aside something like 6 to 7 billion Euros to cover the damages. Estimates already go as high as $30 bln. but it will undoubtedly take years before the dust settles.

We show a picture of the ubiquitous and iconic bug. Just a few years ago it was still made in Mexico. A retro model is back in production. This particular model is not what the fuss is all about. It has an air-cooled petrol engine that sits in the trunk. It was developed in the pre-WW2 years by the Nazi regime as an economy or people’s car for the German roads. Together with the ten year newer (1948) Citroen Deux Chevaux (two horses) , it has been the transport of choice for the poorer classes. It has been the “brand” image of Volkswagen for almost 3/4 of a century. It is also used by others to conjure up a sense of economy. That brand is now seriously damaged and it remains to be seen how long it will take to recover.

The cheating was discovered by a small company, Curious Clean-Air Group, that found the gaming more or less by accident. This underlines once again how important sunlight is as an antidote to obfuscation in keeping us on the straight and narrow.

P.S. The CEO has resigned and reportedly had no knowledge of this matter. His pension at about US$ 32 mln. will start a little earlier and allegedly he could receive up to twice his annual salary of about US$ 16 mln. A free car is thrown in for good order. If this is your downside, risk taking does become a little easier.

Volkswagen

Hamilton

volkswagen sept 21 2015

This is Volkswagen as it trades in Frankfurt in Euros. The 52 week range was from a high of E254.99 to this morning’s low of E126.70. The high was on March 17, exactly 1/2 year ago. That is down slightly more than 50%. Today’s move alone was good for 23%.

The cause today is no doubt related to tinkering with the engine computer system in order to give better, much better, readings when emission control tests were conducted, but clearly there was a lot more going on well before this latest revelation. Volkswagen, the World’s no.2 automaker has been trying to grow at a very rapid pace in the US market. It has been a very ambitious goal which has allowed the company to stray from the straight and narrow much like a Tour de France cyclist using doping.

The message, of course, is that we are entering a bear market because the mood is bad. What might have been tolerated in upbeat times will not be condoned today. A policy of growth at any costs invites these moral infractions , as it blinds management to all the other things that are important.

In EW terms I suspect that we are in some 3d wave so there is more, perhaps a lot more, to go.

LB, Laurentian Bank and the Dividend Gross-up

Hamilton

LB sept 18 2015 bLB sept 18 2015 s

Laurentian Bank has outperformed the TSX by something in the order of 7% during the last year. It trades at a P/E under 10 which is about 20% better than the banks in general. Its earnings, last reported on Sept. 2 were very good and it pays a dividend of 4.5%. Should you buy the stock? That depends.

On an EW basis you are probable about to finish a wave 2 or B up in a correction so either 3 or C is next. Not the best of times. Furthermore you are at the upper end of a well defined channel and, all things being equal ( they never are, by the way), you would prefer to buy at the lower boundary of the channel.

Fundamentally things are a little more complex. Keynes et al believed in their hearts that postponing immediate gratification was not really a sacrifice and therefore it should not command a price. Interest rates should be zero using this philosophy. Apparently, without openly subscribing to this thought (the Fed. cannot as interest rates are their main tool), it would appear that after what was said yesterday they are de facto agreeing as rates will never again go up. In light of this, getting onboard sooner rather than later may well be the best choice.

Then there is that not very well understood little thing called dividend gross up. It is not a minor thing, it is huge and the more so the lower your income! Dividends are after tax profits that are paid to shareholders. If these were taxed as simple income, as in interest, then there would be double taxation, first at the corporate and then the individual level. That would not be fair. Therefore they invented the gross up which serves to add back the taxes paid by the corporation and then they tax you at some arbitrary rate that should even it all out. For 2015 you can earn $43.807 in dividend income without personally paying taxes (including AMT) if you have no other income! At a 4.5% dividend you can therefore buy $973.488 worth of LB shares. That is roughly 20,000 shares. No need for an RRSP or TFSA.