Monthly Archives: December 2012

Fall Over the Fiscal Cliff, Please!

Howard Dean, six-term Governor of Vermont and unsuccessful 2004 Democratic presidential nominee said the following according to Ian Bremmer, “If you go over the cliff and stay over, Dow 15,000 in six months.”  I couldn’t agree more with Mr. Dean.

I wrote this blog back in July of this year advocating this very thing – what is now known as “Falling off the Fiscal Cliff”.  According to model price theory, more specifically Solvency (See under Key Concepts), if the Americans can initiate movement along the Solvency Curve, where the US federal government can substantially slow down or halt their insolvent condition the other sectors of the economy, namely corporations and individuals will respond by spending cash which they have been accumulating in record amounts for the past 5 years.

If a “Fiscal Cliff Deal” is not in the offing market participants initially will probably view this as a negative occurrence and sell the market.  This would be, in my opinion, a great opportunity for purchasers.  Also the US economy will probably slow down in the initial months as corporations and individuals get use to paying higher taxes; noting over time, the world didn’t come to an end.  As time unfolds idle cash on hand will be spent as growth accelerates as demand rises.  With real demand from the private sector come sales and profits, lifting equity prices and asset values.  This virtuous circle all having been started by Republican and Democratic misbehavior that seemingly everyone deplores – except for me.

To me we are at an important inflection point for the United States.  Will the federal government continue marching towards insolvency – Japan like – or will the imbalance of massive federal deficit spending over the last 5 years be curtailed allowing the private sector to takeover its’ leading position in the economy creating wealth, jobs and growth.

Mr. Dean’s comments were viewed negatively in the “tweeter-verse”.  In my opinion and according to model price theory and our Solvency Curve in particular Mr. Dean could be too conservative in his estimate of the Dow if the US indeeds “falls over the fiscal cliff”.

Will be interesting to see what happens.

My past blogs on this subject back in July, 2012.

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)

IntercontinentalExchange (ICE) to Acquire NYSE Euronext for $33.12 per share in Stock and Cash. What does Model Price say?

Breaking news this morning has ICE acquiring NYSE (NYX) for $33.12 per share in stock and cash.

As of last night’s close I have reproduced NYX’s model price chart.

NYSE Euronext with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

NYSE Euronext with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

As one can see we have a calculated a model price of $34.83.  In my estimation NYSE could have squeezed a little more juice on behalf of its shareholders from ICE, so we will see what happens.

We also have IntercontinentalExchange (ICE) model price chart in our database.  Here is last night’s chart of ICE.

 Intercontinental Exchge with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Intercontinental Exchge with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

 

If I were the management of ICE I would be paying for NYSE in stock as well.   According to model price ICE’s stock is trading at a 40% premium.  If this deal gets consummated I would certainly recommend taking the cash, if possible, instead of stock.

Wondering out load whether this deal gets done?  Prices seem out of whack!  The only conclusion I can draw is that management of NYSE must be motivated to do a deal with somebody and ICE seems willing.

JP Morgan, Goldman Sachs – “Coming out of the Blue” (Again) and (Again)

These two names have been frustrating to say the least.  Over 2012, both JPM and GS have had two positive transits up through EBV-3, which we call “Coming out of the Blue”, with subsequent negative transits down through the same EBV-3.  However in the last few days both GS and JPM had positive transits again.

Here are the charts as of last night’s close.

JP Morgan

JP Morgan with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

JP Morgan with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

 

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

Goldman Sachs

Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

 

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

I have too much respect for EBV-3, not to trade based on these transits.  Yes, as I have said before this can be a frustrating experience for traders to be in and out of a position as it transits especially with these names in particular.  Positive and negative transits can and will represent shifting risk and reward metrics for individual stocks and as traders or even longer term position holders by taking action in your investment account as these transits occur is maximizing one’s reward with considerably less risk.  Isn’t this what investing is about, minimizing risk with maximizing reward?

I have included links to my previous pieces on JP Morgan and Goldman Sachs on their previous breakouts, with a lot of explanation detail I hope you find useful.

Goldman Sachs – Breaking out of the Blue! (Again)

Goldman Sachs – Breaking out of the Blue!

JP Morgan – “Coming out of the Blue!” (Again)

JPM – JP Morgan – “Coming out of the Blue!”

 

Hopefully this third positive transit is the charm!

 

Battle for Inmet turns hostile – What does Model Price say?

Early this morning First Quantum Minerals (FM) made a hostile $5.1 billion takeover offer – offering $72 a share – for Inmet Mining (IMN), taking the bid directly to shareholders after two earlier offers were snubbed by Inmet management.

See below our model price chart of Inmet Mining (IMN) as of Friday’s computer run.

Inmet Mining with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Inmet Mining with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

Interesting to see what happens here, but model price for IMN is calculated at $84 a share.

Canada’s Oil becomes the Cheapest in the World!

So I’m spending time rewriting my Key Concepts tab on this blog and for a much-needed break I was reading the weekend edition of the Financial Times.  Buried on page 12, front section I read this headline.

“Canada’s oil becomes cheapest in world amid glut in Alberta”.  I will link this article in hopes you can read this very important article – not sure with paywalls and other restrictions – obviously from a Canadian perspective.  For those that can’t link this article here is a short summary.

Western Canada Select, (WCS) the regional benchmark for low quality, viscous heavy oil, has fallen to less than $45 a barrel – less than half the cost of other crude oil benchmarks such as West Texas Intermediate.

So you have Brent crude, which I see quoted on television everywhere, is $109.04 as of Friday.  Then you have West Taxes Intermediate (WTI) trading at $86.54, with WCS trading at less than $45!

The article quotes Charles St-Armaud, economist at Nomura, says Canadian oil producers are earning C$2.5bn less than they should every month.  “This implies a revenue loss of about 1.6 percent of GDP”, for Canada.

The article continues, “The situation [lower prices for WCS, bigger discounts to Brent] is likely to get worse in the first half of 2013 before it improves”

I knew there was some sort of discount, but not this big!

So what do I do with this information?  As I’m looking at model price charts, especially for oil sands companies, I will be on guard for possible future negative transits.  Let me give you an example.

Looking at Canadian Oil Sands

Here is our model price chart as of Friday’s close.

Canadian Oil Sands with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Canadian Oil Sands with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Even before this article I was wondering rather COS holds EBV+3.  After reading this article I am probably more suspect EBV+3 doesn’t hold.  If you hold a position in COS, I would be on guard also. If COS does have a negative transit of EBV+3 lower stock prices will follow irrespective of the current juicy 7.19% yield Canadian Oil Sands is offering investors.

Netflix (NFLX) – Breaks Above EBV+6 – Higher Share Prices Expected!

Netflix is a bloggers dream come true.  Lots to write about featuring our model price work.

As always we will start with our model price chart as of Friday’s close.

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

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

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

Just as a reminder this is what I said in my last blog on NFLX.

So, for fun let me strategize Netflix for you my readers.  As I have noted previously in my blog on Netflix’s 3rd quarter earnings, NFLX is trading between EBV+6 ($87.61) and EBV+5 ($55.17).  To me this is a battlefield where I want no part.

If NFLX were to transit up through EBV+6 this would be a BIG positive indicating higher future prices for NFLX.   Subsequently if NFLX transited back down through EBV+6, the investment should be sold.

There you have it, short and sweet and I wouldn’t change a word.

P.S.  As the song The Gambler reminds everyone, “You never count your money when you’re sittin’ at the table.  There’ll be time enough for countin’ when the dealin’s done.”  Yes, Mr. Icahn is up some $170 million in profit with most of his investment in Netflix purchased with in-the-money LEAP call options.  Not bad indeed!

Manulife Financial (MFC) – “Coming Out of the Blue” (Again)!

I have been keeping an eye on Manulife Financial and finally yesterday, the stock had a positive transit of EBV-3.

Here is last night’s model price chart of Manulife.

Manulife Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Manulife Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

I wrote a blog on March 15, 2012, when Manulife had its first positive transit above EBV-3.  Here is the model price chart that I included in my blog.

Manulife Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Subsequent to this blog, in early May, Manulife transited back through EBV-3 giving investors a sell signal.  It is important for investors to sell, if not substantially reduce their positions when there is a negative transit.  Why?  One never knows how far the stock will fall and the duration of time the position will trade under EBV-3, if the stock ever re emerges – above EBV-3 – at all.  Also, investing in stocks is about risk and reward, in my opinion there is just too much risk in owning a stock trading below EBV-3.  For investors that buy stocks “in the blue” and they subsequently have a positive transit above EBV-3, these investors deserve whatever rewards they receive because, in my mind they took maximum risk to obtain said rewards.

Why are we drawing your attention to “Coming out of the Blue” stocks?

For over fifteen years we have seen this phenomena.  Stocks that transit up through EBV-3 and over a period of 2 to 5 years trade as high as EBV+5.  These are secular trades that investors can sit back and wait for good things to happen, and they usually do.

Bonus – Highlight of Sun Life Financial

Since I’m on the subject of Canadian insurance companies, back on February 28, 2012 I highlighted through a blog Sun Life Financial “Coming out of the Blue”.  I have reproduced the model price chart that I highlighted when Sun Life had a positive transit up through EBV-3.

Sun Life with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Here is last night’s model price chart of Sun Life Financial

Sun Life Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Sun Life Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

Since my blog post, highlighting the positive transit of EBV-3, SLF has appreciated some 35%, with dividends.

What’s wrong with Thomson Reuters Corp. (TRI)?

If I have been consistent on any stock during my 13 years on BNN (and the old ROB TV) – Canadian television show –  it has been Thomson Corp.  I remember stating even a few times, that if one picked up a dictionary and looked under the definition of dead money you will see the quote symbol for Thomson now Thomson Reuters.  After hitting a high of $62 per share in 2000, Thomson has yet come close to these old highs as it’s currently languishing around the $28 mark.

Last week, Geoff Beatty was dismissed as President of the Woodbridge Company, the Thomson’s Family holding company.  Speculation over the removal of Beatty was met with rumors of David Thomson’s apparent frustration over the lack of performance of Thomson Reuters Corp. share price.  Apparently Beatty had championed the merger between the Canadian company Thomson Corp. and the UK’s Reuters.

As Model Price readers will come to know, if you don’t know already, big mergers rarely workout for shareholders of the acquiring company.  Why?  The concept we call theoretical earnings. (TE)  The idea of TE is proprietary to us at Model Price, however we are happy to share this concept with anybody who is interested.  This financial concept is NOT taught at any university financial course, or MBA, CFA program.  By learning this concept you will be ahead of every major finance program where students are paying tens of thousands of dollars.

Back of an Envelope Calculation of Theoretical Earnings

Under Key Concepts – Theoretical Earnings, I introduce you to R and P where;

Once you calculate R and P, what you do is add R and P together. (R+P)  Once this is done multiply by 2%.  Take the result and divide it by shares outstanding to give you a per share amount.  This result is roughly theoretical earnings (TE) per share.  I say roughly because the 2% will vary, depending on other things however for the majority of cases it will work just fine.

Once you get the new balance sheet of the merged company, or you can try to do a pro forma balance sheet based on the announced details, you perform the same calculation.  Compare the two calculations of TE, the merged company will usually have the higher TE.  Say, the difference in the two calculated TE’s is $0.50 – before and after the merger, and the projected increase earnings from the merger is only $0.25, this will have negative consequences for our calculation of model price of the company initially.  The market is very good at sniffing this mathematical relationship very quickly and usually sends the acquirer’s stock down immediately – say Freeport McMoran Copper on Thursday of last week.  Post merger, managements have to drive earnings at least over the new calculated TE to derive any value or share increase at a future date. (In other words above the $0.50 increase in theoretical earnings post merger.)

Back to Thomson Reuters Corp.

Here is a chart showing the 12-month forecast in earnings for TRI and its’ calculated theoretical earnings going back to 2002.

image0013

Observations

The first observation one can make is the lack of growth in earnings for the company.  For 10 years TRI has marginally boosted earnings to any degree at all.

The second observation is the calculation of TE.  Notice there was a spread between TE and earnings until late in 2008, when the merged company Thomson Reuters finally issued a balance sheet.  This bigger balance sheet (R+P) resulted in TE and earnings converging together.  The stock price of TRI plunged with the market meltdown of 2008, recovered only to fall again as market participants tire of the lack of earnings growth.  A dividend yield of 4.61% certainly helps yield hungry investors at TRI’s current stock price.

Since 2009 TE has been sloping downward, because of various write-offs taken over recent years.  On the positive side at least there is a positive spread between TE and estimated earnings of the company.  This is probably enough of a spread to keep the stock price where it’s currently valuated – in other words “Dead Money”, again, but with a yield!

What would make TRI’s stock price perform?

The firing of Mr. Beatty will not help Thomson Reuters in the near term.  What will?  Derive more earnings from the assets they have.  In other words increase the EPS line on our line chart above.  This will create a dynamic spread between earnings and TE thereby increasing TRI’s stock price.  (Obvious you say!)

Failing this, reducing TE or R+P, by writing off poor performing assets in the short-term while reallocating assets in higher growth areas without substantially increasing TE – hard to do I know!  Or allocating resources in very cheap asset categories and hopefully over time these cheap assets become fully valued – much what David Thomson’s grandfather Roy Thomson did some 60 years ago.

Apple Computer – Price Correction Creating Uncertainty or Opportunity?

Received this tweet from Kushal

Tweet from Kushal

Tweet from Kushal

When the great American financier, J.P. Morgan was asked what the stock market would do, he answered: “It will fluctuate.”

Fluctuating is what is happening with Apple Computer at the moment and it seems to have a lot people perplexed, especially the business media.

No need to be perplexed!  Stocks can and will fluctuate all the time.  All a reader or user of model price has to do is consult our model price charts to see if the price move is relevant or significant. Stocks can and will roam within our EBV zones all they like without meaning.  However, once the stock transits either positively or negatively an EBV line, this act is transmitting important information to the observer.

Let’s consider Apple.

Here is the short-term model price chart on Apple Computer.

Apple Computer with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Apple Computer 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.

I tweeted on October 26, that Apple had a down transit of EBV+6 or $704 – EBV+6 at the time. Here is the tweet and my suggestion of possible resistance.

Tweet From ModelPrice Guy

Tweet From ModelPrice Guy

Well seven weeks later, you can see Apple bounced off its calculated model price.  How did I know?  Easy, this is what Apple has been doing over the last year and a half.

Hopefully it wouldn’t be a surprise to anyone that Apple’s price will probably test support at EBV+5 or $496.56.  Can you imagine the reaction when Apple breaches the $500 mark!  Well, again for model price users this shouldn’t be a big deal; knowing support is just a few dollars away.

Let’s look at the long-term chart of Apple for even more perspective.

Apple Computer with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Apple Computer with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

As you can see Apple has traded between EBV+5 and EBV+6 since March of 2009.  Yes, stocks do fluctuate including Apple.  What is important is model price and EBV+5 will be one year from day.  As you can see from the chart we calculate model price to be $677.36 and EBV+5 at $648.93 – substantially higher than the current stock price.

As I have said in a previous blog I care about outcomes.  In order for users of model price to make money in the equity markets one has to think more rational.  Would the purchase of Apple shares above its model price or worth be rational?  Would you over pay for a car, or any other consumer item?  Better yet, wouldn’t it be more advantageous for you the investor to purchase shares closer to EBV+5 than EBV+6?  Of course it would.

Equity markets can create anxiety and uncertainty and are the enemy of profitable investing.  Especially when you listen or read the business press.  The market, as markets always do, is going to give you an opportunity to buy any company, including Apple, when everyone is hitting the sell button.  Conversely when buyers can’t buy enough shares of Apple at EBV+6, and the analysts and business press is touting even higher prices, yes you lighten up your Apple holdings for the eventual correction to EBV+5.

For those of you who are successful, rational about investing using model price charts, you can help others through blogs and tweets of your own.  Just a business idea from me to you; you could set up your own blog on when to buy and sell Apple shares with a high degree of predictability for your followers.  You could become an expert on all things Apple (or any other stock for that matter) including when to buy or sell.  People helping people, using model price charts for illustrative purposes.  Just saying!

Thanks Kushal for the tweet!

CP’s stock price is already reflecting Hunter Harrison’s success!

After five months on the job, Hunter Harrison is finally speaking and the markets are listening.  The Canadian business press today is filled with Mr. Harrison’s plan to turn around Canadian Pacific after a much publicized proxy battle earlier this year.

What caught my eye were two paragraphs in the Financial Post on Wednesday, December 5, 2012.

Throughout the campaign, Pershing Square and Mr. Harrison maintained they would be able to hit a 65% operation ratio – an important gauge of the company’s profitability that measures operating costs as a percentage of revenue – by 2015.  The lower the figure, the better, and CP’s operating ratio was stuck at a stubbornly high 81% in 2011.

Analysts have speculated that an improvement of that magnitude could drive CP’s share price up to between $140 and $160 from about $90.

Really!

Well let me give you the answer first, and the analysis later in this blog.  Comments from some of my readers say my blogs are too long, so I will endeavour, where possible, to give my answers first, when appropriate, and for those who like the backup analysis, you can continue to read onward.

The Answer!

If Canadian Pacific were trading at the same valuation as industry leader Canadian National, Hunter Harrison’s former company, CP would be trading for $104 per share.  CP closed at  $96.37 a share, on December 5, 2012 therefore leaving investors a possible 8% upside at current prices – comparing apples to apples.  I’m hard pressed to see the $140 to $160 shares these unquoted analysts see.

The market, being the market, has already judged much of Mr. Harrison’s restructuring a success and giving shareholders a valuation commensurate with his possible success, even though he has just announced his reorganization plan. Plainly this is why Mr. Ackman encouraged Mr. Harrison out of retirement.  The market believes in Harrison and has already priced in his future work!

Yes, people like Mr. Harrison are a rare commodity in that the market has given his new company a valuation as if he has already accomplished his turnaround of the company – that’s credibility.  From the end of November 2011 to today, CP has added an additional $6.3 billion of market value for shareholders through a proxy battle and the appointment of Mr. Harrison as CEO of the company masterminded by Mr. Ackman.

As you will see in my analysis CP has a long way to go before catching up to CNR in terms of estimated earnings versus theoretical earnings – my metric of success instead of the quoted “operating ratio” noted above – however the market is pricing in only an 8% discount to CNR!

If for any reason if Mr. Harrison doesn’t deliver on his announced plan, the market will react violently to the downside.  At which point the same unquoted analysts will probably say this hypothetical market correction is way overdone and doesn’t make any sense.

The Analysis

I will start with our model price charts both for Canadian Pacific and Canadian National as at the close on December 5, 2012.

Canadian Pacific with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Canadian Pacific with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Canadian National with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Canadian National with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

In my first blog on CP, on January 10, 2012 I introduced my readers to a table listing all the publicly traded railroads, with their 2012 earnings estimates and theoretical earnings (TE) calculations.  I then take the projected earnings estimates and divide by each company’s TE to produce a ratio.  The higher the ratio, it usually follows, the higher the valuation of the company in question.

Here is the table from my blog on January 10, 2012.

Company Name 2012 Estimated Earnings/share Theoretical Earnings (TE)/share (current) 2012 Earnings Estimates / TE
CNR $5.38 $1.21 4.45x
UNP $7.82 $1.82 4.30x
NSC $5.98 $1.83 3.27x
CSX $1.93 $0.57 3.39x
CP $4.27 $1.85 2.31x
Company Name 2013 Estimated Earnings/share Theoretical Earnings (TE)/share (current) 2013 Earnings Estimates / TE
CNR $6.17 $1.21 5.06x
UNP $9.50 $1.95 4.87x
NSC $5.62 $2.10 2.68x
CSX $1.88 $0.64 2.94x
CP $5.65 $1.89 2.99x

I have updated this table, with 2013 earnings estimates and  theoretical earnings (using current September balance sheets), with the resulting ratio.As you see Canadian National (CNR) goes from strength to strength further improving their ratio from 4.45x to 5.06x.  Analysts are expecting higher earnings for CP in 2013, improving CP’s ratio from 2.31x to 2.99x.  Forecasting a 30% improvement, however still behind CNR’s outstanding ratio.Just as an aside, notice Norfolk Southern’s ratio fell from 3.27x to 2.68x, overtaking CP as the lowest ratio in the group.  It is no surprise the Norfolk’s stock has been hitting new 52-week lows recently.

Conclusion

Investors have hopped on the bandwagon with Mr. Harrison and Canadian Pacific with dreams of substantially higher stock prices if Mr. Harrison accomplishes his well-publicized reorganization plan.  Unfortunately the market is way ahead of investors pricing in Mr. Harrison’s future success leaving nothing but disappointment if there is a hiccup along the way.