Warren Buffett’s Goldman Sachs (GS) deal

July 11, 2017July 11, 2017 Hamilton

This chart is of Goldman Sachs. There are, in my opinion, two ways of interpreting this chart in EW terms. The real top was either in late 2007, which corresponds with numerous other financial institution’s tops, both in the US and elsewhere, followed by a lengthy B-wave that manages to double top for this stock but not most others. Or , alternatively, that top was just the end of a wave 3 and the great recession was wave 4 and the rest is a diagonal triangle wave 5. I do not give this much credibility.

The W. Buffett deal, entered into on the 23d of Sept. 2008 consisted of a purchase of 5 bln. worth of preferred shares AND the purchase of initially 2.5 bln. worth of warrants, that is 5-year options on stock with a strike of $115. This was immediately increased to 5 bln. The whole purpose of the deal was to leverage on W. Buffett’s reputation as an astute investor and pull in other investors.

By pure coincidence, on Oct. 14, 2008, about 20 days later, both Henry Paulson, then Treasury Secretary of the US but previously top dog at GS, and President Bush, announced their versions of the TARP programme. Remember that one? The Troubled Asset Relief Programme. This bailout programme called for or sanctioned the purchase of equity options or warrants and the purchase of preferred shares (debt) mirroring the W. Buffett deal. In essence the GS deal put W. Buffett in a position where he could finesse the government to his advantage. The story is, of course, that this was very risky but the reality is that every second Central Banker etc. is an alumni of GS and that success was virtually baked into the cake.

The HCG deal is similar in all aspects except the timing. Whereas the GS deal was done too early, the HCG deal was done too late. Otherwise both rely on the almost assured cooperation of the respective authorities. These are always caught in the tension between “punishing” and “saving”, that is the regulatory side against the pragmatic side as in deposit insurance and not upsetting the apple cart.

Note that the immediate gains came in the very first year after the deal and then took a long time to repeat. I suspect that something similar may happen in the HCG case. In any event a doubling of your money is definitely not out of the question, even without a 10% dividend guarantee.

One significant difference is that the HCG chart is much clearer as the breakdown from the peak is a simple A-B-C correction, clear as a bell. The only question that might remain is whether or not the $5 low was indeed the low. See previous blogs. Also at this level it yields a little over 7% and trades at a p/e < 4.

HCG update

July 10, 2017 Hamilton

One of the hardest things in this business is to do nothing. At the low today we were $7, roughly, below the peak set just two weeks ago.

I think that this is either a 4th wave (of wave 1 up) or, a wave 2 with wave 1 completed at $20.75. Either way I would expect the stock to find a low at just above $13 and in the worst case at $11.50 where the 50-day moving average is. These numbers correspond to, give or take a 50% and 62% retracement of the entire move up since the low of $5. In any event I would expect the stock to trade above the $20.75 level in the not too distant future so the question is really do you want to make 6, 7,8 or 9 dollars!

Warren Buffett can afford to make offers the victim cannot refuse. On the Goldman Sachs deal he made a small fortune in a very short time. This is a little different and on a smaller scale, but the underlying principles are the same. There is close to a 100% certainty that he will win, and win big and not just break even. At the lower end of the above range you are in at close to the same price as the oracle is.

RUT, Russell 2000 index.

July 8, 2017July 8, 2017 Hamilton

The chart on the left is, of course, from www.chartoftheday.com , readily available to anyone that subscribes, for free. Sometimes they provide you with an insight that you might not have thought of on your own. This is the chart of the Russell 2000, that is the 2000 smallest stocks taken from the Russell 3000, weighted according to the float capitalization. The median cap. size is a little less than 1bln. This makes this index hard to manipulate as there are too many stocks and few are typical “momentum” stocks like the FANG stocks. Facebook, Amazon, Netflix and Google. Arguable, it is therefore the most ‘’accurate” or “true” index.

The shape or structure of the chart is clearly that of a “diagonal triangle” to use the EW jargon. In plain English that is a wedge that gets smaller and smaller as it works its way into the corner. These occur only as a 5th wave if and when it is part of a full 5-wave sequence. That is nice to know as the chart cannot go beyond where the two boundaries intersect and more often than not the peak is reached well before that. Also, once reached the stock/index normally retraces the entire 5th wave and does so rather violently often in just a fraction of the time it took to reach the top, here from the lows of 2003.

To put this in perspective, we have created a much longer chart, also on a semi-log scale, using Bigcharts. It starts around 1987 which is the year in which most EWavers agree that a wave 2 occurred. From that point on we have a wave 3 and a wave 5 which is, perhaps, not quite finished. So far 5 is actually a little shorter in proportion to 3 using log terms. As a diagonal it should follow the 3-3-3-3-3 pattern which it does seem to do. Alternatively there is no diagonal. Instead it is a normal straightforward 5th way as in a 5-3-5-3-5 pattern but starting at the lows of 2009. Either way the next big move should be back down to the level of the 4th wave of previous degree! But do not forget that we are looking at a 14 year developing wave so the timing is more in terms of weeks or even a few months than yesterday or tomorrow.

The “too good to be true” test certainly does seem to support the notion that some big correction should happen soon. 5 times your money in the eight years since the great recession lows certainly fits that criterion if you ask me.

If you draw the trend channel properly, the 2009 point as the start of a normal 5th wave makes slightly more sense. It also suggests that we are pretty close to topping.

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