Last week I was spending some time viewing webcasts from the Milken Institute Annual Conference in Los Angeles, as I do every year. (Thank goodness they placed these videos on YouTube. Is there any reason why anybody would place videos on any other platform other than YouTube? Please Charlie Rose put your videos on YouTube!).
One highlight was an interview with Robert Rubin, the former US Treasury Secretary and Gary Becker, Nobel Laureate, Professor of Economics and Sociology, University of Chicago. Both agreed the Federal Reserve Board’s actions in what has become known as QE3 – the third round ‘Quantitative Easing’ – was less effective than QE1.
Really!
Because everywhere I look in the business press, this “fake” US market rally cannot be trusted because of central bank liquidity, euphemistically called QE3, that is driving asset values higher not supported by underlying fundamentals.
The Fundamentals are Improving!
Last July I wrote a blog called, “What is going on with the world of finance, and how do you fix it!” highlighting our Solvency Curve and recommended a policy course of action to change the solvency ratio of various economic actors in the US economy. I called for substantial tax increases with a reduction of federal spending to increase the solvency of the US federal government.
I stated in this blog,“You mean substantially increase taxes and the economy will boom – absolutely! You mean substantially cut federal spending and there won’t be a depression – absolutely!
On Friday, it was reported the CBO now calculates the federal deficit through the first seven months of the current fiscal year that began in October is $231 billion less than the deficit was at this time a year ago. Also the US Treasury reported on Friday the country recorded a budget surplus of almost $113-billion in April, nearly double the surplus of a year earlier. Everyone will concede this April budget surplus and narrowing of the US federal budget deficit is because of increased taxes, which took effect on January 1, 2013 along with the budget sequestration – cutting of federal expenses.
There is a link between the US budget deficit and the stock market! It’s our Solvency Curve.
When I saw this news on Friday about the US federal budget deficit, I thought the US federal government is becoming more solvent. In other words the US Federal government is “coming up” up the left side of our Solvency Curve. (See Solvency under Key Concepts).
Here is our Solvency Curve
Solvency Curve
As the US Federal government becomes more solvent and starts to climb the severe curve on the left side of the optimal level of 0.689 (see line), the other participants in the economy will come up on the other side of our Solvency Curve, the right side.
This is how the economy works based on solvency in our view. This is why the US equity market has been so strong. The solvency fundamentals for the United States are rapidly improving. To better visualize what is going on here I have reproduced this chart from the St. Louis Federal Reserve on the US Federal Governments revenues versus expenditures since 1980.
Chart from the St. Louis Federal Reserve Board
As you can see the gap between revenues and expenditures is narrowing. This narrowing of the gap allows the other actors in the US economy, which are super solvent to feel more comfortable spending some of their savings or cash hoards on products and services thereby lifting growth and employment prospects in the US economy.
Another chart that caught my attention was this chart showing “Household Debt Service Payments as a Percent of Disposable Personal Income”.
Chart from The St. Louis Federal Reserve Board
As you can see because of low interest rates and de leveraging, service payments (interest rates) on debt as a percent of disposable income is the lower than anytime since 1980’s. This implies the consumer has potential to add on additional debt again creating economic activity.
It’s the dynamic of all economic actors, in the US economy, becoming more efficient in terms of solvency. The US federal government becoming more solvent from an insolvent state and everybody else – corporations, individuals, state and local governments, financials – becoming more efficient in terms on solvency by spending their cash on hand or appropriately leveraging balance sheets because of growth opportunities.
In this dance around our solvency curve, the federal government had to make the first move in order for the other participants to feel comfortable initiating action. The equity markets are sensing this shifting dynamic, again led by the US federal government, and lifting equity levels in the marketplace in anticipation of increased growth and earnings prospects.
The dynamic of these economic actors that shift along our solvency curve is secular (long-term) in nature and can last 5 to 8 years. So we are in the bottom of the first inning of a virtual circle of US growth and market valuation increases that will be healthy and long lasting just as long as both sides are marching towards balance sheet efficiency at the top of our solvency curve – see above.
Conclusion
It has become fashionable for the business press and the “bears” to pooh-pooh this market rally. Central bank intervention by way of “QE3” is often sighted as the cause for the market rise with words like manipulation, bubble and my personal favorite “not warranted by fundamentals” thrown in for good measure. Both Mr. Rubin and Dr. Becker both agree that QE3 is having less impact than the Fed (Federal Reserve) has intended.
The reason, in my opinion, for this US market rally is the link between solvencies of the economic actors in the US economy including the federal government. There is a real reason why this US equity market is increasing rapidity. I have started blogging on this subject in of July 2012 (see links below) and have witnessed and participated in this pneumonia with excellent investment results in Canada when the same conditions were emerging back in 2002.
Links to my other blogs that I have written on this subject.
What is going on with the world of finance, and how do you fix it!
What is going on with the world of finance, and how do you fix it! (Update 1)
What is going on with the world of finance, and how do you fix it! (Update 2)
Fall Over the Fiscal Cliff, Please!
Do you buy stuff “retail” or “wholesale”?
I often equate the investment business to the perfume business. Everyone wants to pay “retail” for my product. They want what the business press is most excited about. They want the latest hot IPO or invest in the company with the hottest gadget. People like “buzz” and energy and seeing their investments in the business news.
They also like simple stories they can focus on. Gold going to $5000 an ounce is a simple story. Apple Inc. taking over the world of computing and the Internet is another. And my current favorite the investing public paying “retail” prices for high yielding securities whether debt or equities because of TINA – There is No Alternative. I hope you know fortunes will be lost on this latest and simplest of financial concepts.
In order to be successful in the financial markets, especially equities, you need to know valuation. And I’m not talking about price earnings ratios, price to sales, dividend yield and or any other simplistic financial metrics in current use today. You need a little more sophistication. You need a new and different type of financial math so you can distinguish “retail” from “wholesale” prices in the equity markets.
So the question is, “How do you know what price you are paying, “retail” or “wholesale”?
One possible investment strategy I have been highlighting since the start of my blog is our “Coming out of the Blue” investment strategy. I have been highlighting large capitalized companies whose share price, for one reason or another, has fallen below EBV-3 (see Economic Book Value under Key Concepts), our last EBV line we color blue, with a subsequent rally – sometime later – transiting above this same blue line or EBV-3. We at Acker Finely colloquially term this investment strategy “Coming out of the Blue”.
I am not making any specific stock recommendations with these blog posts, as I have mentioned numerous times. My purpose is to highlight teachable situations so you can learn our unique financial algorithms and apply them to your own investments with the possibility of helping others who want to learn and follow this work.
One company that caught my eye this week was Cliffs Natural Resources – CLF.
Cliffs Natural Resources – CLF
As always let’s start with our model price chart on CLF.
Cliffs Natural Res with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of CLF subsequent to this post will be maintained on Facebook, here.
As you can see CLF had a negative transit into EBV-3 mid-March of this year. As a rule I never fool around with companies that have a negative transit of EBV-3. I recommend, generically, with all investment situations when they do have a negative transit of EBV-3 or as we say “Going into the Blue” the investment should be sold. As a warning it is not uncommon, even when dealing with large cap equities, that companies can go bankrupt or never re emerge as a healthy company once this EBV line is crossed.
The opposite is true when a company has a positive transit of EBV-3. A positive transit of EBV-3 is a signal the company and its stated assets on the company’s balance sheet has value or is gaining value in the eyes of the public marketplace.
For reference I have also included our long-term model price chart on CLF for the last 7 and half years.
Cliffs Natural Res with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
You can see that CLF traded as high as EBV+7 in 2008. One of the many advantages of using our EBV lines, is they represent a constant to the company’s ever changing balance sheet. So EBV+7 of 2008, can be compared to EBV+7 of today based on the company’s latest balance sheet. You are comparing apples to apples – fundamentally. Again this is NOT technical analysis that unfortunately our work is easily confused because our fundamental analysis is in chart form.
So for fun, and I realize this number is not on our model price chart (and hard to figure since our charts are logarithmic, but would be above $241 figure on the left side of our model price chart), what would CLF be trading at if the stock were at EBV+7?
Would you believe $278.16!
In other words, investors were paying $278.16 for CLF (merchandise) that today costs $23.15! In my mind $278.16 is the “retail” price and $23.15 is the “wholesale” price. I’m making this determination based solely on the EBV levels and NOT on our calculation of model price.
Looking at our long-term model price chart again, CLF almost traded to EBV+5 in 2010 and 2011. Again, comparing apples to apples if CLF were trading at EBV+5 today that would mean a price of $129.93. Still a big difference but obviously not as great as CLF was trading at EBV+7. This is valuation explained. At what EBV level gives you the best chances of success investing your hard earned dollars. That’s right, our last EBV line, EBV-3 the bottom blue line. If you’re investing in companies at this level, EBV-3, that’s “wholesale” pricing in my mind.
I love investing “wholesale”.
I think people are born to purchase equities at “wholesale” prices. It’s a mentality. Yes, the analysts hate the stock. The business press will simply ignore the company or use it as an example of what NOT to do for various reasons. But if you just focus on the math, you will be OK with your own investment judgment.
Myself, I just purchased some CLF at $21.34US that some investors were paying $278.16 for back in 2008. Can you imagine this? Same company. Same management. How is this possible? Who cares! Investors are throwing out the trash and I’m dumpster diving.
You don’t have to put your whole portfolio in this name. That would be too much risk. Why be risky? As these large cap stocks have a positive transit of EBV-3 just put some in your portfolio. Say 2 to 5%. Forget about it. If the stock has a negative transit through EBV-3 sell the position, as I mentioned earlier. Easy. When do you sell? Whenever you want. How about EBV+7? How about EBV+5? Do you really care?
“Coming Out of the Blue” is about buying “wholesale” and waiting for your merchandise to achieve “retail” pricing. If you’re going to make 200 to 700% on your investment do you really care how long this re pricing takes? I know I don’t.
Do you buy stuff “retail” or “wholesale”?
P.S. All of the “Coming Out of the Blue” blogs on various stocks have been doing quite well. Have a look at First Solar (FSLR) that I highlighted back on November 28, 2012. FSLR is up 80% since my blog post. Do I care? With so many “Coming out of the Blue” names – lots of eggs in lots of industry baskets – maybe I never sell the position. Who Knows? Since I purchased FSLR at the right price (wholesale prices) do I really care? Not me!
P.P.S. Since its May and the business press is filled with articles on the wonderful sophistry of “Sell in May and go away” illogic, let me revise this quote and say, “Buy ‘Coming Out of the Blue’ stocks and go away”.
P.P.P.S. As Mark Eaves points out on our Model Price Application on Facebook – Comments Section, Citigroup is close to having a positive transit of EBV-3. I am NOT making a security recommendation here however this will be bullish for Citi, the equity markets and subject of “Coming Out of the Blue” future blog post. Yes, sometimes I can see the future – and so can you!
If interested here are some links to other “Coming Out of the Blue” blogs I have written.
Question and Answers about “Coming Out of the Blue”
I wrote a blog on Sunday, highlighting my curiosity with the trading of BlackBerry shares. (here) My curiosity can be distilled into the following question, “Why can’t BlackBerry have a positive transit of EBV-1 or $15.76 US?” Well yesterday (Monday, May 6th, 2013) provided an interesting example of what I’m talking about.
I have reproduced Monday’s trading action to illustrate my point. Below is a snap shot of my Bloomberg for the daily trading action of BlackBerry (BBRY).
Intraday pice action of BlackBarry for Monday, May 6, 2013
You can witness yourself the struggle the stock is having with our Economic Book Value (EBV) line. BBRY certainly trades above our EBV-1 line intraday however the stock price cannot close above our EBV line – illustrated above. This has been on battle that has occurred on three separate occasions since mid January that I have pointed out in my previous blog. (here)
What to make of this price action?
There maybe good news on BlackBerry from the analyst community, but the stock is certainly struggling here at this EBV level. BBRY was one of my original “Coming Out of the Blue” stocks (here) and still is unless the stock has a negative transit of EBV-3 anytime in the future.
To me, the market is saying BlackBerry will survive in its current form. But in terms of valuation, the market isn’t even giving the company a valuation commensurate with the company’s accounting book value and this is surprising. This shows that BlackBerry needs to do a whole lot more in the marketplace to compete with Apple and Android before any additional valuation to given to this company.
This question has been plaguing me for weeks. What is going on here? Even the noted bear on the stock from Jefferies, analyst Peter Misek, who questioned BlackBerry’s survivability at one point last year and now rates the company a buy with a $22 price target, says that sales checks on the Q10 “indicate broad sellouts” and he continues “Based on our store checks, the BlackBerry Q10 has been selling extremely well and has been sold out or seeing limited availability in Toronto and across the U.K.”
This sounds positive doesn’t it?
Well let’s look at the model price chart of BlackBerry and it tells a slightly different story.
BlackBerry with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of BBRY subsequent to this post will be maintained on Facebook, here.
As you can see BBRY has been trying to have a positive transit of EBV-1 or $15.76US on three separate occasions since mid January of this year. It even tried last week but to no avail. All this price action is occurring under our definition of the book value of BlackBerry’s balance sheet. See our definition of book value is our green line or Economic Book Value (EBV), is different from accounting book value. Even using the conventional accounting book value that we calculate to be $18.14 is above BBRY’s trading action.
So here is my issue with the trading action of this company. Certainly to my mind BlackBerry should be trading at least at book value, whether our definition (EBV) or the accounting profession’s, and it can’t even transit through EBV-1. Since the launch of Z10, and now the Q10, no one questions BlackBerry’s survivability does it? Not that I have seen in the financial press.
Here is a company that will make money this year, solvent and with some analysts predicting big earnings in the coming years and it’s trading like a “dog”!
Something is certainly going on here and I wish I knew why? Maybe BBRY will have a positive transit of EBV-1 in the near future and all my suspicions and questions are moot. I would feel better about this Canadian company if there was a positive transit of EBV-1 and trade at least at EBV or our green line if things are so groovy as Peter Misek suggests.
As always time will tell!
Talk about a market rally! (US equity market that is!) Since mid November 2012 the market, as measured by the S&P 500, has rallied almost 18% to May 1, 2013.
As I have been noting in my “Monthly Strategy Update” blogs, I have been foolishly calling for a correction as my most likely scenario. Well, so much for this most likely of my guesses. (see blog)
Let’s first review our model price chart of the S&P 500 Index. First our short-term model price chart (weekly price bars).
S&P 500 Index with weekly price bars, EBV Lines (colored lines).
For perspective I have included our long-term model price chart (monthly price bars).
S&P 500 Index with monthly price bars, EBV Lines (colored lines).
Remember 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.
S&P 500 Positive Transit of EBV+3
As you can see in the above model price chart the S&P 500 had a positive transit of EBV+3. This is AMAZING and we should stop and ponder its implications. Our EBV levels are about valuation. Collectively in a capitalized weighted index known as the S&P 500 equity prices are increasing in terms of valuation – equity asset prices are increasing. Whether this is occurring because of corporate profits, good government policy or market participants searching for yield does it really matter? Some market professionals think there are negative reasons for this unexplained (according to them) market rise but I would like to point out these persons exist in every market cycle and receive considerable ink from the financial press.
As I have stated in previous blogs this is the first time the S&P 500 Index has had a positive transit of EBV+3 since mid 1992. Our long term chart unfortunately doesn’t go back this far, and you have to take my word for it, but you can see from our model price chart how the market increased from 1995 to 2000 subsequent to the positive transit of EBV+3 in mid 1992. Am I saying this will occur again? What I am saying is you have to think of this possibility – the possibility of a long-term secular bull market in US equities. Is there anyone else saying this? No one I know!
Risk and Reward
Markets and individual stocks are about risk and reward. Obviously good investors want to minimize risk, wherever possible, and maximize reward. This is what our EBV lines are all about. Making purchases close to support or our EBV line minimizes possible downside risk in that if there were a down transit of this same EBV line this would be an excellent sell point for your position or investment. In other words market prices don’t have to fall very far to let you know the position should be sold thereby not placing a significant portion of your capital at risk.
What am I saying?
The risk and reward of the US equity market has changed. With the S&P 500 Index trading above EBV+3 the risk is minimal and the reward is EBV+4 or 1980 in the above S&P 500 model price chart. That’s an upside of a further 25%.
Even if the market trades along EBV+3, this implies a return of 10.5% plus dividends. (How did I get 10.5%? EBV+3 one year from May 1, 2013 is 1749. We get this number by inputting all the balance sheets of the underlying companies in the S&P 500 Index, add estimated annual earnings on a bottom up basis less projected dividends for the year and calculate EBV+3 one year hence.)
Traffic Light turns Green!
Back in a blog post last August (here) I started to use a traffic light analogy in terms highlighting and/or quantifying the risk level for investors/traders. In my initial assessment I thought the traffic light should be yellow to signify caution. Why? The S&P 500 Index traded under EBV+3 signifying limited upside (to EBV+3) and a big downside to EBV+2. Now, with the positive transit of EBV+3, the downside risk is EBV+3 and the upside is EBV+4, some 25% higher. I do have to emphasize these general market calls which I blog about are secular (long term) in nature and will last until the market moves significantly higher changing the risk and reward characteristics which I have highlighted above.
What if the S&P 500 has a down transit of EBV+3?
The S&P 500 potentially could negatively transit below EBV+3 for a period of weeks maybe a few months, in what I call a “break out pull back”. A “break out pull back” formation is common in model price work and very bullish when there is a “re break out” or a positive transit of EBV+3 for a second time. Traders can be quick to make profits from such an event, but long-term investors should ignore such market gyrations and hold quality equities for the long-term.
Conclusion
For the month of April, 2013 the S&P 500 Index had a positive transit of EBV+3. This is an historic occasion in our model price work and noteworthy. The traffic light is “green” in that the risk and reward for long-term US equity investments is heavily skewed towards the reward side of the ledger. In other words, the proverbial wind is at your back when choosing quality US large cap companies. This could be the beginning of a secular run in US large capitalized equities that could last years. And of course this positive transit doesn’t preclude some future hiccups in terms of monetary policy, and a million other macro considerations that have yet been imagined or forecasted but the market is speaking to you and it’s saying as of today and the foreseeable future all is well!
I get the question all the time, “How do I know your EBV lines work?”. Experienced model price users know they work but first time users do find it hard to believe that our pre existing Economic Book Value (EBV) lines do form price support and resistance on our model price charts.
I have seen stock prices bounce off of support EBV lines so often over the last decade that either I have lost the excitement or I have become too mechanical in my own thought process to appreciate the eloquence of the math, which our EBV lines represent. For me weekends and quiet time can be spent looking at model price charts and a review of the past week. So when I came upon the model price chart of Apple Inc. I simply had to stare and marvel.
Have a look at the model price chart of Apple Inc. as of Friday, April 26, 2013.
Apple Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of AAPL subsequent to this post will be maintained on Facebook, here.
Also I have included a Bloomberg chart showing intraday action from April 18 to April 22, 2013. Notice on Friday, April 19th, Apple traded down to a low of $385.10 with a significant intraday rally during the day. This is Apple’s stock price hitting EBV+4 with a subsequent rally from our calculated EBV+4 price support level.
Intraday Price Charts of Apple Inc. from April 18th to April 22, 2013
Not bad!
Yes, it’s hard to believe. This happens all the time!
Millions of traders, billions of dollars are coming together trading Apple shares on a daily basis. However the internal laws of nature, where we derive our mathematical constants that form the basis of our EBV lines, provide a structure where share prices can and do fluctuate consistent with predetermined support and resistance of our calculated EBV lines.
Great football quarterbacks not only can see the play unfolding in front of them but also the whole playing field. When learning and using model price charts you can see the whole playing field through our Economic Book Value (EBV) lines. You can ask yourself “What if” questions like “What if company ABC has a negative transit of an EBV line? Looking back over the last 7 to 20 years you can ask yourself “Has this company ever traded at this lower EBV line before?” The amount of questions – good questions – can be asked and answered with a high degree of accuracy with specific price levels with our model price charts. Keep in mind that EBV+2 in 2001 is the same EBV+2 of today. The constants are the same. You are comparing apples with apples (EBV lines of the past with current and future EBV lines of any company.) If this happens anywhere else in finance I am not aware of it!
By asking yourself these good specific questions, and you can now visualize the whole playing field where you can get a sense of probability of the price action of the individual company in question. For example, if company ABC usually bottoms at EBV+2 over the last 10 years, and ABC just had a negative transit of EBV+3, what is the probability of ABC bottoming at EBV+2 again. Very high, I would say. Not 100%, but very high. Would you buy ABC today, after the negative transit of EBV+3? No, of course not. You would wait for ABC to trade at EBV+2? Of course you would. You don’t know how long this will take, could take months, quarters but you are patient as you see ABC trade lower on a weekly or monthly basis. You see the probabilities of specific levels and specific prices where trading action can occur knowing the probabilities are on your side when investing your hard earned cash.
My first challenge in revealing this work was to convince you and others that these EBV lines and our Model Price calculations work and stock prices are influenced by these mathematical algorithms in real time. For some of you, I have succeeded. Knowing that our EBV lines have relevance we can take the next step together and strategize trading strategies on specific companies with a high degree of confidence of future price action.
Once you know or have a high probability of future price action, investment strategies can be worked out knowing your competence level with various investment instruments and the amount of capital in your investment account. That said, I must reiterate that while I can review in detail various price points and probable future price action, I’m NOT recommending specific stocks to anyone. Nor am I recommending buying or selling stocks at specific levels. Model price work stands on its own and how you trade and or apply this work in your investment account is yours to decide.
So with that being said, let me strategize about Barrack Gold (ABX). Why ABX? Josh asked me to. Thanks Josh for the question.
Barrick Gold (ABX)
Let’s start with our model price chart.
Barrick Gold with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of ABX subsequent to this post will be maintained on Facebook, here.
Let me know if the above chart looks too busy but I’m trying to point out all the relevant information for you to consider. I will break down my thoughts on ABX with a review of ABX’s past price history from July, 2012 up to the market close on April 19,2013. I will continue with my actual trading plan and strategize on an investment strategy for future price action of ABX.
Past Price Review of ABX
Back in July of 2012, ABX has its first negative transit of EBV+2. (Point A) Believe it or not my first thought was ABX was going to EBV or our green line. This was my highest probability outcome. Checking the long-term chart (monthly bars) ABX traded down to EBV (green line) in 2008, so in my mind this was likely future event. However at the end of August ABX had a positive transit of EBV+2. OK, I was proven wrong with my initial assumption but let’s see what happens. Bingo, a second negative transit at the end of October (Point B). Game on, EBV here we come! Yes, 16 weeks later ABX has a negative transit of EBV+1 (Point C). My high probability assumption is of course higher because of this event and it’s only a matter of time before ABX trades back to EBV and I will be ready. Again, 6 weeks later ABX is at EBV (Point D). Remember our multi colored EBV lines are more significant than our other EBV lines – grey – so I thought our EBV line (green line) would hold considerable price support for ABX.
Within a week ABX breaks EBV. Yes, this is shocking but more importantly what is the most probabilistic EBV level in play after this negative transit? The next colored line in our EBV spectrum is EBV-3 our blue EBV line. This specific price level (EBV-3) is $15.62. This EBV level has to be considered in your trading plan irrespective of the fundamentals of the company or its valuation history. This is a key consideration in my mind. What would your capital loss be if ABX trades to EBV-3? This number is easy to calculate. What would your trading account or RRSP (401K) look like after this hypothetical loss? If your loss is too great, sell the position. (You should sell the position anyway irrespective of the size of the loss because of the negative transit.) Remember knowing when to sell your losing investments can save you more money than what you make on your winners over different periods or market cycles. See blog here.
My Trading Plan
Once model price theory and our charts become familiar to you, you will realize there are many different trading strategies that you can employ. I have my own trading strategy, which is personal to my temperament, personality and time – yes I do have a full time job and I cannot see market quotes for long periods of time throughout the day. I must emphasize this personal trading strategy has nothing to do with Acker Finley Inc., Acker Finley Asset Management or any client(s) recommendations. I also have a full time compliance officer scrutinizing every trade I make to ensure my trading is free from any conflict, real or perceived – which I have no problem with by the way.
So after all this, may I further add I’m a long position trader only and my universe is large market capitalized securities which are household names. Very rarely do I short securities or use any exotics like call or put options.
If we are on the same page, here is how I traded ABX. As I stated back in July, I thought ABX would trade down to EBV (green line) and this is what occurred many months later. Once ABX traded at EBV I took a position in the company (Point D). As ABX traded down through EBV, I tried to be patient and that was a mistake. Yes, I do make mistakes. ABX quickly fall to almost EBV-1, so I decided to again be patient with the position to see if any bounce would occur at this level. The next day, ABX gapped down through EBV-1! Great. So I traded out of the position realizing my losses. This is very easy for me because I know, as I stated earlier, that EBV-3 is now a high probability. No thanks.
The Future Price Action of ABX
I want to remind readers of this blog that our EBV lines are fundamental analysis. Something is going on with ABX, fundamentally speaking, and the negative transits are reflecting this. As I have said before our colored EBV lines have more significance than our grey EBV lines. So the high probability future trade is for ABX to go to EBV-3 or $15.62. If and when ABX reaches this EBV-3 level three possible outcomes are likely. The first outcome is a tradable bounce in ABX’s stock price to EBV-2 or $18.18. The second outcome could entail ABX trading along EBV-3 for a period of time. How long? I don’t know. The third outcome is a negative transit of EBV-3 or “Going into the Blue” as we say in our shop.
So for fun, here is my guess. I believe the most likely event of the three scenarios will be a negative transit of EBV-3. If there is a negative transit of EBV-3 or $15.62 investors and traders should sell their positions outright.
My Future Trading Strategy
I want no part of any of these scenarios. ABX has been trading like a hot knife through butter and I want no part of this price action or negative transits. I will wait on the other side of EBV-3. What does this mean? Down the road when we the public have a full and somewhat complete understanding of what is going on with ABX and potential future corporate actions are reflected in the balance sheet of the company, ABX will have a positive transit of EBV-3 sometime in the future. We call this “Coming out of the Blue” or EBV-3 (which I have blogged about many times) and this investment strategy is the simplest and most profitable strategy using our model price work and these two attributes fit my investment style and personality. So I will wait.
If you want to do something different go ahead. If you think you are nimble enough for a possible tradable bounce off of EBV-3 be my guest. This price action could be a distinct possibility. Who knows?
Conclusion
Yes, our model price charts look so simplistic but there is more information contained in these simplistic charts than anything I have ever seen in conventional finance today. You can see the whole playing field. You can assess possible price support and resistance of any equity in our database for the foreseeable future. You can ask intelligent questions about stock price movements with a high degree of accuracy. More importantly you can match high probability market outcomes with your investable capital.
Want to know the most valuable feature? Model Price tells you when to sell your investment. I should have acted on the negative transit of EBV. I should have been quicker in selling ABX. Lesson learned (Again).
Did anyone tell you to sell your gold stocks?
The market back on February 21th gave investors one of the clearest signals I have seen in almost 20 years of using model price charts to sell any and all gold stocks in your portfolio. In a blog which I wrote on February 24th, 2013 I highlighted just 3 gold stocks – major gold companies, which all had a negative transits on the same day! As I noted in the blog, I didn’t think I have ever seen this before or maybe I have and don’t remember. (I’m getting that age!)
In doing a quick recap, Barrick gold is down some 42% from the close on February 21, 2013 to April 17, 2013 – almost 2 months later. Goldcorp is down close to 16% and Newmont Mining down 20% over the same time period.
Ouch!
I could review some mid to small cap names but what would be the use. They are all down big, with some down over 50%.
Believe me when I say I hate bragging and the macho crap that goes along with making such a call. What I can’t resist is highlighting a teachable moment. Yes, anybody could have made this call including you. Better still you didn’t need an exceedingly expensive MBA or a CFA to make this call. There was no complicated spreadsheet analysis, nor industry insider knowledge that you needed. All you needed was our model price charts, which are free for everyone to see. The algorithms do the work for you. Once we overlay stock prices with our EBV algorithms you have more knowledge and sophistication than any gold specialist. The collective wisdom of millions of traders can be seen and used by you when you are willing to look and make some simple observations. Better still you can make these observations and tell others including me!
It’s easy…too easy!
Did anyone tell you to sell your gold stocks?
Yes, sometimes I do think “Outside the Box” or model price charts, if you will. Long-term secular trends are my game especially when I’m without my model price charts.
One question that keeps me on the right side of the market is the question “Paper versus Stuff?” What does this mean? I’m asking the question whether paper money is gaining in value or worth versus stuff or physical assets.
Huh?
Yes, a lot of people don’t get this but “Paper” or the money in your pocket does have a market value. This value is not recorded in any financial newspaper or stock exchange but it’s there. It’s implied. See the people all around you, including yourself, are buying and selling products and services on a daily basis. Tens of trillions of transactions are occurring daily where a sophisticated interplay is occurring between a buyer and a seller. The seller of stuff is willing to accept “paper” for a product or service. The buyer is willing to part with “paper” only if they get a product or service of equal value in return. If value, whether paper currency or product and/or service, is mispriced there are simply no transactions. In other words the holder of paper is willing to save their money until something of value comes along for a transaction to occur. Likewise if a seller of a product or service doesn’t get equal value in terms of “paper” money the seller is happy not to transact. The interplay between these two parties, the back and forth, is called price discovery. Price Discovery or market forces are one of the great and important forces of the market-based economy and the real defeater of communism in my opinion.
When you know what you are looking for you can gauge the value of paper money quite easily. The most simplistic way is the price of gold bullion. Gold is the ultimate in “stuff” or physical property. If the price of gold increases relative to the currency you are transacting or doing business, the price of paper currency or the $20 in your pocket is coming down. Conversely if the price of gold is falling the $20 in your pocket is increasing in value. Yes, a time lag may occur before the economic actors take the market signals into account but rest assure the value of your “paper” is fluctuating.
To me this is rather simplistic stuff and quite frankly should be well known especially by market participants in the market place. Where I hope to separate myself from the crowd is how I view “paper versus stuff” relative to the equity markets. I like to watch what an ounce of gold buys in terms of the Dow Jones Industrial Average (DJIA). I have charted this ratio on my Bloomberg screen and have reproduced this chart for you to see.
Ratio of Dow Jones Industrial Average (DJIA) versus an Ounce of Gold
As I have said I do like secular or long-term trends and charts. This chart spans some 20 years. Back in 1993, one unit of gold could purchase 10 units of the DJIA. Starting in 1995, the “Dow” unit value relative to the price of an ounce of gold started to skyrocket climbing up to 40 Dow units for every ounce of gold. In other words, equity values relative to the price of gold in US dollars massively outperformed in terms of rates of return.
From 1999 to mid-2001, as I highlight on the chart above, the unit value of the “Dow” struggled around 40 units for every ounce of gold – forming a multi-year top in the process.
From the years of mid-2001 to mid 2011 saw a collapse in terms of what an ounce of gold in US dollars buys of the DJIA index. A low was reached on August 31, 2011 where an ounce of gold only purchased 6.36 units of the “Dow”. As one reflects on this ten year period physical stuff in general (housing, gold bullion, and commodities) lead the way in terms of rates of return instead of paper or currency in each national currency of choice. (Physical “Stuff” had its own super cycle with notable bull markets and collapses in its own nominal dollars, Yen, Euros, etc.) Financial assets and equities in particular offered little returns and probably substantial negative returns to the average investor over this period of time.
(As an aside, the “Dow” and an ounce of gold in US dollars had a ratio of 1 to 1 back in 1980. Even though the ratio from the above chart fell from 40 units of the “Dow” to 1 ounce of gold to 6.36 units to 1, I did have the worry of a 1 to 1 ratio if the financial policies of the US administration (both fiscally and monetarily) continue down the wrong path as the Carter administration did in the late 1970’s.)
The Plunging of Gold on April 15, 2013
In my theoretical battle between “Paper Currency” and “Physical Assets”, paper money has had a series uptick in the last few days. In other words currency is gaining in value versus stuff. This is a big change in the last 10 years. Paper money is the foundation of the modern financial economy and when the foundation is solid and gaining in value this helps equity valuations as a whole. Equity valuation cannot increase substantially without a good foundation with which to build upon.
So looking again at my chart above, you will notice on the same day gold is plunging in a 7-sigma price move (that’s big by the way, Thanks ZeroHedge), the “Dow” had a breakout relative to gold since the financial crises of 2008. This is very positive for US equities and for me at least substantially eliminates the worry of a possible 1 to 1 ratio of the “Dow” versus an ounce of gold sometime in the near future and maybe my lifetime!
Secular Long-Term Bull Market in the US is Coming into Focus
You will also notice on the chart above that I have included the years 1993 and 1994. In these years, as you can see, this ratio solidly crawled along 10 “Dow” units for every 1 ounce of gold. This is a good foundation for market participants to establish a base value for paper money in daily transactions and from which to build valuation in the equity markets per se.
Let me complete the picture for you by bringing in our model price work. I have been blogging in my monthly strategy pieces (here) the S&P 500 is currently trading at EBV+3, where the index is today. We’re on the cusp of a positive transit of EBV+3 in the S&P 500 certainly sometime in the near future. As I have written the last positive transit of EBV+3 on the S&P 500 occurred in mid 1992 signaling the start of a bull market in equities that lasted some 8 years beyond this positive transit. This positive transit in 1992 and the subsequent bull market could not have occurred without paper money not only maintaining value but also gaining value relative to physical assets or stuff. These events are eerily similar, aren’t they?
Conclusion
April 15, 2013 was an important day for US equity investors in my mind. Gold bullion prices collapsed and even though the market in terms of the S&P 500 Index was down over 2%, a strong secular trend – one of my favorites (“Dow” units to an ounce of gold) – broke out to new highs placing this ratio the highest since the financial crises of 2008. Over the last 5 years the US has been healing from the largest financial crisis since the Great Depression with policy actions, both fiscal and monetary, taking place with close scrutiny and criticism. Market prices don’t lie, over the long run, and in my opinion “the market” likes what is going on, policy wise.
With the gold price, especially in US dollar terms, falling this is telling me the fever of the financial crisis has broken and the pieces of the puzzle are falling into place not only for a bull market in paper currency, more specifically the US dollar but also a bull market in US assets i.e. US equities.
P.S. You don’t have to look at the above chart very often – I look every 6 months or so – but investors should keep this in their back pocket to ensure they are on the right side of any market you are invested in. I know I do.
I have blogged on 4 separate occasions on First Solar over the last year. For my regular readers this is old news however for new and future readers I will recap my blogs, with relevant model price charts, to illustrate the effectiveness of stocks transiting both positively and negatively one of our Economic Book Value (EBV) lines we label EBV-3.
The first blog was on April 12, 2012, here. I highlighted through a blog post FSLR having a negative transit of EBV-3. We call this negative transit pejoratively “Going into the Blue”. EBV-3 is our last EBV line in our spectrum of EBV lines and when there is a negative transit by any stock of this EBV line this tells you the market – through the stock price – doesn’t believe the stated asset values on the company’s balance sheet (among other possibilities but this is the main reason). This real time mark to market indicator gives investors a strong signal to sell their investment in the company.
Here is the model price chart at the time contained in my April 12, 2012 blog.
First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Since this blog, FSLR subsequently traded down to the $11 level in June of 2012.
In my second and third blog, I highlighted FSLR “Coming out of the Blue”. This is an investment strategy – specific to Model Price – where a company’s stock price transits positively above EBV-3. We pejoratively call this “Coming out of the Blue” and we color our EBV-3 line blue for this very reason. More specifically in my November 28th, 2012 blog I authored the title “First Solar – Coming out of the Blue! Stalking The Big Game (Returns)”.
Was I too obvious with my title!
Here is the model price chart from this November 28, 2012 blog.
First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Specifically I wrote;
As I have written many times in this blog[roll] about investment situations where the equity price of any security, I fish in the large cap pond, transits above EBV-3. I call this “Coming out of the Blue”. “Coming out of the Blue” investment strategy is a very profitable one for those investors, traders who invest when an equity positively transits above EBV-3. Would I place my whole portfolio into this one situation? No! I would diversify in names, industries and even countries. I can only say from experience the one company you least expect will probably yield you the most profit, often times that’s the nature of investing. In other words it’s healthy to have a bunch of companies, as many as possible, breaking above EBV-3 and you will never know which will be the most profitable.
I revisit FSLR again on February 19th, 2013 with a blog titled “How Jumbo Gains are Possible Using Model Price – Part 2”. I noted in the blog at that time even though FSLR had a positive transit of EBV-2 in the first week of January of 2013, the stock subsequently traded down but not through EBV-3. I commented at the time, “Sometimes it’s important to give these names some room to maneuver but also sell when the position transits down through EBV-3.”
Current model price chart, including the big price gain on Tuesday, April 9, 2013.
First Solar Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of FSLR subsequent to this post will be maintained on Facebook, here.
Conclusion
If history is any guide – my history over the last 15 years with model price math – I will be updating FSLR additional times in the future hopefully highlighting substantial gains (no specific prediction on FSLR, just going with the percentages of “Coming out of the Blue” companies making the positive transition of our EBV-3 line.) I would also like to note that patience is required with these individual stock plays. They need room to “run” if you will, just as long as these companies stay above EBV-3. If these same companies have a negative transit of EBV-3, you guessed it; this company would be “Going into the Blue” and should be sold.
P.S. Also see my blog Q&A about “Coming out of the Blue”
