I’m on Market Call!

On Thursday, April 14th, 2016, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

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 (MPT) and chart? You can make your comments via Facebook.

Should be fun!

modelprice

Model Price Question #4

Facebook Comment (from our Model Price Facebook app)

Brian, I read your latest blog with great interest. I’ve been reading some articles recently on what’s being called “the great unwinding”. It centres on the underlying fact that Global debt is increasing at a much more rapid rate than expansion of Global GDP, countries are trying to narrow the gap through various means. Seems to me the trickle down effect always ends up on the doorstep of individual households. Governments, central banks & corporations have many tools at their disposal to unwind. What can Joe & Jane average do to unwind when they are so overleveraged? When I hear commentators on BNN talk about real estate and they encourage people to buy at any cost (paraphrasing) simply because rates are low, I really start to wonder where all this is going! Thanks again for making MP available, it has been an invaluable tool for me in terms of knowledge, making $ and keeping what I have safe.

From ModelPrice Guy

OK, it’s Friday afternoon, Master’s weekend, and I’m working on my S&P/TSX Composite blog but this subject is more fun…so with a little ADD, I will give you my 2 cents worth on this subject.

I am incredibly optimistic about the future and our kids and grandkids well being. Yes, I think legacy companies and debt will be an issue but we are on the verge of creating whole new industries and jobs that will leap over everything and anything man has created since we have been on this planet. That’s right, I think there will be a reset in equity prices, a retracement back to the lows, that we saw back in March 2009, and this will be one of the biggest buying opportunities for the next 20 plus years. So you better be ready, because this buying opportunity could happen anytime and not last long.

Hogwash you say. Well consider these three things while Jordan Spieth wins the Master’s this weekend.

Artificial Intelligence – Google’s computers (AI) just won at ‘Go’! OK, the worlds leading Go player won 1 game out of 5. And like chess, soon the computer (AI) won’t lose any games. AI is here and it will impact our way of life forever. And its possibilities are endless in the fields of finance, drugs, medical, hell, we might as well say everything. Today this may be a novelty but tomorrow it will show up in everything we do, giving us a productivity miracle that mankind hasn’t seen since the 1820s.

Global Warming – Did anyone notice the temperature in February? It was not only the warmest monthly temperature on record but it completely smashed all records by the widest margin. Global warming is exponential not linear! When the world’s leading countries got together in Paris to talk strategies about lessening our carbon footprint both the scientific community and politicians agreed that a 2 degree Celsius warming would cause huge global dislocations. Well folks, maybe you don’t know this but we are at 1.38 degrees of warming so far. Climate change is going to happen but there lies the great economic potential. Carbon will have to be left in the ground because as a human species we can’t use it anymore. Why do you think Saudi Arabia is pumping all the oil they can? They figure, and correctly, that they will be left with oil reserves in the ground in the foreseeable future when the world, together as one, will not let the Saudi’s (or anyone else) pump oil someday. So with every barrel they sell today they are at least getting something, instead of nothing. But alternative energy will be an economic boom for those willing to participate. US coal companies had a market capitalization of $45 billion three years ago, now it’s only $2 billion and we used the largest amount of coal as a global energy source worldwide in 2015. Oil companies of today face the same future, it’s only a matter of time.

Debt – Central Banking – Banking, Finance Industry – Yes, debt is at an all time high. And yes, central banks around the world have the wrong monetary policy. This is going to change.

Debt – A huge amount of debt is, in my opinion, located in legacy companies/industries that are slowly dying. Take Tesla (TSLA) versus General Motors (GM). GM has debt of $155 billion dollars with a market capitalization of $45 billion. TSLA has debt of $7 billion with a market capitalization of $34 billion. Mr. Musk could snap his fingers on this Friday afternoon and eliminate his debt by issuing stock at a huge valuation compared to GM’s. GM…will probably die, longer-term, with bondholders owning the company. Debt will have to be written-off, as bondholders will get something on the dollar. This will happen to every company/industry that doesn’t have a future. And as we head past 2020 there will be a lot of legacy debt, and assets for that matter, that will have questionable value.

Central Banking – Please consider all the economic textbooks ever written in the history of man, not one, has a chapter or even a paragraph on negative interest rates. That’s why the men and women of the main central banks of the world are academics. They have to figure out a way to restore or reset the monetary system, where interest rates are normalized and credit is functioning the way it was before the financial crash of 2008. Sure they could fail, but what if they succeed? Can you imagine the worldwide equity rally? And conversely, the bond market crash, if and when this happens. This most certainly would be a major buying opportunity as I’m sure the equities would be pounded (crash) temporarily as interest rates normalized. This will happen sometime in our future but I have full confidence that these men and women can figure this monetary conundrum – negative interest rates – out.

Banking, Finance Industry – Will never be the same again. The market is already telling you this. Yes, Citigroup/Bank of America are in the ‘Blue’, below EBV-3. It’s time we broke up these ‘too big to fail banks’ and find others ways to issue credit to the economy. At their worst they were criminal organizations extracting too much economic rent from the real economy. They need to be ‘disintermediated’ and in this high technology world alternative platforms could be easily designed offering lower costs and full transparency to all participants. For instance, credit as well as loans could be provided by peer-to-peer apps. Call it the Uber of loans were I have capital and lend this capital to people with a FICO score of 700 and in my own neighbourhood or across the country. As these big banks are broken up thousands of smaller specialized shops could/will be founded and staffed by people that would do a better job with lower costs.

Yes, call me an optimist. The ‘Great Unwinding’ will happen but for the benefit of everyone. It’s a great time to be live!

This is the world as I see it, on a Friday afternoon, Master’s weekend.

 

April 2016 – Monthly S&P 500 Market Strategy Update

 

The year 2016 started with the cold hand of deflation on all global markets and then it lifted: Sending global equity markets to gains, from the lows, that we haven’t seen since the 1930s.

Crazy times.

As I have outlined in my January and February 2016 blogs I believed the markets were focused on two big issues – Chinese renminbi peg to the US dollar and the Federal Reserve (Fed).

I also stated that over time we should have clarification or better yet answers to these two central questions.

Well since my last update these two issues came into better focus or more benign to what investors were thinking coming into 2016. Go figure…

Renminbi (RMB) Currency Peg

Not only did the brouhaha over a possible devaluation of the RMB calm down but we actually witnessed a small strengthening of the RMB against the US dollar in the month of March.

Huh?

That’s right. With a strengthening of the RMB against the US dollar the bears or traders expecting devaluation were last seen scurrying a hasty retreat. As I commented in my February comments (here), I believed China would NOT devalue the RMB against the US dollar and so far, one month later, that prediction looks sound. Of course, and likely, these bear raids will continue for sometime in the future adding to the variability of global markets so we better get use to it.

And once it became obvious the PBOC – China’s central bank – would not devalue the ‘risk-on’ trade was on sending low priced shares and previously hard hit emerging economies, including Canada, up for big gains intra-quarter.

US Federal Reserve

In hindsight, and after two and a half years of talking tough, the US Fed hiked interest rates in December just when global economic growth was slowing down.

Yes, great timing ladies and gentlemen!

Anyway for much of the quarter, and a mystery to financial markets globally, the governors still talked tough and signaled more interest rates hikes – as much as four hikes for 2016 – in the face of clear evidence that slower US economic growth was occurring.

Much to the relief of the financial markets, Janet Yellen – Chairwoman of the Federal Reserve – in a speech during the last week in March simply stated the obvious; in that she and the board of the Federal Reserve indeed observed the same economic slowdown, as the market participants, and that future interest rate hikes would be moderated or no interest rates will be seen for the foreseeable future.

Again, market participants breathed a sign of relief knowing that the Fed was truly data dependent and the data pointed to a slowing down in the global economy.

Model Price Chart

Let’s have a look at our Model Price chart for the S&P 500 Index:

sp500.n238

S&P 500 Index Model Price Chart with EBV Levels and Weekly Price Bars

 

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.

As you can observe the US equity market, as defined by the S&P 500 closed April 5th at 2045.17. If the market rallied to EBV+4 (2202) this would represent a gain of some 8%. If the market corrected back to EBV+3 (1760) investors would be suffering Index losses of almost 14%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

Model Price Comments

What is interesting to me is that the S&P 500 index didn’t retreat all the way back to EBV+3 back in January. As you can see this index hit 1810 twice, first in January and then in February with a subsequent rally into March. The only conclusion I can come to as to why the market didn’t need to go to its support level – EBV+3 – is the market internals are strong and healthy. I know this flies in the face of the bad business news we constantly hear, but really, traders tried to sell the S&P 500 hard, twice, and it rallied both times without coming close to EBV+3.

Impressive, yes?

So we are now getting to the top of the zone between EBV+3 and EBV+4. Yes, we are getting close to the top of the zone…and we may stay there for a while with the Chinese RMB peg devaluation rumours on hold as well as further Federal Reserve tightening or interest rate increases.

We have now been in this zone between EBV+3 and EBV+4 for three years now – the original positive transit happening back in May 2013 (here) – with no sign that either of a positive or negative transit. That’s right, we trade up to the top of the zone and then correct to the lower portion of the same zone. And we could be hear for a while longer, within this EBV zone,  as global fundamentals and possible central bank action is contemplated and enacted.

Conclusion

Well that was one interesting quarter. And with 2016 being a US election year, with both sides of the ticket – Republican and Democrat – having issues trying to get a clear leader to represent either party for a November election. Maybe where the future fireworks or volatility will be in the political arena instead of the financial markets for the balance of 2016. But either way the S&P 500 index is certainly comfortable within the zone of EBV+3 and EBV+4 and will probably be here for sometime in the future.

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

I will be on Market Call tomorrow, March 9, 2016 and I will be referencing this blog so I thought I would reblog it here for the convenience of BNN’s viewers to read. Yes, it was seven years ago that the S&P 500 Index hit its financial crisis low and hasn’t look back. These were my thoughts, my internal analysis, of what transpired and lessons that I learned. I hope these thoughts will help others who went through this difficult experience and help them prepare for any possible crashes that may lie in our future.

(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.

Conclusion

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.

mpg-1

I’m on Market Call

On Wednesday, March 9th, 2016, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

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 (MPT) and chart? You can make your comments via Facebook.

Should be fun!

modelprice

February 2016 – S&P/TSX Composite Market Strategy Update

 

OK… in my career in the financial markets I don’t think I have ever seen anything like the month of January 2016 in the Canadian equity markets!

From the end of 2015 the S&P/TSX Composite dropped 11.4% without a meaningful up day in the first 13 trading days of 2016 then reversed and climbed 11.2% in the last seven trading days, again without a meaningful down day. Leaving the index down only 1.44% for the month.

Wow!

Let’s have a look at our Model Price chart to see what happened.

sptsx.to213

S&P/TSX Composite Index with EBV Lines and weekly price bars

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

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

What our Model Price Chart is Saying?

You can observe the downward spike in the market hitting an index low of 11,531 and the rally back up to and almost reaching EBV+1. Could the Canadian index have a positive transit of EBV+1? Not likely was my guess in my comments [Comment Section] on our Model Price app. EBV+1 would be huge in terms of fundamental resistance according to Model Price Theory [MPT].

As I have said in my previous blogs on this Canadian index, I believe we will see the market fall to our EBV Level (Green Line) that is calculated at 10,809 as of Friday, February 5th close. That’s a fall of over 15 percent for those at home keeping score.

So what was the market action about in January? Well, the Canadian market was falling with every other equity market around the world. Up until the time Premier Li made a comment in Davos, Switzerland that the Chinese would not devalue the renmimbi (RMB). Again, as I stated in my blog on the US equity market (see here) this comment seemed to go unnoticed in the front pages of the international business press however Twitter participants were tweeting up a storm.

Since Li’s comment at Davos global equity markets went from a risk-off sentiment to full bore risk-on. And Canada’s resource heavy equity index saw heavy buying, or was it short covering, to satiate traders’ risk-on appetite.

Unfortunately none of this wild and whacky trading does nothing to change my mind in terms of where this market is heading in the future. Again, unfortunately… we have to feel the pain of the market’s fall in the first part of January all over again.

Nice.

Conclusion

What a wild ride the month of January was. And I’m glad it’s over. However with the rally at the tail end of the month left us at the top of the EBV zone with nowhere to go but down.

No economic or company specific news in the month of January convinced me that a bottom had been reached and that we were on a new course, a new bull market. Just more falling share prices. Again, what makes me excited about the Canadian equity market is if and when this Canadian index does fall to EBV… this will, or I should say has a high probability, of being the bottom for the Canadian market/index.

In my last blog on the Canadian market (see January’s blog and reproduced here below) I gave readers our long-term Model Price chart going back to 1995. You can see the start of the Bull Market in the late 1990s started at this EBV Level or Green Line. Also the market bottom of the March 2009 market crash was… you guessed it the same EBV Level. So it just makes sense, doesn’t it, that a potential bottom in this current market is… EBV.

Again, see what happens.

sptsx.to211

S&P/TSX Composite Index with monthly price bars and EBV Lines

February 2016 – Monthly S&P 500 Market Strategy Update

 

Well, that was one hell of a January!

Thank goodness it’s over.

Unfortunately the issues that caused the volatility are far from over.

The world financial markets are worried about two big macro issues here, in my opinion. The first being the artificial peg the renembi (RMB) – China’s currency – has with the US dollar. And the second being actions or should I say future actions of the US Federal Reserve. As we all know the Fed has increased interest rates in December along with preparing the market with rhetoric about further increases in 2016: What in heavens name do they do now with the world economy and the US economy clearly slowing down from the albeit low growth levels of 2015?

Until we have answers to these questions… that will reveal themselves over time, obviously… the US equity markets and global markets will be under stress, in my opinion.

Let’s deal with these two issues.

Renembi (RMB) Currency Peg

As I have said in my January market comments (here), China’s economy has clearly and currently slowing down. And at the same time the government wants to transform its economy from a high investment spending/growth economy to one where the consumer leads future economic growth. Again as I said previously, China is doing this transition with large amounts of foreign reserves and the best economic brainpower on the planet. That being said China’s central bank, the PBOC, is literally spending billions on a monthly basis to maintain their RMB currency peg to the US dollar. For example, in December authorities estimate that the PBOC spent $120-$150 billion US dollars buying/purchasing RMB to help maintain the value of RMB against the US dollar. The result? The RMB still depreciated by over 2% against the US dollar in the month of December!

We are waiting for the PBOC numbers but leading experts estimate that the Chinese central bank was more aggressive buying RMB in January than in December. [News Flash – Goldman just estimated that the PBOC spent $197 billion US dollars for the month of January.]

As we all know money is not infinite and experts (and markets) are wondering whether how long the PBOC can keep this up.

The other observation I will make is on this topic is the S&P 500 was down heavily in the first two thirds of the month of January and reversed course and rallied hard for the final third of the month.

Why did the S&P 500, and other global markets rally so hard, at the same time you maybe asking?

I believe little noticed in the business press was a rare interview with Premier Li in Davos, Switzerland – I saw his quote on Twitter and not in the leading business papers. (Premier Li, for those who don’t know is the number two guy in the Politburo and is responsible for China’s economy.)

Mr. Li simply stated that China will not devalue the RMB and the equity rally was on!

But the S&P 500 Index was still down over 5 percent for the month of January.

The world’s leading hedge fund managers are lining up and shorting the RMB believing China will inevitably devalue the RMB against the US dollar. This push/pull will last certainly for 2016 and beyond.

For what’s it worth, I believe China will not devalue its currency. If China wants to become the global superpower of the next 50 years, displacing the United States, the RMB needs to be viewed as safe for international transactions and a store of value for global savings. In lieu of devaluation, China must work hard at internal reforms so transformational that economic change can occur in their domestic economy spurring economic growth and ultimately supporting the value of the RMB.

US Federal Reserve

What will they do?

Will the December interest rate increase, be the only rate increase this business cycle? What happens if the US economy slows markedly in the coming months? Would they reverse course and lower interest rates they just increased? Would they reinitiate Quantitative Easing [QE4]? And what would be the impact of the Fed’s credibility if future policy decisions were to reverse course and additional non-traditional monetary experiments were put in action.

What if we just hit an unexplained soft patch in the US economy in the fourth quarter and the US economy re-accelerates economic growth for the balance of 2016? And the Fed stays the course and continues with hiking interest rates and draining excess bank reserves. Certainly this policy response would result in the US dollar gaining strength in the foreign exchange markets, further increasing the pressure on the PBOC trying to maintain the currency peg I was describing previously.

Model Price Chart

Let’s have a look at our current Model Price chart for the month of January, leading into the month of February 2016 of the S&P 500 Index.

sp500.n236

S&P 500 Index Model Price Chart with EBV Levels and Weekly Price Bars

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.

As you can observe the US equity market, as defined by the S&P 500 closed February 1st at 1939.38. If the market rallied to EBV+4 (2199) this would represent a gain of some 13%. If the market corrected back to EBV+3 (1766) investors would be suffering Index losses of almost 9%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

Conclusion

I believe the most amazing thing about the US equity market is we are not at EBV+3, yes some 9% lower! The market is throwing some big macro issues at all financial markets and the S&P 500 index seems to be the most resilient of any global equity market. Yes, stocks in the S&P 500 index have been getting crushed and are in their own BEAR market. However others, admittedly few, are reaching new all-time highs keeping the index value above our calculated EBV level.

Obviously this could change at anytime. And, if or when, the S&P 500 were to fall to EBV+3 the market could crawl along this EBV level for quite sometime.

But, in my opinion, global macro issues are in control here and we need some clarity certainly on the two issues raised above before equity valuations go substantially higher.

As always we’ll see what happens.

I’m On Market Call

On Thursday, February 4th, 2016, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

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 (MPT) and chart? You can make your comments via Facebook.

Should be fun!

modelprice

January 2016 – S&P/TSX Composite Market Strategy Update

The selling continues.

But you should know this.

Model Price Theory [MPT] has been very good; scratch that, excellent, in telling you what was going to happen. (And what will happen!)

Backing up we saw a negative transit of the S&P/TSX Composite of EBV+2 back in June of 2015. This negative transit was a sell signal for those not familiar with our Model Price work. Subsequent to this negative transit, the Canadian index went to the bottom of our EBV zone (between EBV+2 and EBV+1) in late August. Since August we have been bouncing along EBV+1 ending 2015 with two negative transits (yes, another sell signal) of EBV +1, one in the middle of December and the other, believe it or not, on the last day of the trading year (December 31), giving Model Price users a heads up on what the opening of 2016 would look like – down about 8% in the first week and a half.

Here is our Model Price chart

sptsx.to212

S&P/TSX Composite Index with weekly price bars and EBV Lines

I have been negative on Canada since the negative transit of EBV+2 back in June 2015. And I have expressed so in my comments on Facebook on our Model Price app. We are in a BEAR market and it’s obvious to me we have to go to a place on the Canadian index that represents value. What is that EBV level? Well, our green line or EBV of course.

Is this the first time I’m saying this? Again, of course not. Here is an excerpt from my November 12th, 2015 blog here:

“So the question on my mind is; at what valuation or EBV level should this rebuilding start?

 My answer: At EBV or our calculated green line on our Model Price chart. This level is calculated at 10,566 as of November…

 Yes, that’s a full 22% lower than the S&P/TSX Composite Index close on November 5th, 2015.

 Gulp!”

Here is our long-term Model Price chart for the S&P/TSX Composite Index

sptsx.to211

S&P/TSX Composite Index with monthly price bars and EBV Lines

How do I know we are going to EBV?

Looking back we can see (and I have annotated (above)) where the S&P/TSX Composite Index bottomed out during the financial crisis of 2008-09. Yes, it was at EBV or our green line.

Yes, no rocket science. No MBA or CFA required. An obvious spot where the S&P/TSX Composite is going to go and hopefully stabilize.

So we will wait.

Again, as I stated in my last blog in November, we could get at this valuation level quickly or very slow. Starting off 2016 one has to be thinking the former. But who knows…

Conclusion

The Canadian BEAR market continues. And the selling seems to be building to a crescendo as most BEAR markets do. This should not be a surprise to anyone who have been reading and looking at our Model Price charts.

And if you’re sitting on a bunch of cash (preferably US dollar cash), Canada does represent a buying opportunity at our EBV Level (Green Line). I know for myself, I will be purchasing both Canadian dollars (converting from US dollars) and the Canadian Index at this level. Looking out 3 to 5 years from now…returns on these purchases/decisions will look impressive I’m guessing.

 

January 2016 – Monthly S&P Market Strategy Update


Welcome to 2016!

And what a start it was. All negative of course, as you know.

In the first day of trading in 2016 the Chinese market sold off 7% and their regulators closed the market. And all this occurred before the opening bell on European and North American markets for 2016. China giving its version of Adele’s “Hello It’s Me” to the rest of the world.

And so everyone, globally, hitting the sell button for the rest of the week…save for Friday…giving us a day of rest not knowing what to expect in the following weeks.

Being in the financial business I hate and bored by the hundreds of financial predictions that will occur for the forward-looking calendar year. Back in the old days, when financial news was very hard to come by, predictions from ‘old sages’ (Bob Farrell and the like) seemed to have good value and laced ‘nuggets of gold’ giving myself a good reason to endure ink stained fingers for a day or two. Now I have to hear millennials giving predictions based on regressed data that has as much nutrients as a fast food meal.

The only prediction I can make is that the financials markets will be open this coming year and stuff will happen. And the market will telegraph whether the economic fundamentals will be improving or getting worst. Yes, that’s right. The market will tell you what’s going on…and it communicates through Model Price Theory [MPT] and all we; as users of MPT, have to do is observe. Prediction is easy however it occurs all year round and not just at the end of December/beginning of January.

The other observation I will make is we are entering the 7th year, marked by March 9, 2009 S&P 500 market bottom, of the financial crisis. Central banks, including the US Federal Reserve, have been experimenting with monetary policy trying to get the global economy back on track of pre-financial crisis global aggregate demand. The preferred policy tool of choice has been printing money or quantitative easing (QE). Asset prices have been boosted including equity valuations and real estate. And I have to admit this is a good thing. The business press is filled with what I call the ‘liguidationists’, who would like asset prices to fall to some 1930s level, so a very small minority, could benefit. This policy response would certainly skew income inequality even more than it is today.

As the US Federal Reserve increased interest rates in December, the market seemed to take this policy action in stride. The financial press and the man on the street was focused, of course, on the 25 basis points increase in Fed Funds. What they don’t see, and is critical, is the ‘reverse repro’ financial mechanism that was introduced at the same time. The New York Fed has been testing this financial instrument for the last two years. Not to get too technical but the Fed through this new instrument will start to drawdown the excess reserves sitting on the banks balance sheets. Estimates range from $3.5 to $2.5 trillion of excess reserves the Fed pumped into the banking system during the financial crisis, that the banks, collectively, have been sitting on and the Fed wants to take some of this back. Of course, they will start slowly at first, say $300 billion or so, but the important thing is the Fed is starting this process.

So over the last year or so, the US Federal Reserve has stopped QE and are in the process of withdrawing excess bank reserves. This is healthy and signs of the US economy returning to normal. Yes, good news…but you won’t hear this anywhere else.

So let’s look at our Model Price Chart of the S&P 500 Index.

sp500.n234

S&P 500 Index with weekly price bars and EBV 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.

As you can observe the US equity market, as defined by the S&P 500 closed Thursday, January 7th at 1943.06. If the market rallied to EBV+4 (2208) this would represent a gain of some 14%. If the market corrected back to EBV+3 (1766) investors would be suffering Index losses of almost 9%.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

What is our Model Price chart saying?

Simple, we are in the zone between EBV+3 and EBV+4, as we have been for a year and a half, and nothing much as changed. Yes, within the S&P 500 Index itself, stocks are winning and losing, based on their top line and earnings growth estimates. And this has occurred, cyclical and secular rotations, since public markets were invented.

As I have said previously we could trade down to EBV+3 some 9% lower. But would this be the end of the world? Not according to Model Price Theory. It would suggest, if we were to go there, more upside potential than downside and obviously a good reward/risk scenario for investors.

Is there anything in our Model Price chart that is worrisome? Not that I can see. As you can see the S&P 500 fell to 1867 back in the last week of August 2015. And by the end of October we were within 4% of an all time high!

Obviously the world is focused on China right now. For the last thirty years China has been nothing short of a major economic miracle. From a poor fourth world economy to a $60 trillion dollar economic behemoth and will soon rival the US for economic supremacy. Their next stage of economic development is to transition their economy from an investment lead economy to one of a middle class and consumption. In the history of the world this has not happened to any nation without a deep recession/depression. However, China is doing this transition with large amounts of foreign reserves and the best economic brainpower on the planet. As Bank of England head, Mark Carney said to Charlie Rose in an interview several years ago, it’s in everyone’s interest, globally, that this transition happen without economic repercussions for the rest of the world and every central bank is willing to help China with this transition.

The reason I mention this China has a big decision to make in relation to their currency. They have been pegged to the US dollar and have been feasting or reaping the economic benefits as the US dollar has been low compared to other currencies especially the Japanese Yen over the last few decades. However the US dollar has been rallying because, as I have said previously, the US is emerging from the financial crisis and their currency is appreciating against all other currencies worldwide. So what is China to do here? Because of the currency peg the renembi (RMB) is stronger than most of their competitors (i.e., Japan, South Korea and the like) and putting downward economic pressure on their economy.

The Chinese have been trying to devalue their currency slowly and intermittently against the US dollar over the last few months and this is causing everyone concern. Thus your seeing panic selling in the Chinese markets with ripples out to the rest of the world. For if China devalued the RMB, say 30 to 40% against the US dollar, this would send a wave of deflation out to the rest of the world as China’s manufacture goods would be competitively priced compared to other exporting countries.

And what if the US dollar rallies higher from these current levels? As readers will know I’m predicting a large and secular rally for the US dollar against all global currencies over the longer term 5-7 years. If China is having a tough time at these present levels…what happens if the US dollar rallies substantially higher?

So you can see why there is cause for concern by global investors and they are re-pricing asset prices/valuations in case things go badly.

Conclusion

As last Friday’s job numbers have pointed out the US is finally emerging out of the financial crisis that started nearly seven years ago. The problem at this particular time is much of the global economic world is monetarily out of sync and is either losing their economic strength (China and the emerging economies) or have been mired in very slow growth (Europe) over the last several years. These ‘macro’ considerations have taken over the narrative in global financial markets leaving all participants to be cautious and worried.

Hopefully this ‘marco’ narrative changes in the coming weeks as US companies start reporting their 4th quarter financial results with guidance for the rest of 2016.

Yes, the market could fall to EBV+3. And, yes the S&P 500 Index could rally up to EBV+4 and make all-time highs for the S&P Index. Good companies, will show their stuff in the coming weeks and we will see how the market reacts to possible forward fundamentals.