Monthly Archives: January 2013

Equity Valuations in the spotlight from Apple (AAPL) to Netflix (NFLX)

Thousands of people took to Twitter this week questioning and looking for answers of the current state of valuation in public equity markets.  How is it possible that a stock price of a company such as Apple, with staggering profits and massive sales, trade lower when so obviously successful?  I viewed tweet after tweet of confused individuals pointing out the nonsensical low price earnings ratio (P/E ratio) and the massive cash balance of $137 billion leading many to conclude the market is irrational or better still, and my personal favorite, the market just doesn’t know how to value Apple!

My question is, “Is the market irrational or is our current knowledge of finance incomplete?” In my opinion, the current field of finance is so inadequate that it fails to explain anything to anyone.  Using simplistic ratios that current finance and analysts promote like price to sales, price earnings ratios and other remedial relationships do a poor job of explaining valuation to anybody.  Isn’t it time for something new in the field of finance to aid market participants in the understanding of valuation?

On the other hand technical analysts are cheering that their side won – versus the people who use fundamentals. They saw and predicted Apple’s price decline because of various chart formations.  By analyzing market price data alone without the apparent unhelpfulness of fundamental financial data is the only logical way to invest in the stock market they will gleefully say, using Apple as Exhibit 1.  Can this be true?  Maybe these chart formations are picking up something that technical analysts cannot explain but seem to work from time to time.  Maybe market prices and the use of technical analysis are highlighting something that is currently hidden from the technical analyst community in general?

Model Price Theory and Analysis to the Rescue

Using Model Price Theory can easily explain the valuation of Apple.  The market decided, with millions of buyers and sellers coming together, that Apple no longer should trade in a certain zone.  This zone was from EBV+5 to EBV+6.  This zone contained Apple’s valuation since 2004, as I pointed out in this blog.  So what happened this week? Apple changed valuation zones: to EBV+4 to EBV+5.  Apple could stay in this new zone for a period of days, years or decades.  As the balance sheet grows so does the zone in question.  Simple.

Apple is still Apple!  The company will still grow.  But the market is communicating a judgment for those listening and observing that at this time Apple belongs in a new lower zone.  As of the close on Friday, January 25, 2012 this zone, includes a price range of $506.02 for EBV+5 and $366.51 for EBV+4.

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

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.

So Apple can trade within this price zone and still have the same valuation.  Plus these dollar amounts of our EBV zones can change everyday.  Why?  Simply put because the balance sheet is changing everyday.  So every night, after the market close, we calculate new daily EBV levels for every stock in our database.

How do we do this?  We take future earnings estimates, add these earnings to the equity of the company and deduct dividends, if the company pays any.  Every quarterly release of financials is updated in our database and the daily calculation from this updated balance sheet is started anew.

Just for fun we have the EBV numbers for Apple one year out.  So EBV+5, one year out is $631.10 and EBV+4 is $457.11.  So you can see the zone growth with the projected balance sheet of Apple. Valuation is the zone the company trades in, not the price of the stock relative to some measure (i.e. price earnings)

So thinking about this for a minute, using model price theory, an investor has two independent variables interacting with each other.  The first is the market price of the company listed on the stock exchange.  Again, millions of people are coming together and transacting on price.  The second is the balance sheet of the company itself.  This is an independent variable that has undergone much scrutiny and as everybody knows the balance sheet has to balance.  (Assets = Liabilities + Shareholders Equity)

Thinking of the current state of finance neither fundamental analysis nor technical analysis can boast two independent variables.  Each camp, fundamentalists and technical, have only one independent variable between them trying to extrapolate price movements by building extraneous irrelevant and sometimes simplistic mathematical relationships to explain stock price valuation.   On top of this fundamental investors dismiss model price charts thinking they are a form of technical analysis.  The technical analysis people look at the weekly price bars and simplistic parallel lines on our model price charts with ridicule.

Yes, our EBV parallel lines look simplistic.  If you the reader spend time and effort understanding these EBV lines would they have a material impact on your investment results?  Absolutely!

Economic Book Value (EBV) lines are one of the keys to understanding valuation.  See every stock trades somewhere within our EBV lines.  How does the market determine what zone a specific equity should trade?  Cause and effect!  The effect is the zone in which the stock will trade which we disclose on our model price charts.  The cause is based on the dynamic of our solvency ratio, theoretical earnings and convexity (see Key Concepts).  Yes, I know you have never heard of these concepts and cannot read about these concepts in any textbook.  That is the point of this blog.  When and if management changes, in a material way, any one of these variables in these highlighted concepts, can and will change the EBV zone the company will trade.  Or when a stock transits an EBV line, either positive or negatively, something is going on with one or more of our Key Concepts.

So you’re skeptical? I get it!  I was once too.

Let’s look at both Apple and Netflix, and see how model price charts prognosticated the price moves we have seen this week.

Here is the model price chart of Apple Inc. on the close of January 15, 2013.  As I indicated on the chart Apple had a negative transit of EBV+5.  This occurred a week before Apple’s earnings release date scheduled for January 23, 2013.  This negative transit is an equivalent to a “tell” of a poker player.  I warned readers of this negative transit and its implications here and here.

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

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

This negative transit was telling investors the market will treat, for valuation purposes, EBV+4 and EBV+5 as its new zone.  EBV+5 will be the top of the zone or future resistance and EBV+4 will be the bottom of the zone or future support.  As the balance sheet of Apple grows, which it will at a rapid rate, so does the EBV lines containing this zone.  This is the valuation question solved.  It’s not about price earnings ratios or cash on the balance sheet.  Technical Analysts’ caught the breakdown in price but this particular breakdown was more meaningful then I think they realize as I blogged about here.

If management wants to lift the valuation in Apple in the future they need to change the variables of our solvency ratio, theoretical earnings and convexity.  See my blogs on Apple one year ago – “Four Actions Management Can Do to Double Their Stock Price (Without Breaking a Sweat)!” and “Apple Computer – A Special Dividend of $75 Billion would Reward Shareholders, Management and the Economy.”

As a trader or investor where would you like to purchase a specific equity?  Would you rather purchase at the top of the EBV zone or the bottom of the zone.  Simple, the bottom of the zone!  In the case of Apple, the stock could trade to $366.51 and still be in the same zone.  Also $366.51 will give the stock meaningful support that I’m sure many investors are looking for in this current situation.

Let’s continue on to Netflix.

Here is the model price chart of Netflix on the close of December 14, 2012.  As I indicated on the chart NFLX had a positive transit of EBV+6.  I blogged about this positive transit with the title – Netflix (NFLX) – Breaks Above EBV+6 – Higher Share Prices Expected!

Was I too obvious with this title?

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)

With NFLX’s earnings news this week the stock had a positive transit of EBV+7 like a hot knife through butter.  Again from a valuation perspective NFLX is in a new zone.  The market is giving management of NFLX “equity dollars” to sign up subscribers as fast as possible.  Try and look up “equity dollars” in any finance textbook.  It doesn’t exist.  However it’s part of our model price theory!

Current chart of Netflix

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.

As one tweeter user lamented NFLX made $8 million in earnings and the market gave it $2 billion in market cap on this earnings news.  AAPL made over $13 billion of profits and the market took away $60 billion of market capitalization.

Yes, this seems nonsensical on the surface but the market is more sophisticated in judging valuation and with keeping your eyes on our EBV zones and possible transits will help you better understand valuation and where the stock prices of your investments are going.

I’m on Market Call!

On Monday, January 28, 2013, I will be on Market Call on BNN (Canadian Business Show) 1:30 pm – 2:00 pm (eastern standard)

While I’m on the show answering viewer’s questions about individual stocks, you can input the stock symbol in our Facebook app and follow along – easy.  Just click on “Go to Application” button on the right and this will take you our app.

Would you say something different from what I said?  You can make comments via Facebook.

modelprice

Three Things you should know since my last blog on RIMM.

Just wanted to give you an update on some items with regards to RIMM that has come to my attention since I wrote my last blog on RIMM, which I posted on Saturday.

1.  By coincidence, I picked equity research analyst Gus Papageorgiou at Scotia for disclosure of his earnings estimate for RIMM.  As I noted in my past blog Gus had RIMM losing $1.15 for fiscal 2013 (RIMM’s fiscal year end is the end of February) and making $0.86 for fiscal 2014.  Well this morning Gus revised his earnings estimate for RIMM.  Instead of estimating $0.86 for fiscal 2014, Gus has revised this estimate to $4.13!  Yes, this is correct, from $0.86 to $4.13!  This change is obviously a head turner and can explain why RIMM had such a big pop here in Canada yesterday.

Gus was already ahead of street consensus with his $0.86 estimate.  The street is still looking at a loss of ($0.48) for fiscal 2014 as of yesterday.  With this blowout estimate it will be interesting to see what happens with the other analysts’ estimates.

2.  Fun with math.  Based on last night’s Canadian close of $17.41, we can reverse the algebra and ask the question; “What would earnings have to be to have the model price equal to the closing price or $17.41? ”  We have this number.  Earnings would have to be $0.75.  So you can see the market over the last month with the substantial increase in RIMM’s stock price has already taken into account Gus’s previous earnings estimate of $0.86 for fiscal 2014.  If RIMM had earnings over $4, this would place our model price calculation above EBV+5 or $65.

3.  We do have Nokia’s model price chart in our database.

Model Price chart of Nokia OYJ

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

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

As you can see Nokia is already trading at EBV+1.  Now I realize Nokia currently has a phone and it’s selling in the marketplace where RIMM has yet to announce theirs.  However, at least this gives you a comparable turnaround story in the smartphone space.

Again, I’m not recommending RIMM to you as an investment!  This blog is about the math behind the valuation of equities.  It’s about connecting the dots of various pieces of information giving you a more complete picture of what public information means in terms of valuation.  We love doing the math, and maybe pointing you in the right direction.  RIMM’s substantial rise in valuation is happening for a reason, and hopefully through our model price work you can see why this increase is happening.

If you are making investments based on model price work, and want to talk about it to help others, this is why we have the comment section under our model price charts in Facebook.  I may not be able to give recommendations, but certainly others can help to provide a profitable outcome.

Research in Motion (RIMM) – “Coming out of the Blue”! (Update 1)

Where would RIMM be trading if the company earned 1 cent a share?

Forgetting about the actual BB10 for a minute, and its capabilities or lack thereof – which everybody seems to be stuck.  A trader or investor in RIMM doesn’t have to be a seer technology guy/gal to figure this out while using model price charts.

If any public company earned 1 cent a share chances are they would be trading at EBV or our green line.  Why? That is our definition of book value.  This isn’t accounting book value that the industry uses; it’s our – model price – definition of book value.

So what are the chances of RIMM earning at least 1 cent a share?  I think high to very likely.  Even if the BB10 doesn’t sell very well certainly RIMM could lower expenses enough to break even couldn’t they?  Of course they could.  So let’s pick an analyst at random.  Say, Gus Papageorgiou at Scotia.  Gus has RIMM still losing $1.15 for fiscal 2013 (RIMM’s fiscal year end is the end of February) and making $0.86 for fiscal 2014.

So let’s go a step further.  Say RIMM can earn $1 a share.  Where would RIMM be trading?  RIMM would be trading at EBV+2 or EBV+3.  Why? See I didn’t choose $1 by accident.  $1 just happens to be the theoretical earnings of RIMM’s balance sheet.  And when companies can earn their TE, they usually trade at these levels, EBV+2 or EBV+3, even if there is no growth in their business. (See model price chart below for EBV level values on RIMM.)

So forget about the BB10, and it’s capabilities.  Just think about the probabilities of outcomes.  Can a public company break even?  Can a public company make their theoretical earnings?  If the answer is yes, then at least you know where the stock should trade.

So where is the stock currently trading.  Again I prefer stocks that have a positive transit up through EBV-3 or as I call “Coming out of the Blue”.  As I mention here in this blog, stocks that have a positive transit from EBV-3 the market is starting to form a connection to the company’s balance sheet.  The market is starting to believe what is on the company’s balance sheet.  So from here, at EBV-3, if the company can break even, then achieving EBV on their model price chart is relatively easy.  If the company can earn their theoretical earnings then achieving EBV+2 or EBV+3 can be relatively easy.  If this same company can grow their earnings and achieve faster growth then say their competitors EBV+5 is certainly very achievable.

Wait a minute you just made 490% or five times your money!

So big breath here!

I am NOT recommending RIMM.  I am NOT saying RIMM is going to EBV+5.  I giving you another set of questions to ask?  Remember in the model price world, the world I have created different questions can be asked, with concrete targets in the form of EBV lines which you can clearly see.

Here is a thought.  Why don’t you invest your money, a little at a time, as company’s transit above EBV-3?  One can have a portfolio of them.  Be like Buffet and never sell them.  Or as they start having negative transits you can sell these positions with potential substantial gains.

Be rational how you invest.  Consider risk and reward.  The higher the valuation the higher the risk, translates into the higher the EBV level the higher the risk.  Yes companies that are “Coming out of the Blue” are not sexy.  They are broken companies coming back from the brink.  The business press ignores them.  They have an odor to them.  Dumpster diving anyone!  But more then a few of these “Coming out of the Blue” stocks will become winners again.  At EBV+5 the business press will be lauding management as visionaries.  Awards will be given.  Mistakes will be made and the stock gets slammed.  The process starts all over again.

Bonus Coverage

And while I’m on a roll let’s compare Apple model price chart with that of RIMM’s.

Here is Apple’s model price chart.

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

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

And here is RIMM’s.

Research in Motion with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Research in Motion with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

What do you notice?  Apple has had two negative transits.  Apple actually had a negative transit of EBV+6 (which doesn’t show up on our chart, but it did) and this week transited down through EBV+5.

On the other hand RIMM, had a positive transit of EBV-3 back on November 25, 2012, which I blogged about here.  And in the last two weeks has had two positive transits of EBV-2 and EBV-1.  Yes, Apple is a better company.  Yes, Apple has better products.  However in the investment game this it’s about valuation NOT about how good the company and its products are.  Hell, RIMM doesn’t even have a product yet!

P.S. Since my blog about RIMM on November 25, 2012 RIMM is up some 35%.  I hate cheerleading. I’m about outcomes as I’ve said many times before.  The good news about model price charts is they confirm to investors they are on the right track, as companies continue to transit either up or down through their EBV lines confirming investment positions in your portfolio.  In other words, after transiting above EBV-3, RIMM had two more positive transits confirming the original move back on November 25th.

P.P.S. After hitting a low of $6.22 US on September 24 many investors are put off purchasing shares of RIMM at the $15 dollar level.  “It’s gone up to fast”, “I will purchase shares when the BB10 is launched.”, etc.  With using model price theory and charts, the higher the stock price in some circumstances the less risk investors are taking.  Stocks “Coming out of the Blue” have less risk than stocks below EBV-3.  Stocks that are transiting up through their EBV lines, have less risk then stocks with negative transits when investors are long.  Stocks have less risk when at the bottom of their EBV zones then at the top.

What the Market is telling You About Apple (AAPL)!

Apple Maps was a glitch.

Now Apple fans hate iTunes 11.

Is this the same company who could do no wrong?  Everyone seems to have an opinion on Apple.  The crossfire or cross talk is deafening.  People pointing out simplistic fundamentals like P/E ratios and the hoards of cash on the balance sheet.  Others are banging the drum with technical analysis, using moving averages, MACD, and relative strength.  But the market itself has a voice.  Do you hear what the market is saying?  How is this possible you say?

The market, the collective wisdom of millions of people coming together to transact at a single price, has an opinion – a voice.  How do we get to hear this voice?  We can hear this voice by looking at the interplay of price and our calculated EBV (Economic Book Value) lines on our model price charts.  These parallel lines are a constant multiple of our EBV or green line on our charts.  As I have said many times in blogs elsewhere some EBV lines are more significant then others.  We highlight these lines in colors for easy differentiation.   Our yellow or gold line is EBV+5, five lines up from our EBV or green line.

What so special about EBV+5?

EBV+5 marks an important dividing line in what the market is saying about the company in question.  Companies above EBV+5 have the wind at their backs if you will.  The market is giving management an asset – money – through the share price of the company to further growth prospects of the entity.  If management wanted to sell shares or purchase additional companies with stock the market would be happily writing the checks at a large multiple to accounting book value.  Companies under EBV+5 are companies not given this valuation premium, are not sanctioned by the market for this special status.  Sure companies under EBV+5 can issue equity and do M&A activity however the cost to the company is high due to the lower valuation of the company.  This is why we call companies above EBV+5 as having “Economic Velocity”.

Apple transited above EBV+5 back in late 2004, and except for a brief period in late 2008 and early 2009 during the financial crisis, which makes this negative transit – some 8 years later – noteworthy.

What am I saying?

Apple is still Apple.  This blog is about valuation and “the market” just made a valuation call reducing the zone where Apple’s stock price gets to hangout.  Also, “the market” has taken away the wind on Apple’s back or “Economic Velocity” which I refer to above.  With less valuation management will have to work harder, produce more with less of a result on its stock price.  Yes, book value will grow over time meaning higher stock prices with far less help from the market in terms of valuation.

Just to put this in context all major technology companies in the S&P 500 now trade under EBV+5.  Microsoft transited through EBV+5 back on October 28 and you can read my blog here.  Apple was the only shinning star in the group until yesterday.

Economists from all strips are fond at pointing to innovation and technology companies as the future by which America and the world can pull off higher growth rates then we are currently getting.  This maybe be true longer term however the market just made a call on one of America’s shining stars of innovation – Apple Inc. – that it will have to work harder, or produce more with less capital, for higher share values down the road.

Is anybody listening?

Model Price chart on Apple Inc.

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

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.

Thinking the Unthinkable – Does Apple Break EBV+5?

I love equity markets!

Equity markets are in constant motion.  And when you marry equity markets with model price charts you will be amazed at the stories the market is telling you about individual companies.

Well this morning started off with a bang seeing a pre market price quote of Apple Inc. below $500.  A quick look at my model price chart has EBV+5 of AAPL at $507.79.  Hmm… What is going on here?

We should see more evidence in the coming days, but I tell you what looms large over this stock is the Q1 FY13 Earnings Release on January 23, at 5 pm eastern.  Certainly going into this earnings release where AAPL is trading today – just under EBV+5 would speak volumes of future price potential for Apple (or lack thereof).

This is certainly a major caution flag for anyone who owns Apple.  As of tonight we will have 7 trading days to assess the daily trading of Apple, and where it trades relative to EBV+5 before the earnings news.

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

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.

Remember back on October 26, 2012 I warned readers of this blog of Apple having a negative transit of EBV+6 or $704 that lower prices would be in the offing.  Here is a copy of that tweet.  Also see may blog,”Apple’s Correction no big Surprise to Readers of ModelPrice Guy”.

Tweet sent October 26, 2012

Tweet sent October 26, 2012

So how would I summarize this trading day for Apple?  Not a killer blow, however a significant chink in the armor, for sure.

Who uses Weekly and Monthly Bar Charts?

“Be different”.

I will always remember these words.  See I was in Austin, Texas in August – the heat was unbearable – in the late eighties at the elbow of a famous commodity trader, observing and learning.  He had a leased telephone line to the floor of the Chicago Mercantile Exchange (CME) trading S&P 500 futures contracts.  Every once and a while, he would switch his charting software from 5 minute price bars to 7 minute price bars.  And if trading profits were slim he would change to a 15 minute price bar.  He explained if all the traders were using the same price bar trading profits were nonexistent because everyone was acting on the same bar and the boys on the trading floor were fading (taking the opposite position) against the trading masses.

On a another occasion I was in Incline Village, Nevada just outside of Lake Tahoe, at a famous commodity trader’s home.  He welcomed people from all over the world to witness his trading style in the living room of his house.  He was a trend follower, who fashioned himself after the famous “Turtles”.  He planned his trades during off trading times.  Before the market opened he placed his trades with his personal floor broker in Chicago.  During market hours he invited his visitors to sit cross-legged in his living room humming Indian hymns while he beat a drum.  After the markets were closed, he would call his broker for a rundown on his trades and plan for the next trading day.

Pretty different!

See being different wins.  Warren Buffett is different.  He tells everyone, and I mean everyone what he is investing in.  One would think there would be thousands of Buffett’s doing exactly what he was doing in terms of investing.  I’m sure many try to emulate his style, based on his financial disclosures however in the end they seemingly all give up because they don’t have the discipline to follow through.

Who uses weekly and monthly charts?

Nobody!

Weekly price bars are my favorite.  I see so much.  I see supply and demand. (Look for the right tick mark in relation to the left.  Right tick higher then the left, demand in control.  Left tick mark over the right supply in control – at least for the week.)  I see variability.  How long is the vertical of the price bars.  Long verticals mean volatility, short and stubby mean peace and quiet.  What has been happening in the last few weeks or the last fifteen weeks?

I’m sure I’m the only guy on the web producing customized stock graphs on my blogs and Twitter accounts with weekly and monthly price bars – if you know of anybody please let me know.  Hopefully this gives my readers and followers a different perspective from the usual daily charts offered and analyzed on the web.  I have seen many canned software packages offering technical analysis that I have to admit look pretty slick and with beautiful colors!  It reminds me of the fishing lure joke, where an out of town fisherman was looking at a beautiful fishing lure and asked the store owner whether the local fish would like the lure.  The storeowner shrugged and commented that he didn’t know; only fishermen purchased the lures and not the fish!

As you can see my model price charts are programmed special for my use.  I want no frills, just the striped down version, and the bare essence of the simple price bar.  Simple is best.

What trading tools are you using?  Are they different from the trading hoards?

At least you can say one thing about the material I’m producing in this blog and how I analyze individual stocks in relation to others on the web – I’m certainly different!

Predictions for 2013 – Watch the Canaries!

As Niels Bohr commented “Prediction is very difficult, especially about the future” is one of the classic quotes.  However this doesn’t stop Mr. Byron Wien and Mr. Doug Kass from making predictions for the year ahead.  On slow business news days leading up to 4th quarter earnings announcements this is candy to both the mainstream business news and the blogosphere alike.

What did catch my eye in both men’s opinion was the decidedly bearish nature of their predictions for 2013.  Byron sees the S&P 500 trading below 1300 as the market trades down on disappointing revenue growth and profits.  He also sees a rough year ahead for financials.  Doug sees the U.S. economy disappointing relative to consensus expectations as well with a resulting earnings drop for S&P 500 companies.  Kass also sees financials as a loser for 2013 after big gains in 2012.

What is one to make of these predictions?

This is the wonderful thing about model price charts.  Predictions can be made with certainty with very high probability of success when both positive and negative transits occur of our EBV lines.  So let me finesse these predictions a bit with our model price work.

Financials are the Key!

As I have pointed out many times in my monthly S&P 500 – Market Strategy pieces, Too Big to Fail (TBTF) financials are an important tell on the market.  As I have pointed out both JP Morgan (JPM) and Goldman Sachs (GS) have transited above their EBV-3, EBV lines.  This is a market positive.  And as long as these names continue to trade above these levels I will be constructive and looking for opportunities to invest.  If JPM and Goldman transit negatively below their EBV-3 levels, this in my opinion will be very bearish for the market.

Canaries in the Proverbial Coal Mine

If JPM and Goldman stay above their EBV-3 levels and climb higher during the year, these two men’s predictions will look pretty stupid.  However if these two names transit down through their EBV-3 levels they both will look prescient.  We should call these two companies canaries, because they will tell you where the market action will be heading.  This is my prediction!

Model Price Charts of JPM and GS

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 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.

State of Model Price Nation – One Year Anniversary.

It has been one year since I started my blog Model Price – Ideas and Concepts by ModelPrice Guy.  Believe it or not I posted 162 blogs over the year, and I had fun writing every one of them.  This blog has taken me from spectator constantly saying, “I saw that”, to actively blogging about events and going on record with my thoughts.

When I started to blog the writing muscle in my head was soft and flabby.  Over the year this flabby muscle has started to develop some definition.  Certainly when I read my earlier work I cringe of how I wrote certain things.  And yes, I even corrected my spelling mistakes.

From a traffic perspective, I have been impressed at the amount of traffic I have received throughout the year.  To date, I have received over 35,000 page views or “reads” as I call them.  As any beginning blogger will tell you, when you start blogging you have NO idea who will read what you write, if anybody reads your stuff at all.  I didn’t know what I expected but thrilled at the numbers especially since Acker Finley clients were not told of my effort.  We will start to integrate, with links to the Acker Finley site in a few weeks.  I wanted to get my “sea legs” if you will before announcing this effort formally.

As for the blogs themselves, which I reread every so often, I have made a fair amount of predictions with a lot of success, in my opinion.  Certainly my Netflix (NFLX) call at the beginning of last year started my blog off with a bang.  With NFLX trading at $123 a share on January 30th last year, I targeted EBV+5 or $47.50 at the time.  NFLX was trading at $55 at the end of August or EBV+5 as I predicted.  My other calls on the S&P 500, Canadian Pacific (Ackman winning proxy fight), Tweeted recommending the sale of Apple at $704 with follow up blog, and following Facebook – pre IPO, post IPO and highlighting in my last blog on Facebook in 2012 pointing out a positive transit of EBV+5, a good entry point for my readers, were certainly highlights.  The one post I do regret doing was the one blog on “The Coming Social Media Bull Market”.  With Groupon, and Facebook crashing and burning, certainly there was no bull market for these names in 2012.

Model Price Facebook Application

Individuals using our model price application have grown steadily over the year.  There are now over 200 people using this app over a week’s period according to Facebook.  Like the blog I had no feeling of the number of actual users who would use our database however I know the potential is huge and Facebook can scale accordingly.

However my dream of people helping people is coming up short.  I know people are looking at the charts however hesitant to make any comments.  Though some have started in the last few months, baby steps.

Forget About the Past.  What about the Future!

First and foremost I will keep up with the blogging.  WordPress is a great platform to explain our model price work and I will continue to blog and use it as a platform.

Facebook is awesome.  No better platform to develop two-way relationships.  I need to get more people using this app and start contributing.  The more people contribute with model price charts as the focal point of discussion the more money the contributors and the community will make.  I have total certainty of this claim and hope this reality will soon appear.

I have used Twitter off and on during the year.  For the most part I didn’t get Twitter.  Why?  Just couldn’t get my head around the flow of tweets and relevancy.  Then over Christmas I discovered Tweetbot and the world has opened up for me.  I see it!  For those of you not into Twitter, give Tweetbot a try.  I certainly will be using Twitter a lot more this year as a platform so you may want to follow me @modelpriceguy on Twitter if you haven’t already done so.

Video.  I will be doing short video clips, which will be posted on Facebook and sent out to my community on Twitter.  We are currently testing a few applications, which can do this seamlessly and with little effort.  You will be able to see my enthusiasm and a model price chart together in one frame as I explain or interpret the chart I want to highlight.

As a heavy iPhone 5 user, placing our Facebook app database on a mobile platform makes perfect sense and on my wish list.  My tech developer (love you bro) and I have had some initial thoughts and as 2013 continues don’t be surprised that model price charts can be viewed from your smartphone.

Reminder – Model Price is about Outcomes

Even though I discussed page views and numbers of the Facebook community earlier, this whole project – Model Price the application and myself  (modelprice guy) are about outcomes.  As I have stated in this blog.  Outcomes, where individuals are making better trading decisions and making money or losing less because of this service.  I know several individuals who have integrated model price with other disciplines or trading tools (i.e., technical analysis) they have come to trust over the years with great results.  Investors/traders can be different but the goal is the same – making $$$.

So this is the state of the nation – Model Price Nation.  2012 was a great year, one of introduction and commitment.  2013 will be one of continuation, expanding to the Twitter platform and trying to get the Facebook community to expand and expound on all things Model Price.

As always comments are welcome!

January – Monthly S&P 500 Market Strategy Update.

Are we confused yet?  With the politicians in Washington in control of the US market it’s hard sometimes to figure which end is up.  Thankfully I have my model price charts to show me the way, so I can put this market action in some context.

Yes, let’s start with our model price chart of the S&P 500.

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

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

Remember we aggregate all companies in the S&P 500 into one chart, so we can see where the market is trading relative to its EBV lines.

With no time to waste early on December 31st, the senate passed, with the blessing of the White House, a bill to increase tax rates on the wealthiest of Americans – a clear victory for President Obama.  On December 31, 2012 the market rallied almost 2% on this news.  Then just before New Year’s Eve the House of Representatives passed the senate bill without amendments driving the market up again on January 2, 2013 over 2.5%.  The good news is that tax rates are going to increase which President Obama campaigned on during the last federal election.  The bad news is spending cuts and the debt limit increase, were not resolved in the legislation just passed.  This negotiation will be considerably tougher, since the debt limit ceiling has been officially reached and cutting expenses is difficult for any politician.  This show down is expected to take place in February, a mere two months away.

So where does this leave the market?

The EBV level EBV+3 is 1563 as noted on the S&P 500 model price chart above.  This leaves an upside of 6.9% after yesterday’s, January 2, 2013 action.  I still feel a positive transit of EBV+3 is not in the cards, which puts a ceiling on this market for the time being.  A market participant still has to consider the odds of the S&P 500 going to EBV+2 or 1132 also indicated on the chart above or a fall of 23%.  The last time Congress and the President had a show down on the debt limit, August of 2011, the S&P 500 came within 10% of EBV+2 after an accelerated fall.  So in my opinion EBV+2 cannot be ruled out entirely as market support even though the probability of such an event is small.

What if the S&P 500 where to transit above EBV+3?

This action, a transit above EBV+3, would be in my opinion a “game changer” for this market.  Just to give you some history, the last positive transit of EBV+3 was at the end of 1992!  The United States, and for that matter Canada, were coming out of a nasty recession.  The US fought and won the first gulf war, and candidate Clinton won the presidential election over George H.W. Bush. Also, my business partner Joe Finley (now deceased) and I started Acker Finley Inc. in October of 1992.  Fond memories.

The S&P 500 had a negative transit of EBV+3 in September 2008, so from 1992 the S&P 500 was for 16 years above EBV+3.  Since its’ negative transit the market, S&P 500 has been under EBV+3 for 4 and half years. So I hope you appreciate what a big deal this event would be if this were to occur.  More on this in future posts.

Financials are acting well since my last Strategy Blog (December).

I was lamenting last month that the TBTF financials, chiefly JP Morgan and Goldman Sachs were still under EBV-3.  During the month of December these two big financials had a positive transit of EBV-3.  (Which we call “Coming out of the Blue”) This is another piece of the “Bull Market” puzzle falling into place.

Traffic Light: Yellow

My traffic light analogy is still yellow.  Investors and traders still have to respect where we are trading within the zone, which the S&P 500 finds itself.  With an upside of 6.9% to EBV+3 and downside of 22% to EBV+2 the glass clearly is half empty according to the market.  As I have said earlier, I still think the cap on this market is EBV+3 until the market proves me wrong – and I want to be wrong! – by a positive transit of this level.

As always will be interesting to see what happens.