You want to be rich like Warren Buffett? Read This! – Reblog

Energy companies are ‘jiggy’ my friends on both sides of the border. The number of energy companies making new 52 – week highs is astonishing. Please take your time and ‘Speed Chart’ your way through the ‘SP500 Energy’ sub index of the S&P 500 and the ‘S&P/TSX 60 Index’ for valuable possible investable ideas. Large capitalized energy companies, after years of sub par returns, are having positive transits and should not be ignored.

I blogged about Exxon Mobil Corporation back in November, when Mr. Buffett made a very shrewd and well timed investment – would expect anything different! At the time of the Buffett investment and my blog, it was later disclosed that infamous short seller Jim Chanos had a short position on the same Exxon Mobil!


(P.S. Hope you enjoying your Easter Sunday!)

Last Thursday Warren Buffett, chairman and CEO of Berkshire Hathaway, reported his third quarter portfolio update.  He, or one of his hired fund managers Todd Combs or Ted Weschler, reported holding a new stock position in the third quarter: Exxon Mobil Corporation.  The size of the position suggests that it is a Buffett position.

Berkshire reported owning Exxon Mobil in the third quarter in an amended filing, but actually first bought the stock in the second quarter without filing, and hid the fact until now.  In the second quarter he bought 31,244,110 shares.  In the third, it added 8,845,261.  The average share prices for the two quarters were both $90.

As always when I hear such an announcement I rush to my model price charts to see what is happening and for a quick analysis.  I didn’t have to for Exxon Mobil, this model price chart is well known to me and Buffet’s purchase makes all the sense in the world.

If you want to be a successful investor in real estate the cliché is “Location, Location, Location”.  To emulate Warren Buffett in the equity markets you have to know Valuation, Valuation, Valuation (and tax-free compounding).  The business press will always tell you who, what, when and the where.  I will disclose the why and the how!  Let’s have a look at Warren’s playbook.

First, let me show you our super long-term model price chart from our database for Exxon Mobil.

Exxon Mobil with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Exxon Mobil with monthly price bars, EBV Lines (colored lines) and model price (dashed line)


As you can see our model price chart goes back to 1995, some 18 years.  I have annotated by ‘up’ arrows only two other times – 1995 and 2010 – that Exxon Mobil traded at the same EBV level that Mr. Buffett made his most recent purchase of XOM (EBV+3).

One of America’s largest and best-managed public companies is trading at a valuation only seen twice before over the last 18 years.  Mr. Buffett used this valuation level to purchase a sizable stake in the company.  This is why Mr. Buffett is one of the wealthiest men in the world.  The market is, for whatever reason, placing a valuation on Exxon Mobil that rarely occurs.  First, Mr. Buffett recognizes this fact and has the investment capital to take advantage of the situation.

Another secret of Warren’s that rarely ever gets any coverage is the man rarely, if ever, sells his main positions.  Warren has two things working for him when making an investment, the first is the valuation level of his purchase and the second is tax free compounding as the book value of the company goes up over time – as you can see in our model price chart in that our EBV (parallel multi-colored lines) slope upward on a logarithmic scale.  Another bonus is Exxon Mobil pays a dividend of 2.64% in line with 10 year US treasuries.

To summarize, Warren’s has some cash lying around.  One of the best-managed companies in the world, a company that can trace its roots to John D. Rockefeller, is trading at a valuation that’s only occurred twice before in the last 18 years.  Plus as an added bonus Exxon pays out a yield of 2.64% –  same yield one receives on US Treasury bonds.  (In ten years the US Treasury gives you your money back, one can only speculate what the value of Warren’s shareholding of XOM would be and the future yield the company would be paying.)

This is how the rich get richer my friends!

NASDAQ Finds Support at EBV+5

Sometimes pictures can say a thousand words.


NASDAQ 100 Stock Index with weekly price bars and EBV Lines (colored lines).

NASDAQ 100 Stock Index with weekly price bars and EBV Lines (colored lines).


Enough said.

P.S. I hoped everyone noticed the ‘Chicken Littles’ in the news media have gone from hysterics to calmness once the NASDAQ market found support.

P.S.S. Twitter and the ‘Echo Chamber’ of the usual suspects last week when the NASDAQ stocks were declining.


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Corrections don’t matter anymore…I guess they can’t get peoples attention unless they say the word ‘crash’!

Do you like Optical Illusions?

Here are a few popular optical illusions that you might have seen before.


The Infamous Elephant Drawing

The Infamous Elephant Drawing


and this,


See a young woman with her head turned or an old hag?

See a young woman with her head turned or an old hag?



Want to see another one?


S&P 500 Index from 1997 to Present

S&P 500 Index from 1997 to Present



Sometimes I do pop my head ‘up and about’ and try to see what others in the world of finance are seeing.


This chart has been making the rounds, seemingly produced by J.P. Morgan Asset Management (Can you believe anything on the internet these days?) and I have seen it numerous times on predominantly bearish websites and used by individuals who say there is a crash coming in US equities.


I have to admit I did stare at this chart for quite some time. Then I cracked a smile, shake my head and say “gotcha”.


This S&P 500 Index chart is an optical illusion like the other two! So please don’t be fooled. This stuff embarrassingly is passed off as serious research however it is anything but.


For comparison purposes have a look at our long-term model price chart of the S&P 500 Index over a slightly longer but an inconsequential two years. (Our S&P chart starts in 1995 instead of 1997.)


S&P 500 Index with monthly price bars and EBV Lines (colored lines).

S&P 500 Index with monthly price bars and EBV Lines (colored lines).



As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.


Our model price chart does look different in some very important ways.


Logarithmic versus Linear Charts? The best is …


We do all our chart work on a logarithmic or a semi-log scale instead of linear charts. This is a very important distinction. Why? When viewing a price graph or chart on a linear basis, you are observing a chart numerically based on a standard measure of the y-axis – the numerical value of the S&P 500. I would recommend that you view a price chart on a semi-log basis so you can easily observe the percentage change of the stock or index in question. Compare where the S&P 500 bottomed in 2009 on both charts. The market bottom on the linear chart looks relatively calm compared to our semi-log model price chart where the downward price spike looks longer and more hazardous to your financial health, which it was. In general, distortions can appear in the market or equity bottoms or tops, for that matter, on linear price charts that can fool the observer in the actual price volatility that actually did occur.



How to disclose meaningful financial data in chart form?


In the history of finance we have yet to formally discover or thought about how best to display fundamental information on a price chart. You can observe the preparer of this S&P 500 Index chart – assuming it was J.P. Morgan Asset Management – tried their best to insert on what they thought were key pieces of information for your consideration. Was this financial information disclosure meaningful? Should investors make important investment decisions on relative measures like dividend yields, bond yields and the simplistic price/earnings ratios? How about something more concrete? Wouldn’t it be better to try and find another financial fundamental independent variable to chart so users make more informed investment decisions?


Re-Thinking the Use of Corporate Balance Sheets


Nobody it seems think about public companies balance sheets in terms of financial price analysis. Firstly, all corporate balance sheets by definition have to balance numerically, which is a good thing. And secondly, management and auditors spend an inordinate amount of time to ensure valuations on key asset and liabilities are properly recorded and reflect economic reality. Whether you have thought about a company’s balance sheet in terms of company analysis you may have to agree with me though, as an independent price variable to be charted over time this variable would be very strong.



Accounting Book Value per share + our ‘Secret Sauce’


The accountants call it ‘book value’ – simply divide the net book value or net worth of the company with its shares outstanding. To this number we add our ‘Theoretical Earnings’ value on a per share basis. (Remember our calculation of Theoretical Earnings is the net income a company needs in order for its balance sheet to stay of constant value or state over a period of time. See Theoretical Earnings under ‘Key Concepts’ tab above.) This result gives us our ‘Economic Book Value’ – to distinguish and differentiate from accounting book value – that graphically we chart on a semi-log scale as the green line, which we call EBV. The constants above this green line we number EBV+1, EBV+2 and so on to EBV+10. There are only three EBV lines below our calculated EBV or our charted Green Line that we number EBV-1, EBV-2 and EBV-3. See below



By calculating and charting these EBV levels or zones over time observers can observe how the balance sheet of any company or companies grouped together in an index have grown or compounded their net worth over time – especially on a semi-log price chart.


Combining together both EBV levels and the S&P 500 Index Value


Thinking of these two variables separately – EBV levels and Index pricing – they are both independent of each other and readily verifiable. So combining them together on one chart provides what I believe is a fundamental financial analysis first. Two independent variables on one financial analysis chart interacting together and giving an observer valuable fundamental information not only on valuation levels but also positive and negative transits alerting investors of a possible change in fundamentals.



Analyzing Both Charts – J.P. Morgan Asset Management and our Model Price chart – at the Same Time


Look at the first market high in 2000, on the JP Morgan produced chart. Now look at our long-term model Price chart. The S&P market high, in 2000, almost put the Index value up to EBV+6 – amazing in hindsight. Now trace the second high, in 2007, on the JP Morgan produced chart – with an Index high of 1565 versus 1527 in 2000. Again, referencing our Model Price chart this market high was at EBV+4. Same index price level, however a big difference in terms of valuation in the market.


Now look at the third and last high on this chart produced by JP Morgan, an index level of 1872, after a heroic and seemingly Everest climb from the market bottom of March 2009. Again consulting our model price chart, this same index level, 1872, places the S&P 500 in a valuation zone just above EBV+3.




Is the valuation on the S&P 500, something to worry about when the past previous tops in the market were at (almost) EBV+6 and EBV+4? Phrased another way, the market – as defined by the S&P 500 – traded over EBV+3 from 1993 (not on chart) to 2007, (14 years) probably without fear of excessive valuation. But now in 2014 investors should now be worried of excessive valuation?




Grazers of financial information on the internet must be on guard. Information can be displayed in such a way that can lead users to the wrong conclusions or worse support the originators narrative or agenda. I have essentially proven that two price charts, each displaying essentially the same piece of information – the price series of the S&P 500 Index over a certain period of time – of having two different meanings. Depending how the price series and the information around the price series are displayed.

Optical illusions can be fun for you and the whole family.  Unfortunately and often optical illusions do appear in the financial news media and get spread around the Internet like a wild fire.  Take great care when viewing and assessing this information.  As the colloquialism goes, this free piece of information and 50 cents won’t buy you anything at Starbucks or worse may put a dent into your financial future.


Flash – Rundown or Strategic Review of our Model Price Equity Indices Charts

After another down day in the markets, let’s have a look at our model price charts of the three major North American equity indices that maybe of interest.


In no particular order,


S&P/TSX Composite Index


S&P/TSX Composite Index with weekly price bars and EBV Lines (colored lines).

S&P/TSX Composite Index with weekly price bars and EBV Lines (colored lines).


No correction here.  At least not yet!

If things do get hairy south of the border, then look for downside support at EBV+2 or 13,906.  That’s only 2.6% below tonight’s close.  No big deal, right?


S&P 500 Index


S&P 500 Index with weekly price bars and EBV Lines (colored lines).

S&P 500 Index with weekly price bars and EBV Lines (colored lines).


I can hardly see any correction on this price chart, can you?  Support for this Index is back to EBV+3 or 1716.  That’s only 7% from tonight’s market close, which doesn’t sound like much but I’m sure this will shake investors’ confidence if this Index did reach support in the immediate future – leaving buyers with a great buying opportunity.  Keep in mind the closer this Index gets to EBV+3 the less risk investors will be taking in the US market in general.


NASDAQ 100 Stock Index (NDX)


NASDAQ 100 Stock Index (NDX) with weekly price bars and EBV Lines (colored lines).

NASDAQ 100 Stock Index (NDX) with weekly price bars and EBV Lines (colored lines).


I guess I don’t need to tell anyone that the NASDAQ stocks have been the ones that have corrected the most.  The good news, as of tonight this Index has a downside risk of only less than a percentage point before touching support at EBV+5.  Look for the NASDAQ Index to start looking for support, or better still individual NASDAQ stocks to start holding their ground in the next few days at their own support levels or the bottom of their current EBV zones.


Big rallies have and do occur when Index EBV support levels are reached when individual stock declines become tapered.  Buyers do become emboldened when they think the sellers have abated for whatever reason.


Hopefully this will give you some guidance on where we are at with this market and plan your investment or trading plans accordingly.

My “Aha” Moment with US Equity Electronic Trading

You have heard the expression “Conflict of Interest”.

Well, a Bay Street veteran introduced me to its iteration early in my career “Where there is no conflict there is no interest.”

Now that Michael Lewis has blown the whistle on High Frequency Trading or HFT, in yesterday’s New York Times (here) and his just released book ‘Flash Boys: A Wall Street Revolt’, my question is ‘What took so long?”

I encountered an early version electronic trading back in 1999 – 2000. We at Acker Finley Inc. (AFI) had a sizable proprietary trading desk – prop desk – trading both US and Canadian equities. Traders using AFI’s capital to make short term trading gains in the equity markets.

For US equity trades our traders were using _______ ____’s on-line equity platform. Month after month things were going swimmingly, with AFI making a tidy profit after bonuses and expenses.

Then one day one of our traders was complaining about a US equity fill he received to a _______ representative over the telephone and the conversation wasn’t polite (if you catch my drift). I made a mental note but thought nothing of it, until a few months later there was a chorus of similar complaints from the guys on AFI’s trading floor.

Just like Michael Lewis’s article I stood behind one of my traders as he placed a buy market order on the offering side of the market and as he hit ‘enter’ on his computer the market offering immediately moved upward while we waited what seemed like hours – OK minutes – with no fill as the stock gapped higher.

I couldn’t believe my eyes.

So confusingly I picked up the telephone to enquire what the #%$# (expletive) was going on. The _______ rep said the explanation was simple. He explained _______ was internally ‘restricted’ on the stock and they had to ‘trade away’. Meaning, _______ was acting on behalf of or advising the company corporately and as a market maker they gave our buy order to another firm or worse, place our order in a very low priority so as _______ would not be in any ‘conflict of interest’ situation. If the market moved against us, so be it! ( _______’s commission rates still applied by the way!)


Thinking quickly I said “OK, so every morning could you please give me a list of your ‘restricted’ stocks so we can trade somewhere else or better still NOT trade the name at all?” This seemed reasonable in that if _______ couldn’t give us the best price and speed for our orders then why risk losing money on the trade to begin with.

“That information is confidential”, snapped the rep. I guess reasoning if the public knew the stock was on _______’s ‘restricted’ list some corporate activity was in the offing potentially impacting the stock price.

“This is ridiculous”, I shouted. “ If we get a lousy fill or no fill at all, then we are to assume you are ‘restricted’ on the stock”.

“Obviously!” the rep responded without a hint of incongruity.

And after this conversation we got lousy fill after lousy fill!

So as the saying goes, I was born at night, but not last night!   We began auditing the results of our traders over the last six months and the result was jaw dropping. Our traders were making money, but only in Canada. The US equity trading was slowly and steadily losing money, albeit in small amounts, consistently and repeatedly.

_______ was swallowing a bigger spread of our trading action. The more we would have traded the more we were to potentially lose.

We pulled the plug on _______’s platform and we modified our US trading habits to recognize the US equity market’s new reality – more on this in another blog. Canadian trading always was profitable and still is. I thought over time market participants would get smart to what was going on and fix what was a clearly a broken equity trading system.

Keep in mind this occurred in early 2000 where much of the work behind the trading interface was human. Over time these human acts were coded into high-speed servers and routers and placed not only in the big investment banks but also their ‘siren’ high-speed servers where in close proximity to if not in the stock exchange buildings themselves. Yes, these big investment banks, hedge funds and specialized ‘High Frequency Traders’ have had 14 years of open-field running and probably have accrued huge profits at the expense of investors.

Finally it has taken Michael Lewis and a Canadian boy from Royal Bank of Canada, Brad Katsuyama, to finally expose what is truly going on and did something about these unsavory business practices by starting his own independent equity exchange called IEX.

The final irony for me was _______ _____ announcing in the New York Times Op-Ed page their approval and use of this new equity exchange, IEX. My guess is the predator became the victim. Others ‘Conflict of Interest’ are finally boomeranging round and affecting them and their clients. This US financial heavyweight is now in the role of a client – AFI back in 2000 – and probably grew frustrated of what others were doing to them.

If you’re in this business long enough things do come full circle – eventually!


P.S. While in the midst of writing this blog – Monday night, the FBI announced an investigation of HFT. Another investigation of Wall Street, of how clients were disadvantaged for the sake of inflated salaries and excessive profits. Sound familiar?


Telus – “Getting Ready for Groundhog Day Part III?”

Mike Dal Santo in the Comment Section on our Facebook App posted an excellent question.

Mike writes:


Do you ever use technical analysis in determining your model price? I was looking at Telus, your model price is quite a bit lower than the current price, for a stock that has been in such an nice upward trend for the last number of years there would seem to be a need for some type of unseen catalyst to have it drop down to the model price. Does your model price incorporate competition such as another player into the Canadian telecom market? I don’t think the fundamentals for Telus, on the surface, are bad at all.

Let me parse this excellent question.

First off, I dislike anything to do with Technical Analysis.  Here is an excerpt from a previous blog I wrote titled “Do these EBV Lines work?” on the subject of Technical Analysis.

First of all our charts do look like technical analysis. Let me be clear…I hate technical analysis.  Early in my career I learned every technical analysis tool ever invented to get an edge in the market. I sat beside some of the greats like Mr. Jerry Favors – Gann Specialist, Mr. Gerald Appel – founder of the MACD indicator – and Mr. Joe Ross to name a few.  When I walked away from these people, I was not satisfied they discovered a competitive edge in the market and guess what, neither did they!  They always had exceptions to their own rules.  I sat in their offices and I saw how they traded and lived.  Believe me they didn’t live on estates and cruised on their yachts. They all could barely afford a car!

And people tell me the reading of the MACD indicator from their canned software program tells them to buy a specific equity. Really!  The man himself who invented the tool barely made a living and you think this tool will make money for yourself in the equity markets over the long haul.

Even though our Model Price charts look like Technical Analysis, I assure you they are not.  These charts are 100% fundamental.

Getting back to TELUS!

Below is our short-term (weekly price bars) model price chart of TELUS.

Telus Corp with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Telus Corp with weekly price bars, EBV Lines (colored lines) and model price (dashed line)


For those interested, a daily updated chart of T subsequent to this post will be maintained on Facebook, here.

On the surface, I agree with Mike. TELUS’s model price chart doesn’t look bad at all.  Yes, TELUS is expensive in that the company is trading at an 18% premium over its calculated model price or our calculation of fair market value.  And with TELUS’s recent positive transit of EBV+4 – marked with an arrow – the stock does look poised to march higher, if not to EBV+5 or $52.44 (Dollar value of EBV+5 at the time of this blog post).

Looking at our long-term model price chart, below, for TELUS on our Model Price App you can clearly observe TELUS returning to the valuation highs achieved before the financial crash of 2008. So instead of a buying opportunity, is this something to worry about?


Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)


I do have a small advantage over Mike and the rest of the users on Facebook Model Price App.   Our in-house model price database reaches further back into history, back to the beginning of 1995.  For our Facebook App we only include model price data at the start of 2007 to unclutter our long-term charts and make the visuals more user-friendly. However there are rare occasions, like I did for TELUS, I do like to check data over a longer period of time to get a sense of the valuation range over the last some 20 years.

Super Long-term TELUS Model Price Chart

Here is our Super Long-term Chart on Telus

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Telus Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)


“Does history repeat itself?” or “Getting ready for Groundhog Day Part III”

A picture can be worth a 1,000 words, yes? TELUS’s stock price was flying high in 1998, only to have crashed some 4 years later.  Again in 2006-7, TELUS was AT THE SAME VALUATION LEVEL as 1998 only to have severely corrected in the financial crash in 2008. Believe it or not we are almost here again – the same valuation high – that TELUS achieved back in 1998 and 2006-7. Amazing!

So what do you think, does history repeat itself?

Mike’s point in his question is valid. TELUS does look good here, in the present day.  And maybe who knows, the stock price could reach valuation highs of EBV+5. But Mike could have said the same back in 1998 and 2006-7, obviously before TELUS severely corrected. Wouldn’t you agree?

Going one step further!

Equity investing can be about the possible range of valuation distributions over a period of time.  Yes, I visualize a statistical bell-curve, if you will (see below). Using Mike’s TELUS as an example, what is the possible valuation distribution using our long-term model price chart on our Facebook App, seen above.

By simple observation – a blink of an eye, the valuation range is just over EBV+4 (right side of the bell-curve) to EBV+1 (left side of the same curve).  Using a longer time frame – almost 20 years – with our super long-term model price chart, the valuation distribution is expanded to EBV-3 (left-side) to just over EBV+4 (right-side).  Notice the right side of my imaginary bell-curve doesn’t change but a different and broader left side emerges.  (I have to emphasize that having less time history does NOT disadvantage Facebook Model Price users. With the financial crisis of 2008 included in our data the distribution of the shorter or 7 years of model price data – EBV Levels – will suffice.  More history usually only broadens out the lower end (left-side) of the distribution curve.)


Imaginary distribution graph of upper and lower EBV Levels over a period of time

Imaginary distribution graph of upper and lower EBV Levels over a period of time


So with my hypothetical statistical ‘curve’ in your mind where would you like to invest, valuation wise, in TELUS?

Hint: The investment “greats” always invest on the left-hand side of my theoretical distribution, never the right. The “greats” in the business invest to make dollar bills with little to no downside where all others play for pennies with all downside.

What kind of investor or money manager are you? This should give you something to think about this weekend.  Yes?

“I’m currently invested in TELUS, what should I do?”

This is an easy question to answer, with Model Price Theory (MPT) ready to help.  The answer being, any negative transit of EBV+4 would be an excellent sell signal at some future date.



Great question Mike!  Keep them coming.  It will probably take a year or so for the price action on TELUS to play out but it will certainly be interesting to see what happens. My bet, it will be “Groundhog Day Part III” where a multitude of investors probably losing money on their TELUS investment and of course reiterate to anybody who will listen my favorite expression, “Nobody saw that coming!”


P.S.  One observable is that for a utility stock TELUS, over the last some 20 years, has been hugely volatile.  Investors don’t usually associate huge volatility with a utility or regulated company so it would pay investors to be mindful of the fact.


P.P.S.  I annotated where at one time TELUS was a “Coming Out of the Blue” stock at one time – back in 2002.  Amazing purchase opportunity for any investor at the time and who knows maybe investors will have this same opportunity sometime in the future as well.  In equity markets anything and everything is possible. Keep on open mind and surplus cash at the ready.  Remember, this is what the investment “greats” do.


“What if?”

I’m still in mourning over Mark Carney, the former Governor of the Bank of Canada, leaving us for the Bank of England.

So I haven’t focused at all on our new Governor of the Bank of Canada – Mr. Stephen S. Poloz.  So on Tuesday, March 18th, 2014, I was heading to our office kitchen, for my one cup of Earl Grey tea I allow myself, through our trading and technology office space when Mr. Poloz was on our trading floor big screen television and said three words that made my head spin around.

“Blah, blah, blah, … lower interest rates, blah, blah”!

Nursing my whiplash, I know one thing about ‘Central Bankers’; they would never say these three words in any context without thinking through its communication value.

So I went to the Bank of Canada website to read his speech, “Redefining the Limits to Growth”, he delivered to the Halifax Chamber of Commerce, in obviously Halifax, Nova Scotia.

Let me say, every Canadian investor should read this speech!  For a central banker this speech is direct, forthcoming and has huge implications for your investments – not to mention the future for your kids and grandchildren.

Mr. Poloz is giving everybody a very direct assessment of the Canadian economy and its not very good.  Down right scary as a matter of fact.

The highlights include:

1)        Five years after the financial crisis the world economy is still stuck in a period of slow growth – say 2% annual growth, if we are lucky.

2)        For the first time in 50 years, and starting in 2011, the growth rate of the population of working-age Canadians crossed below that of the overall population.  As a way of comparison the US still has 0.2% – 0.3% growth in hours worked – a small but still growing population of working-age people.

Why is this important?  Mr. Poloz explains in his speech, “Long-term economic growth is driven by two factors: 1) growth in the supply of labour, which is connected to population growth and changes in its composition, or what we call “demographics;” and 2) productivity growth, which is economists’ shorthand for how efficiently we produce goods and services. For illustration, if we had 2 per cent trend growth in the supply of labour and 1 per cent trend growth in productivity, trend growth for the economy would be about 3 per cent.

So the growth rate of the population of working-age Canadians will be negative for the seeable future, say negative 0.1% – 0.2% annually.

Therefore our only growth influence in the Canadian economy will be the nebulous and hard to pin down productivity growth that economists calculate.  Mr. Poloz stated “Productivity growth fluctuates around a long-term trend, tending to be weak during recessions and the early stages of a recovery, and stronger in periods of economic expansion. It follows then that the weakness in productivity growth since the financial crisis may be a symptom of a post-crisis hangover. Indeed, in Canada, the latest data show a pickup in productivity in the second half of 2013, to around 2 per cent, which is very promising.”


Let’s look south of the Canadian border to look at long-term trends of productivity growth in the US.  According to Jeremy Grantham, of the money management firm GMO, for forty years after WW II economists calculated productivity growth of around 1.8% per year.  Unfortunately the following thirty-year period saw US productivity growth slowing to 1.3%.  With some economists seeing a trend of lower productivity growth in the foreseeable future.  This is in the United States, the most productive and inventive society on earth.

Mr. Poloz points to a short-term spike in productivity in the Canadian economy over a certain period of time but no one – at least not me – really believes that Canada will out do the US in terms of productivity growth.  And remember productivity growth is really hard to measure, if at all.

So, do the math.  The CDN labour force is contracting say, 0.1%-0.2% per year.  Productivity growth, let’s just say, it’s the same as the US – big assumption, in that productivity is growing 1.3% per year.  So the maximum growth rate in Canada over the foreseeable period of time will be 1% per annum – if we are lucky!

Going one-step further inflation in Canada has been falling like all industrial countries all over the world.  Inflation last year in Canada according to Mr. Poloz was 1.2%.  The goal of the Bank of Canada is to have 2% annual inflation.  So there will be no real growth in Canada for the foreseeable future!

Mr. Poloz states “the global economy may not be just suffering through a hangover from the financial crisis. There are other, longer-term forces at work as well. Some analysts are suggesting we may be facing a long period of secular stagnation. On this alternative view, the economy could perform well below normal, leaving many out of work or underemployed for a long time to come.”

Candid hard-hitting stuff!

3.         Mr. Poloz cites the Club of Rome“Over 40 years ago, the Club of Rome published a book entitled, The Limits to Growth. To the global think tank, those limits were about finite natural resources and the environment. Although the timing remains uncertain, its arguments remain relevant today.”


This, my friends is jaw dropping.  For a central banker to cite the Club of Rome, in a public address is unheard of.  If Janet Yellen, the new Chairperson of the US Federal Reserve, had made this reference, and maybe she will in the future, the US would be in a full-scale panic with both public and private debates on how the US economy can exceed these “Limits to Growth” and reference the presidential years of one Jimmy Carter.

4.         There are other items in his speech that are interesting.  Including statistics on where Canadians are allocating an ever-increasing and significant portion of their wealth over the last 10 years.  Interested?  My lips are sealed in hopes that you will read the speech.


Shocking speech and a must read.  Mr. Poloz wasn’t on my radar screen but he is front and center now.  The investment implications of this speech are quite real and should be considered by all investors.

So “What if” Mr. Poloz is right?

My interpretations are:

1.         The Bank of Canada rate – similar to the Fed Funds rate – is still around 1%, leaving Canadian chartered bank prime at 3%.  The US Fed Funds rate is 0 – 0.25%.  The Bank of Canada still has room to drop interest rates, if need be.  When, not if according to this speech, the Bank of Canada starts to reduce short-term rates look for GIC’s and other short-term debt instruments to follow suit squeezing retirees and savers even further.

2.         We have already seen a decline in the value of the Canadian dollar under 90 cents to the US dollar.  The weakness is probably making Mr. Poloz happy, in that a weak CDN dollar is giving the Canadian economy, especially Ontario; a must needed boost (cheaper exports) and higher short-term import inflation.  The economic impact of the lower CDN dollar does take time.  I’m sure the Bank of Canada will be monitoring export growth, import inflation and interest rates very carefully in the future however this speech is confirmation to me we are probably in the early stages of a secular decline in the CDN dollar vis-a-vis the US dollar.  (Something I have been professing over a year and a half ago.)

3.         Interest sensitive Canadian equities will probably have another bull rally to valuations higher than their previous stated valuation highs – EBV Levels – as income investors scramble for higher dividend and income returns that are lacking elsewhere or when the Bank of Canada starts to reduce the Bank of Canada rate.

4.         Canadian companies that have any growth, say high single-digit or low double-digit growth, in any Canadian or international economic market sector will have a high valuation (EBV Level) as investors will pay any price – valuation – for growth in a no-growth country (maybe world).

5.         Assuming all the above happens, this will increase the valuation of the S&P/TSX Composite from currents levels to EBV+3.  See chart below.  This will imply an upside of approximately 35% from current levels.

S&P/TSX Composite Index with monthly price bars and EBV Lines (colored lines).

S&P/TSX Composite Index with monthly price bars and EBV Lines (colored lines).

If the S&P/TSX Composite did achieve this valuation level, EBV+3, in any future time period this would represent full value for this Canadian Index and much needed caution for Canadian equity investors.

Just a normal weekend my friends, alone with my investment thoughts!

“What if?” indeed!

I’m on Market Call!

On Wednesday, March 26th, 2014, I will be on Market Call on the BNN network (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Mark Bunting.

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

Would you say anything different based on your interpretation of Model Price Theory and chart?  You can make your comments via Facebook.

Should be fun!


10 Things I Did Differently in the Crash of 2008; That I Didn’t Do in 1987 and 2000.

(Five years ago.  It hardly seems possible that 5 years ago the S&P 500 Index hit an intraday low of 666, on March 9th, 2009, the mark of the beast – coincidence, I think NOT.  Officially, I have now lived through three equity market crashes of 1987, 2000 and 2008.  Each ‘market event’ has taken their own personal toll on my soul in the same way as others in the industry.  My goal here is write something personal.  I did some things in the last crash – 2008 – that I learned from the other two.  Allow me to examine my scar tissue long since healed but visible in its own way.)

They don’t tell you about the pain.  Physical pain.  When you are nauseous and you can actually feel the cortisol levels spiking in your body – that’s bad by the way.

Blood pressure?  Off the charts!

Welcome to the field of finance.  Do professors talk to students about what happens physically when their market positions severely go against them in MBA School?  Do they simulate calls where students call their best clients or better still their own mother and father explaining they lost millions of dollars on their best recommendations and they won’t have the retirement they had always dreamed of?

Probably not, is my guess.  Even if they did it’s hard, if not impossible, to simulate this feeling in some ‘Ivory Tower’ setting where everything is knowable and risk can be calculated.

(I know personally a handful of brokers who had to make this brutal call to their parents.  After I overheard two tearful calls after the 1987 crash, I always shied away and never did handle my parents investment account, as little as it was!)

That’s what wrong with the movie “The Wolf of Wall Street” – which I reluctantly watched while on my last vacation. Jordan Belfort, the protagonist, was shown to be all hype, drugs and sex.  Antidotes and crude stories never make this movie very interesting – we in the finance business have our own share of stories as well.  But the movie never tells you why he acted this way?  My interruption, for what’s it worth, is the physical and mental pain Mr. Belfort felt when losing his blue-collar clients money.  Even though in Mr. Belfort’s case, he and his firm lost their clients money on purpose!  Only a true psychopath, like Bernie Madoff, could steal people’s money – especially Jewish (like himself) clients’ money – and not feel anything.

Want more proof!

The website ZeroHedge has been keeping a tally on suicides of traders/bankers over the last while including one that occurred early Thursday morning, February 13th, last week, by one Mr. Edmund Reilly.  Mr. Reilly (47) – trader/banker jumped in front of the Long Island Rail Road (LIRR) Commuter train at 6 am.    ZeroHedge’s tally is up to 10 recent souls!

Why so gloomy?  Have you never read anything about the dark side of the financial business?  Don’t get me wrong I do love what I do.  I have professed my love for equities in this blog “Why do stocks go up and down?” here.  Similarly I have also professed my hate for the business “Blowing Up the Financial Business” here.

With any endeavor one pursues whether sport, career or that special someone there is heartache.  It comes with the territory.  Starting in early 2008 – Martin Luther King Day to be exact, I knew it was highly probable I was about to enter my third ‘market event’.  Here are the 10 things I did differently based on the knowledge and experience that I learned from the previous two ‘market dislocations’ to survive this on coming financial tsunami.

1.  Anticipate, don’t react to the market or stock price in or of itself.  Always ask “What if” questions.

This is where Model Price Theory (MPT) came to my rescue.  I was not flying blind.  Actually this is an apt metaphor because some days I felt like I was in a cockpit of an airplane using only the instrumentation, blocking out all the financial noise both in the financial press and television.  A negative transit was a negative transit, simple and don’t over think it!  I could look at the next EBV level down – from EBV+6 to EBV+5 – and get a sense both in terms of dollars and percentages where the next possible support level would be.  Also stocks having negative transits of EBV-3, or “Going into the Blue” was an easy sell signal.

Our Index charts (S&P 500 and TSX Composite) were invaluable.  We had Index Model Price charts for the above indices going back to 1980.  There wasn’t a day that didn’t go by in 2008 and 2009 that I didn’t consult these charts and asked, “What if” questions.  I had a SELL strategy for each negative transit.  More importantly I had a BUY strategy for each major index support EBV level.

Technical and fundamental analysis, were no use to me when every stock on the board is falling!  At least EBV levels gave me a sense of certainty in a very uncertain world.

2.  Visualization

Elite Athletes do it, why not investment managers.  On the front of our Acker Finley website we place the performance of both public mutual funds we manage – Canadian and US.

Throughout 2008 and 2009, believe it or not, I visualized our future five-year rate of return chart (the future 5 years from the date of the market bottom) on our Acker Finley website, comparing our investment performance versus our selected benchmark after the market bottom, wherever that market bottom eventually would have happened.

Here is our performance chart, screen captured, from our website as of March 10, 2014.  This chart shows our performance for the Acker Finley Select US Value 50 Fund (costs and fees included) versus the S&P 500 Index (Total Return in Canadian $) over a five-year period beginning March 9, 2009.  I visualized this performance chart over 5 years ago and it came true!

Voila_Capture 2014-03-11_10-02-33_AM

Daily Performance of the Acker Finley Select US Value 50 Fund (CDN$) over 5 years compared to the S&P 500 Index (Total Return in Canadian $)

Visualization the future 5 years, back 5 years ago, helped keep everything in perspective, especially being fully invested if and when the bottom occurred.  If we were not fully invested when the market hit its bottom this chart would be totally different (far worse) including (probably) underperforming our benchmark over the last 5 years.

3.  You can’t time the market so don’t!

You hear this all the time and its true!

The bottom of the US equity market occurred on March 9, 2009, five years ago.  Did we know this at the time?  Nope!  For this particular crash – 2008 – I was fully invested unlike previous crashes where I tried to time the market resulting in very unsatisfactory long-term rates of return and personal regrets that I didn’t purchase quality companies at generational low prices.  Yes, I could have minimized my physical and mental pain short-term by selling equity positions only to have anguish longer-term in not buying great assets at a discount.

(Maybe a partial explanation for the suicides mentioned earlier.  This US equity market has gone straight up since September 2011.  Who would have thought this would have happened with all the seemingly worldwide bearish economic news especially considering a US Federal government shutdown.  An equity investor may have guessed right on the timing of the ‘market crash’ but sitting out the ‘market recovery’ can be equally as painful.  Or how about selling and going to cash on March 9, 2009, realizing your losses, staying in cash and watching over a 5-year period US equities recapture previous highs.  Painful indeed!)

4.  Be prepared both mentally and physically.

Woody Allen said, “Showing up is 80 percent of life.  Sometimes it’s easier to hide home in bed.  I’ve done both.”  So have I.  Physiologically it is painful to me to have my net worth and more importantly my clients net worth reduced on a daily basis.  In past crashes I did hide underneath the covers, trying to avoid the pain – it didn’t work by the way.  For the crash of 2008, I came to work everyday.  Yes, I would start fresh and energized every morning only to go home after market hours drained and defeated (and poorer).  Knowing this behavioral grind from past market crashes, I increased substantially my physical workout schedule including switching my workout routine from the local gym to an Ashtanga Yoga Studio for a more complete and physical workout.  My alcohol consumption, which I would call moderate (red wine only), was reduced to sparingly and infrequent.  I faced each working day with bright clear eyes!

5.  Communicate with everybody…staff as well as clients.

Like a good marriage communication is key.  I took the time to communicate with everyone, from our valuable support staff answering the phones, executive team, to clients who called daily and especially the clients who you don’t hear from.  Everyone knows the financial markets are under stress so why add to peoples stress unnecessarily by being uncommunicative.  Talking drained my daily energy faster, a precious resource, but it needs to be done.

6.  Have empathy with clients who want to bail (sell) but you are running money for the silent majority.

For every client, you have to recognize they have different agendas and pain levels when equities start to head south.  The vocal clients get your attention and maybe too much of your focus.  Always do what’s best for everybody’s financial interest, to the best of your ability and not the few who you hear.  Short-term decision-making may boost your rates of return quickly – going to cash in a down market – and keep the vocal clients happy with the cost being exceptional long-term rates of returns for everyone.  Clients have shoes, they do walk from time to time, and it’s usually the vocal ones you tried to appease in the first place that are first in line out the door.

7.  Government and Central Bankers will work day and night, pushing and pulling every policy tool imaginable to right a sinking economy but sometimes it just takes time for new policies to work.

I observed in past crashes the Federal Reserve Board (FED) do extraordinary things to right financial markets in past crashes.  I have learned the FED has incredible powers with policy options – real and made up – and when the FED wants financial markets to go up, they go up!

Financial markets viewed from 40,000 feet are feedback mechanisms.  Good economic policy drives societal financial wealth upward.  Poor policy does the opposite.  Central bankers are the smartest people on the planet because we trust them with the most valuable piece of machinery on earth.  The “money-printing machine”.  Print too much money and we as a society have to deal with inflation.  Print too little and society would have to deal with deflation.  We, as a society, don’t hand this power over to a village idiot.  Mr. Ben Bernanke, in my opinion and others, was slow to respond to the unfolding financial crisis of late 2007 and 2008 but once he was on the case every monetary policy device was brought to bare.

Have faith in the “Greenspan, Bernanke, or Yellen Put”.  It’s real!  Or alternately your house is on fire.  You and your community know that the fire department is coming.  Whether they save your house is another matter entirely.  They are coming, we just don’t know when!

8.  Each crash had a different charactistic or theme.  Try and pick-up what is going on – some stocks going down faster than others – in the markets as fast as you can.  This is the key for capital preservation, if possible, and stock selection on the rebound.

Of the last three ‘market events’, each had a different footprint or reason for plunging equity values not necessarily tied to equities themself.  The result however was always the same – equities prices plunging appreciably worldwide.

The ‘Crash of 1987’ was about the value of the US dollar.  Both the US dollar and stocks went down significantly but it was the stock market that received all the media attention.  Once the US dollar stabilized, at a lower value, the stock market rallied to new highs two years later.

The ‘Crash of 2000’ was a valuation correction in the NASDAQ induced by the Federal Reserve (FED) – remember them – restricting monetary policy, and raising interest rates to 6.5%, to a point of negatively impacting the real economy.  Subsequently after the market crash, the FED came to the equity markets rescue and lowered interest and mortgage rates significantly leading to a housing boom and eventually lifting equity markets, at least the S&P 500 and Dow Jones, back to previous 2000 highs.

The ‘Crash of 2008’ was a garden variety ‘financial crises’ – where declining home values triggered substantial declines in an alphabet soup of newly devised fixed income financial products – CDO’s, Asset-backed SIV’s and Sub Prime Mortgage-back securities – bankrupting an over-leveraged regulated banking system including much of the unregulated shadow banking organizations.

For example, in the ‘Crash of 2008’, with the help of Model Price Theory (MPT), we were able to quickly observe that lower valuation and priced stocks faced the greatest risk in a deflationary world.  Ever-lower stock prices implied a real possibility of the company going out of business that was a precursor to an even lower future stock price.

This was a wrinkle never observed in the previous two crashes and hurt ‘Value Managers’ rates of return during the two years following the market bottom of March 9th, 2009.

9.  I instituted a two-part question when I thought about selling anything in the 2008 ‘Market Crash’.  “Why was I selling?” (Answer, probably to feel better) and more importantly “When would I repurchase the position or increase your asset allocation in equities?”

My first two market crashes – 1987 and 2000 – involved what I call one-dimensional selling.  Selling for selling sake.  It felt good in the moment.  At least I was doing something.  Protecting capital.  Only to see, you guessed it, the stock(s) you sold rally hard (higher) the next day.  I felt like a proverbial cork in the middle of the ocean.

This time around, I forced myself to answer two questions before I sold anything.  Why was I selling?  Whatever my answer, probably very rational – knowing my rationalization – the real answer was I just probably wanted to feel better, physiologically.

Knowing buying during a ‘market crash’ is much harder physiologically than selling, at least for me, I instituted a follow-on question to the “Why was I selling?” question.  I would ask myself “So big-shot ‘When do I buy?’”   The answer inevitably lead to the stock value or price the company was trading at, on that particular day!  So instead of feeling the need to sell, I felt better in that I was buying by not selling a high quality company at a discount to fair market value.  Yes, you read this right, buying by NOT selling.  Confusing, but it worked!

10.  Keep to your personality type.  Keep true to yourself.  Recognizing that ‘Market Crashes’ changes your daily route and forces you out of your comfort zone.

I have a procedural personality in context of the equity markets – I’m an accountant after all.  I like process.  Again my first two market crashes took me out of my comfort zone and who I was.  Declining markets seem to demand assimilating tick-by-tick news developments as well as rapidly changing stock prices – mostly down.  You’re on the edge of your seat trying to assimilate everything because that’s what you think the job entails.  With the help of Model Price Theory (MPT) I was able to largely keep to my personality type or mental makeup on track.  I say largely because on very active days and weeks the market does twist you into being something you’re not.  At least recognizing this is half the battle and a simple mental readjustment can be made to get me back on track.

Once I realized the potential of a market crash (2008) and future equity markets being non-procedural, I looked for ways to enhance my procedural goals away from equity markets.  Like how many gym visits did I achieve over a certain period of time that eventually evolved into learning the various Ashtanga Yoga positions that make up what is called the ‘Half Primary Series’ almost four years ago with daily practice.


Will there be another ‘market crash’ in my career, my lifetime?  Probably.  Will I be ready?  As we have seen in past crashes, severe equity market ‘corrections’ can be extraneous events impacting equities as a consequence.  Shit happens in this complicated interdependent world.  Financial excesses are built up; policy responses are thought out and implemented.  Capital excesses are wiped away, setting up the rebuilding phase all over again.

Yes, I made mistakes in the crash of 2008-09.  I was not perfect.   Can anybody be perfect when presented with a bunch of unknowns and much uncertainty is an open question.  But the fact remains, I have three ‘market events’ under my belt and I have learned much not only my physiological makeup but also another fact set of accumulated numbers, data, captured in my database – Model Price App – that will help me – and hopefully you a Model Price App user – ‘keep on top’ of the next market dislocation.

Thanks for listening.


March 2014 – Monthly S&P 500 Market Strategy Update

Back from vacation, rested and ready to go.

Let’s start with an update on the US equity markets that never want to correct.  Ukraine and Crimea.  This market doesn’t seem to care; at least not today.

What does our Model Price chart look like?

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

S&P 500 Index with weekly price bars and EBV Lines (colored lines).

As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.

Simply stated the S&P 500 has an upside of almost 13% and a downside of 10%.  If and when the S&P 500 Index value gets closer to the top of the zone or EBV+4 we will become more defensive both in our cash position and our stock selection.

It’s been a great 5 years, in terms of performance, for US equity investments.  However bull markets do come to an end usually because of excessive valuation either in a rising interest rate environment or future weaker economic growth.  Knowing what EBV levels investors use to increase and decrease equity allocation is very important for large outperformance and compounding rates of return of any equity asset class.

This current bull market started at EBV+1 (March 9, 2009) and is probably heading for EBV+4 and higher.  Reducing your US equity exposure in your portfolio will be difficult when everybody is pocketing seemingly over-sized profits.  Unfortunately, if the past bull-bear cycles are any indicator – they are – these same individuals will lose these over-sized profits and much more when the US equity markets rollover to bearish declines.

If you think I just turned into a bear than you misread what I have written.  I am strategizing on the future in terms of US index levels – and EBV levels – and my future US asset allocation.  Our math driven EBV levels allow you to do this.  With all positive market action over the last couple of years, it’s only my intention to put a little crumb of thought into planning how to gracefully exit this current bull market with your (hopefully) oversized gains intact.