Monthly Archives: June 2013

TMX Group – Dead Stock Walking

If you haven’t figured it out yet, I love stocks.  Not only do I love stocks but I want to know what makes them tick.  Why do stocks go up and down?  Why “the market” gives stocks valuation and ultimately takes it away?

As I mentioned previously when I was first introduced to the initial mathematical concepts behind what I call Model Price some 20 years ago, I got it right away – especially the concept of Theoretical Earnings (TE).  Simply stated the calculation of TE of any public company yields what one can call benchmark earnings or what the company should be earning, again in theory, given the capital structure of the company and the capital employed in the business.

Once TE is calculated, you can compare the result to the actual earnings (AE) of the company.  If AE is greater – which it usually is – the market gives additional valuation in the public financial markets for this differential between TE and AE.  If a company is dynamically increasing its AE with TE staying the same or marginally increasing over time, equity markets usually signal its approval of this expanding ratio by increasing the valuation of the company.  The antithesis is also true if dynamically TE and AE as a ratio is contacting, the equity market will take away valuation.

This should make sense to a lot of people.  In essence we are comparing a public company to itself in terms of its own benchmark earnings or Theoretical Earnings.  I like to think of individual companies as unique as fingerprints, each being individually different even though they may compete in the same industry.  CEO’s have a large influence over their own TE calculation in the way they manage their business and can have a direct impact on their company’s valuation, again this should make sense.

If you think my line of logic is sensible – on the concept of TE – and wanted to seek out more information on the topic you will be disappointed.  Unfortunately this financial concept (TE) is NOT taught in any business class, MBA or CFA program.  So by reading this blog you‘re ahead of the other financial professionals in terms of equity analysis.  TE analysis is embedded in our calculation of Model Price in case you were wondering.

We – at Acker Finley, including myself, – are constantly scanning our database of some 2,000 companies looking for any aberrations from past histories in terms of our computations on theoretical earnings and other model price concepts.  This screening process is what I consider fun.  It’s about being curious.  It’s about asking the question “why” and not stopping until I get an answer.  It’s about finding potential catalysts that can have a large price impact on an equity security sometime in the future.

TMX Group (X)

While scanning the database this week TMX Group (X) jumped out at me.  Actually I was scanning the 52-week low list and X was on the list.  I thought this was odd so as usual I call up the model price chart on TMX Group and this is what I see.

TMX Group (X) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

TMX Group (X) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

This model price chart looked weird to me.  TMX was a quality company since its IPO in early 2000: has anything changed?  Also notice where the stock is trading – just over EBV-2.  TMX is a profitable company with good earnings, so why is the company only trading at EBV-2?  Interestingly our model price calculation seems to support the current market price of the company.

So I start to do some digging.  And wouldn’t you know, TMX Group is NOT the TMX Group!

Come again?

The original TMX group was purchased by a consortium of banks and pension funds commonly known as the Maple Group back in July of 2012.  So the old TMX Group that had a good history of earnings and dividend gains no longer exists.  Once the Maple Group purchased the company – old TMX Group – along with Alpha Trading Systems Limited Partnership (Alpha) and The Canadian Depository for Securities Limited (CDS) it renamed itself TMX Group.

Are you with me so far?

So, in essence this is a new company, with new financial statements.  The model price chart illustrated above is correct (prospectively) but any financial history, including the history of our long-term model price chart is inaccurate.  Keeping this comparable data may be informative from a historical perspective so I will keep the data and chart as is, but meaningless in terms of a financial data continuity and history.

What is the “Theoretical Earnings” of the new TMX Group (X)?

Here is our calculation of the TE of the new X with the past history of the old TMX Group.


Again, you are looking at two separate companies here. The history of our model price numbers no longer exists as stated on this chart.  But it’s instructive and teachable analysis so I’m keeping it the way it is.

When our computers calculated a TE of $9.69, I didn’t believe it.  This is massive.  Remember this means this company, the new TMX Group, theoretically should be earning at least this amount in order to have any market valuation at all.   I quickly looked at published mean earnings estimates for the company and discovered estimates $3.16 for 2013 and $4.00 for 2014. This is quite a shock.  So like a good accountant I start digging through the financial statements, double checking the numbers – and they were correct!

This is way TMX Group is hitting new lows.  This new company can’t earn their “Theoretical Earnings” the way the new owners constructed their balance sheet.

I could go into the mathematical minutia of why the TE is so large, but it would make this blog post too long and complicated.  In a nutshell the primary cause for this substantial ‘TE’ number was the acquisition of CDS or The Canadian Depository for Securities Limited for a paltry $167.5 million.  This was a terrible mistake, in my opinion.


Maple Group’s acquisition of CDS moved CDS’s balance sheet from private quasigovernmental ownership to public ownership.  Unfortunately CDS’s balance sheet is too large relative to the earnings the public company actually receives and will ultimately crush the valuation of the public entity.  In order to restore any sense of valuation to the new TMX Group this CDS subsidiary must be placed back in governmental or regulator hands where it previously existed.  In other words this organization, CDS, cannot exist in the public marketplace for valuation purposes however performs a critical market function of clearing financial transactions in the Canadian financial marketplace.


As my title suggests TMX Group is a “Dead Stock Walking”.  This company will never have earnings come anywhere close to its calculated “Theoretical Earnings” number.  The best shareholders can hope for is lackluster to sideways action on the stock price.  The worst is very dark indeed.  If the stock does suffer, which I think it does, TMX Group will have to undergo a major corporate restructuring which may yield interesting profit potential for sharp-penciled investors down the road.

The other question I have is the confusion over the name of the company.  I am in the industry I didn’t know the material changes of the transactions involving Maple Group and the old TMX Group resulting in the new company called the TMX Group.  Without considerable digging and if I didn’t know any better I just thought TMX Group was the…. TMX Group!

I do feel sorry for the current and future high yield dividend investors making an investment in this company.  As I said previously the old TMX Group was a good equity performer with a solid dividend yield.  On the surface the new TMX Group appears to be the same company.  This has disaster written all over it for investors looking for a quality company with a safe and growing yield.

P.S. During the week a new consortium of financial players in the Canadian market place announced the formation of Aequitias Innovations to compete directly with TMX Group.  This is not good news for TMX Group that may face earnings pressure down the road with a sky high ‘TE” placing further potential pressure on the future stock price.

P.P.S.  One of the investors in the Maple Group is the Canada Pension Plan Investment Board.  Great to see my (and your) retirement dollars potentially going up in smoke on this one!

P.P.P.S. I love counter-intuitive situations in business and flawed common sense thinking.  Everything Maple Group did in this transaction seemed perfectly reasonable.  I’m sure the well-intentioned Board of Maple Group with the best minds in Canadian finance congratulated themselves on a job well done.  Also, I would bet money that there were more MBA’s and CFA’s on this file then any other business transaction performed in Canada in the last decade!  Will be interesting when this situation turns south who is left holding “the bag”.  (Hint…. It’s usually the CEO!)

P.P.P.P.S. The last company I saw in the past that had this relationship, too high of a ‘TE’ relative to ‘AE’ was AOL-Time Warner back in 2000.  Yes, you are correct, that didn’t end well either!

I’m on Market Call!

Surprise, Surprise

As a fill-in for a chap in Calgary, I will be on the television show Market Call, tomorrow Tuesday, June 25, 2013, on the BNN network (Canadian Business Show) from 1:30 – 2:00 pm (eastern standard).

Having a Time Out from Model Price Charts

Do I have this title correct?

Yes, I do.

Occasionally, I take time away from our model price charts.  Last week I took four whole days of not looking.  This is very hard for me but I force myself.  Time away equals perspective.

Yes, sometimes you look to closely.  Sometimes you look too often.  When markets are working in your favour you believe more work will yield more profits.  But life and markets don’t work out this way.  Often times less is more.

After four off days, Sunday night, I open our model price browser with anticipation.  I have discovered a new energy, a new sense of what is going on.  Each model price chart is new.  Yes, I have seen them before but they look different.  Edgier.  Telling a fuller story.

And I’m using the Facebook application more and more. I like the simplicity.  The lack of exact EBV numbers actually makes the transits more visible.  Tradable.  More profits.

Business news never stops.  It is always in the background.  The buzz that is continuous never stops.  This buzz accumulates in your subconscious whether you know it or not.  This is what it’s like when you’re in the business or make your living interacting with the financial markets.  My anxiety builds over these four days.  Sometimes it is helpful to let this anxiety build on purpose.  This is what happens when I don’t look at our model price charts for a period of time – anxiety.  And when I start looking at the model price charts this anxiety quietly melts away.  (See my previous blog – “How Model Price Charts ease my market anxiety”)


ENB – Enbridge and the Perfect Sell Signal!

“Macquarie Starts Enbridge at Outperform” – June 6, 2013

“Canaccord Genuity Upgrades Enbridge to Buy” – June 3, 2013


Who do you believe in the equity markets?  Do equity analysts’ ratings hold any sway with you?  I often wonder if anybody really cares about these ranking changes.  Better still who is Macquarie talking to with their Outperform ranking?  Are they communicating to the retail investor, the institutional client or Enbridge, the company, and its executives?  Is Macquarie after investment banking business and want to show case the company in the best possible light?

Better still why do websites and the business press trumpet such upgrades?  Are these announcements a public service?  Is it newsworthy?

I have long given up on these ratings.  Are they meaningless?  Probably.  So where do you get the truth?  Would an analyst ever tell you to sell an investment?  Model Price math tells you to sell!  Let me give you an example.


First let’s start with our short-term model price chart (weekly price bars)

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

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

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

As you can see you have two negative transits (see up arrows).  The first occurred in the first week of April.  With very strong stocks, with multi-years of gains, the first negative transit is usually a warning sign of a possible negative transit sometime in the future.  This makes sense because buyers take the opportunity of initial price weakness to pickup, in their view, a cheap price on a good investment.  As you can see ENB rallied back over EBV+5 and made new highs.  This is classic!  The momentum crowd gets all excited when this happens.  Then the last week in May, the second negative transit occurs, with a big down price bar.  This obviously is the second negative transit and confirming the initial negative transit back in the first week of April – this is the perfect sell signal in my view.


In my view the stock tried to stay above EBV+5 in terms of valuation.  As a matter of fact Enbridge has tried on two separate occasions to trade above EBV+5 and has failed on both occasions.  So the market is saying, no matter how much we love the stock and the company, “we” the collective market, cannot give Enbridge a valuation in excess of EBV+5.  So this means the zone of EBV+4 and EBV+5 is where Enbridge belongs.  EBV+4 becomes support and EBV+5 becomes resistance.  In other words Enbridge has limited upside and a big downside of 23 to 25% – this is to EBV+4, EBV+3 is a further 20%!

For some perspective let’s have a look at a very long-term model price chart on Enbridge going back to 1995 from our database.

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

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

There are a number of observations you can make from this above long-term Model Price chart.

1.  Enbridge has never traded at EBV+5 going back some 18 years, the length of our chart.  (Actually we have data going back to 1980 – 33 years – and ENB has never traded at EBV+5!).

2.  Enbridge traded on its model price calculation up until 2005.  Starting in 2005 the differential between ENB’s stock price and our model price calculation started to widen.

3.  For the most part Enbridge was comfortable trading around EBV+3, certainly in a higher interest environment than we have today.

4.  Enbridge has been a multi-decade winner in terms of stock market or rate-of-return performance.

5.  I believe this chart perfectly illustrates valuation.  With Enbridge being a utility its basic business hasn’t changed all the much over the period covered by our model price chart.  As you can see Enbridge has traded at a valuation low of EBV+2 during the “Internet Bubble” of 2000 to its current valuation high of today.


So within a blink of an eye our model price charts can give you not only a definitive sell decision but also multi-years of investment analysis that is incalculable not to mention a time saver!

I have no idea what “Outperform”, “Buy”, “Sector Perform” and of course my favorite “Conviction Buy” analyst ratings mean or if anybody uses them but you be the judge on who to believe, investment firm analysts or Model Price Theory [MPT].

Of course and as always we’ll see what happens and who is right!

June 2013 – Monthly S&P 500 Market Strategy Update

Life and equity markets are so much easier above EBV+3!

Sorry, maybe I’m getting ahead of myself for the new readers or beginners.  In my last Market Strategy Update blog – I highlighted “the market” as defined by the S&P 500 Index had a positive transit of EBV+3 (red line).  (See Economic Book Value under Key Concepts)  Of course I was predicting for most of this and last year, in this blog, “the market” would have a hard time making this positive transit.  Well there was nothing “hard” about this transit; it was like the proverbial hot knife through butter.

Let’s have a look at our updated S&P 500 Index model price chart.

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

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

For those who missed our long-term model price chart in previous blogs, I have included this chart as well.

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

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

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

The US Equity Market is in a “New Zone”

The earth moved. Did you feel it?  Most investors will be oblivious but the risk and reward of the US equity markets have changed.  The S&P 500 had a positive transit of EBV+3.  What does this mean?  There is a new zone within which “the market” will trade.  The boundaries of this new zone will be EBV+3 and EBV+4.  In other words, the risk and reward of the US equity markets have changed.  The risk, if you will, is the equity markets falling back to EBV+3 or 1586 – as I have illustrated on our model price chart above.  From the close of the S&P 500 on May 31, this represents a fall of 2.74%.  This quantifies your US equity market risk.  The potential reward is obviously EBV+4 or 1984.  This represents an upside of 21.7% or again quantifies your reward.  Putting these facts another way, would you risk 2.74% of your money to make a potential 22% in today’s dollars.  Keep in mind the balance sheets of the companies in the S&P 500 are compounding so one year from the end of May or May of 2014, EBV+4 will be 2192 or 35% higher than the close on May 31, 2013.

Folks this is a good deal!

Yes, I know I’m repeating myself but it bears repeating, this is the first time the S&P 500 Index has had a positive transit of EBV+3 since mid 1992!

So what does this mean?

Speaking plainly, this marks the starting point of a secular bull market in large capitalized US equities.  I can clearly state that we don’t know the length nor the height – in terms of valuation (EBV+5 perhaps) – of this coming secular bull market but at least you have been duly notified of its beginning.  Yes, May 2013.

So back to my first line, “Life and equity markets are so much easier above EBV+3”.  I know this my sound weird but the US equity markets do feel lighter and less tense and for a period of time in April and May the US equity market went up everyday.

Trust and the Equity Markets

I know you have lost faith in the equity markets.  Some of you have sold your equities for good.  We have witnessed or participated in two equity crashes in the last 13 years.  In 2008, the US financial crises shock the confidence of every man, woman and child trying to save for retirement.  I understand and have empathy for your lack of confidence.

But the US equity numbers are on your side!

Finance isn’t a crapshoot.  It’s about the math.  Unfortunately the world of finance doesn’t have the math that we do, so let our math help you achieve higher rates of return on your savings – in other words, large cap US equities are worth a look again.


As the business press points out with the occasional market prognosticator the US equity markets are up a long way.  From the bottom of March, 2009 the S&P 500 is up some 144% without dividends reinvested.  Some even use the word “bubble” just to scare unsophisticated investors or give comfort to those who sold their equities at the market bottom back in March 2009.  However let ModelPrice Guy give you another mathematical fact that certainly should counter any bubble talk.  The S&P 500, in terms of valuation, hasn’t been this cheap for the last 21 years!  Yes, the US market is up a sizable amount, but still very cheap by historical standards.  I guess this shows how far the market went down in 2008 and we have just recovered from these market lows to a more normal market valuation level but still cheap.