Monthly Archives: September 2013

Model Price Chart on the Nasdaq 100 Stock Index

If your reading the financial press over the last few days you may have noticed the Nasdaq 100 Index achieving 13-year highs over the last few trading days.  So what does this bit of news mean?  Is this news bullish or signs of market froth – excess speculation – as some market commentaries have suggested?  Can anybody put these new highs in context so one can understand its relevance?

ModelPrice Guy to the rescue!

It just so happens that we have a model price chart of the Nasdaq 100 going back to 1995.

Here is our long-term Model Price chart of the Nasdaq 100.

Nasdaq 100 Index with monthly price bars, EBV Lines (colored lines).

Nasdaq 100 Index with monthly price bars, EBV Lines (colored lines).

Observables from this chart

1.  The most amazing observation is the valuation high the Nasdaq achieved back in 1999 early 2000.  As you can see from our chart this technology laden index spiked up to EBV+9.  This is an unfathomable valuation level for an index to achieve especially considering what has transpired in the last decade.  Through the power of math let me try to put this valuation level in context.  The Nasdaq closed yesterday, September 18, 2013 at 3231.31, just under EBV+5.  If the Nasdaq Index traded at EBV+9, the valuation level back in 2000 – apples to apples comparison, the Nasdaq Index would be trading at 17,285 – some 435% higher.

2.  After the tech-wreck of 2000 the Nasdaq settled back to an adjusted EBV+5.  I say adjusted because our EBV lines sharply turn downwards after 2000 reflecting write-offs of corporate assets primarily goodwill recognized when mergers took place locking-in high equity valuations on the merged company’s balance sheet.  (AOL/Time Warner is the best example of a mega merger to subsequent breakup of the company resulting in tens of billions of write-offs primarily of goodwill.)

3.  From the market bottom in 2002, at EBV+5, the Nasdaq traded within the zone between EBV+5 and EBV+6 until the financial crisis of 2008.

4.  During the financial crisis of 2008, the Nasdaq had a negative transit of EBV+5 finally bottoming at EBV+3.  (Remember this is the current valuation level the S&P 500 Index now resides – see my Monthly S&P 500 Market Strategy Update blogs)

5.  Since the market bottom of March 2009, the Nasdaq has worked its way up, valuation wise, to just underneath EBV+5 mirroring the performance of the S&P 500.

Having a closer look with our short-term chart of the Nasdaq 100

Nasdaq 100 Index with weekly price bars, EBV Lines (colored lines).

Nasdaq 100 Index with weekly price bars, EBV Lines (colored lines).

As you can see EBV+5 for the month of September is 3289.  The Nasdaq 100 Index closed at 3231 on September 18th.  This only leaves a 1.8% cushion for future performance.  As I have noted in my previous blogs, EBV+5 is a special EBV line in model price theory.  Companies over the EBV+5 valuation level means ‘the market’ is giving equity capital by way of share valuation to expand market share of its products or business growth.  As I have noted in previous blogs companies such as Apple (blog) and Microsoft (blog) have had negative transits of EBV+5 in the last year and these companies are obviously big weights in the Nasdaq 100 Index.  The risk, yes there is always risk, the Nasdaq Index falls to EBV+4 or 2383 that represents a fall of over 26% from yesterday’s close.

The Big Question

The obvious ‘Big’ question here “Does the Nasdaq 100 Index have a positive transit of EBV+5?”  The answer is “I don’t know”.  I am probably more certain that EBV+5 remains a ceiling for the index for quite sometime.  Bye the way, this isn’t bearish news by many means.  Looking out one year or September 2014 we calculate EBV+5 for the Nasdaq Index to be 3840, 16% higher.  Not a bad return considering a spectrum of possible returns from other asset classes.

Conclusion

So hopefully I have put this business news story – Nasdaq hitting new 13-year highs – in context.  Is this news signs of froth and worrisome that a technology market crash of 2000 is just around the corner.  I don’t think so.  Are there big and quick returns to be had by investors in this highly visible market index that contains America’s leading technology companies?

Probably not.

However slow and steady rates of return are possible as the Nasdaq Index crawls under EBV+5, the most likely course of future action, isn’t a bad outcome at least in my opinion.

“Do these EBV Lines Work?”

Yes, I get this question ALL THE TIME!

And if you are showing model price work to your friends you are probably getting this question asked of you.

I guess people have a right to be skeptical. Nothing this new has come along in finance in a generation. (I’m thinking about Modigliani-Miller theorem that Model Price work totally disagrees with.)

Our EBV lines are theorized and constructed from a different pool of water, metaphorically speaking. The statistical/current fundamental pool of water– what passes for fundamental analysis these days – has been pumped so much one has to wonder whether the remaining puddles of water have any value. The thinking behind these EBV lines is so original and fresh that users of model price are thinking totally different than any other participants investing and trading equities. The early adopters of model price certainly will have an advantage over laggards who resist our economic and fundamental principles. Yes, its fundamental analysis displayed in a graphical format.

And it works.

Equity prices use our EBV Lines as support and resistance. Yes, this can be unbelievable. First of all our charts look like technical analysis. Let me be clear…I hate technical analysis. Early in my career I learned every technical analysis tool ever invented to get an edge in the market. I sat beside some of the greats like Mr. Jerry Favors – Gann Specialist, Mr. Gerald Appel – founder of the MACD indicator – and Mr. Joe Ross to name a few. When I walked away from these people, I was not satisfied they discovered a competitive edge in the market and guess what, neither did they! They always had exceptions to their own rules. I sat in their offices and I saw how they traded and lived. Believe me they didn’t live on estates and cruised on their yachts. They all could barely afford a car!

And people tell me the reading of the MACD indicator from their canned software program tells them to buy a specific equity. Really! The man himself who invented the tool barely made a living and you think this tool will make money for yourself in the equity markets over the long haul.

I digress!

Apple Hits a Brick Wall at EBV+5

The latest example of our EBV lines working is the trading of Apple over the last few weeks.

Here is our Model Price chart of Apple

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.

I know for myself this is an amazing sight to see and by the way I have been seeing this phenomena for well over 15 years. Our calculated EBV+5 becomes a brick wall for Apple’s stock price.

How is this possible?

The mathematical constants that make up these lines come from nature and model price theory – our theory of solvency of a corporate structure. Where these constants come from is really not important if they work, wouldn’t you agree? Certainly in this recent case of Apple, anecdotal evidence is surely given on whether these mathematical constants are relevant.

Looking for an edge in the equity markets?

In my early career in the financial business I was constantly looking for an edge, an edge that few traders or investors would ever know or see. When I saw the original math and theory of model price I knew I stumbled upon something special. Back 20 years ago the work and theory wasn’t perfect and the computers at the time needed 15 hours or so to crank through the numbers. Over time we have nurtured and expanded model price theory to include additional concepts and our model price calculation itself.

What is the payoff?

For me it’s about predicting high probability future events through stocks prices. I blogged and commented many times that Apple would not have a positive transit of EBV+5 and that Apple’s stock would hit a brick wall. I believe this was obvious to any user of Model Price even with beginner experience using our calculated model price charts. My prediction was a high probability outcome and you can see what happened in our above model price chart.

What other security analysis could have done this? None that I know of and believe me I searched high and low for any and all analysis that could give me this edge.

Through the power of Facebook, you can use this edge to your own advantage. My only condition for making this work available to the general public is for you to pass it on to others who are interested.

I believe with a dedicated group looking for investment opportunities through the spectrum of model price, investment ideas will be plentiful and profitable for everyone using model price work.

Don’t you agree?

Morgan Stanley (MS) – ‘Coming Out of the Blue’!

Five years after the ‘Financial Crisis’, Morgan Stanley is finally ‘Coming Out of the Blue’.

What is ‘Coming Out of the Blue’?

For those new to my blog, “Coming out of the Blue” is an investment strategy where investors purchase large capitalized equities as they emerge or have a positive transit of EBV-3.  Since our last EBV line is colored blue, we call this “Coming Out of the Blue”.  This investment strategy is unique to Model Price and a buy and hold strategy that can take many years to unfold.  I have not only blogged many times of this unique investment strategy but also blogged on specific company names that I believe qualify initially for this investment strategy with additional follow up blogs when positive transits occur on specific companies that qualify from time to time.

Again, I do emphasize that I am not specifically recommending Morgan Stanley for purchase.  The purpose of this blog is to highlight specific situations that are teachable in relation to our model price work in the hope you can learn our concepts with the potential of passing these concepts unto others.

Model Price Chart of Morgan Stanley

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

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

 

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

Much has been written and filmed on Morgan Stanley and how the company escaped bankruptcy by the skin of its teeth some 5 years ago.  Morgan has substantially changed its business from proprietary trading to client advice, money management and brokerage.  Morgan’s change in business practices should achieve some sort of multiple on the company’s book value.  (In Model Price language MS should be able to achieve a share valuation at a minimum of EBV – Green Line on our model price charts – to a maximum of EBV+2 – Grey Line – over a period of time.)

Morgan Stanley was at the center of the hurricane in the largest financial crisis since the Great Depression.  The company obviously survived and five years later having had a positive transit of EBV-3 ‘the market’ is finally giving its blessing that MS’s balance sheet has value and ‘the market’ has started to form a connection with a positive transit.

Some links to my “Coming Out of the Blue” blogs (but not all).

Questions and Answers about “Coming Out of the Blue!”

How Jumbo Gains are Possible Using Model Price – Part 1

How Jumbo Gains are Possible Using Model Price – Part 2

Citigroup – “Coming Out of the Blue”

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

 

 

Emera (EMA) Fundamentals Always Win…Eventually!

Money flow trumps fundamentals!  The only way markets can deal with excessive money flows from investors is excessive valuation.

Fundamentals are different than money flows.  Money flows occur in the equity markets irrespective of fundamentals and by the way this phenomena occurs all the time.  Sometimes excessive money flows can last for years at a time giving investors and analysts’ comfort that excessive valuation of a specific equity must be approximate to the real fundament value of the company.  Unfortunately this is NOT the case.

Let me be more specific.

Look at Emera Inc. – a Canadian Power Utility.  (Believe me I could have chosen any number of utility companies, in US or Canada, as a subject for this blog.  Have a look at the new 52-week low list of your local business daily newspaper or website.  Pick any utility on this list and look it up on our Facebook application and do your own analysis.)

Model Price Chart – Super Long-term Chart

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

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

I pulled this long-term model price chart from our database that goes back to 1995.  As you can observe Emera would hit valuation highs in and around EBV+2 from 1995 to mid 2010.  Any dips from EBV+2, especially to EBV+1 became buying opportunities for investors/traders.

Model Price Chart – Long-term Chart from Facebook Database (monthly price bars)

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

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

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

As you can observe starting in mid 2010 Emera exploded in valuation up to EBV+3.  Why?  Yield hungry investors piled into high yielding stocks without regard to valuation.  And why not?  Investors had a choice between less than 1% on government bonds and GIC’s versus 4 and 5% yields on utility stocks like Emera.

“Getting Paid to Wait” Nonsense

So I guess the question is how can excessive money flows occur without any change in the fundamentals of the company in question.  We just witnessed over the last 3 years global equity investors, especially Canadian investors – including institutions, directed their investment capital into high yielding and long considered safe securities like utility shares and other industry sectors such as real estate investment trusts (REITs).  Financial history is littered with investment fads that start and are maintained by superficial analysis or common colloquialisms that do not hold up under careful or analytical analysis.  My personal favorite colloquialism is the nonsensical “Getting Paid to Wait” slogan.  Yield hungry investors took the saying to heart by placing a major portion of their invested capital in securities that paid a substantial yield – relative to safe government bands and GICs – and didn’t much care whether the yield was earned through income of the company or the company returned some or all the yield with investors’ own capital (a blog topic for another time).  Early investors were richly rewarded as excessive money flows increased equity valuation to a point never seen as you can see from our model price chart with my Emera example.

Model Price calculations can keep investors on track

I have blogged many times before we are delivering two pieces of information, through our algorithms, to help investors evaluate large capitalized securities.  The first calculation is model price or our calculation of fair market value of the company.  As you can see from our model price charts above the excessive valuation increase from EBV+2 to EBV+3 was NOT collaborated by an equivalent increase in our model price calculation.

The second piece of information, in terms of our EBV lines, helps investors by illustrating, when the last time if ever Emera achieved the valuation of EBV+3 going back some 18 years.  As you can clearly see Emera has never traded at this lofty valuation going back to 1995.  (As an aside I have data going back to 1980 and still Emera has never traded at EBV+3)

“Yield is not Valuation”

To counteract one colloquialism I tried to make up another for the financial press and audiences familiar with my appearances on television.  I came up with “Yield is NOT valuation”.  Since valuation calculations like ours are not well known I’m sure audiences where mystified about my message or what I was trying to say.  Fair enough.  However investors where happy, initially, investing in a utility company yielding over 4.5% and trading over EBV+3 irrespective of the past history of Emera’s valuation parameters or our calculation of fair market value or model price.

Sometimes it takes a while!

Unfortunately excessive money flows from investors can last for quite sometime.  New people looking at our calculation of model price could and would probably assume that our calculation is misguided or wrong, especially in circumstances where over valuation occurs over a lengthy period of time.  Markets change. Investors’ perceptions change.  Money flows abate.  Excessive valuations are corrected, sometimes overnight.

Conclusion

The excess valuation in Emera and similar utility stocks in both Canada and the United States is finally coming to an end as money flows from investors get diverted to other areas of the market.  Initial investors back in 2009 have performed well with Emera and other utility stocks and valuations increased to unprecedented levels.  Investors late to the party, mid 2013, are already experiencing negative rates of return even though they are “getting paid to wait” – waiting for what is another matter.

Time will obviously bail out investors in quality equities including utility shares that have been purchased at excessive valuation levels.  Investors who are curious about fair market values of individual equities and excessive valuation in terms of our EBV lines can check their portfolios against our database to spot areas or companies they are holding for possible overvaluation concern.  The lesson here is twofold.  Don’t let simple colloquialisms separate you from your hard earn capital and knowing valuation will give you a leg up in terms making a rate of return on your portfolio without being confused by a company’s dividend yield.

September 2013 – Monthly S&P 500 Market Strategy Update

The war drums are pounding.

To ‘taper’ or not to ‘taper’?

This month, September, we get to know the new nominated chair of the Federal Reserve Board to replace Mr. Ben Bernanke.

What to make of this market?

Everyone seems to be confused.  Bearish views and news seems to be everywhere.  ‘Tapering’ seems to be the topic of every business newspaper and television program on the planet.  Even a few portfolio managers are getting into the act.

Voila_Capture32

What does Model Price say?

Everyone calm down, everything is fine.

Let’s have a look at the S&P 500 through the filter of our model price chart.

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

S&P 500 Index with weekly price bars, EBV Lines (colored 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 markets, as defined by the S&P 500 Index, is following a logical pattern.  First the market had a positive transit of EBV+3 back in May of this year. (Blog).  The market rallied to new highs in May with a pullback to the end of June.  In July the market rallied again to new highs and pulled back to the end of August.  This pattern or saw-tooth action could occur for quite sometime while the ‘BIG’ issues the market is facing, whether real or made-up by the financial press, are resolved.  Plus we have had tremendous gains year to date especially in the financial stocks and selected growth companies like Netflix and Tesla, so some consolidation maybe in order.

The good news, as you can see from the model price chart above, our EBV (Economic Book Value) lines are sloping in an upward direction.  This is compounding at work for investors.  EBV+3 one year from the month of September is 1764.  (How do we do this?  From a bottom up basis we add all the earnings less dividends to all 500 companies and project out what EBV+3 will be on a pro forma basis.   Of course we cannot anticipate any future corporate activity like stock buybacks, M&A activity and other future corporate news that could change balance sheets materially over the period.)  So from the close on September 3, 2013 of 1639.77 to 1764 – EBV+3 Pro forma September 2014 – represents an increase of 7.6%.  Not great but not bad either.

What is the risk in US equities?

Defining risk can mean a lot of things to a lot of people.  But here at model price defining risk and reward is as simple as looking at the value of the zone the equity or market trades in.  What are the numbers to the S&P 500 Index zone?  For the month of September EBV+3 is 1595 and EBV+4 is 1995.  So as of September 3rd close (1639.77) the S&P 500 has a risk or downside of 2.73% and an upside of 21.66%.

The calculated model price risk/reward scenario is very positive for US equity investors no matter what the issues real or imagined that face this equity market.

Conclusion

Everyone seems to have an opinion on this US market.  Is anyone in the financial press overly bullish here?  Not the financial press I have read anyway.  Could the S&P 500 have a pull back to EBV+3 or 1595 or 2.7% lower from the September 3rd close?  Absolutely!  Would this be a great entry point for long only investors who wanted to get into this market at a favorable valuation level?  Absolutely!

EBV+3 represents a floor under the US equity market that is formidable according to model price theory.  Could the market have a negative transit of EBV+3 in the next few quarters?  Sure, but the probability is low.  Actually the higher probability, believe it or not, is for the S&P 500 Index race up to the top of the zone or EBV+4 (1995).  But hold on, what if the market takes a year to reach EBV+4?  We calculate EBV+4 in September 2014 to be 2206.  Yes, that’s some 35% higher then the September 3rd close of 1639.77.  Can you image the US market tacking on another 20 – 35 percentage points of performance after the gains already accrued since March 2009.

The good news about Model Price Theory (MPT) is presenting to you what is possible/probable in terms of risk and return and upside and downside percentages for your investment plan or strategy in all deference to Mr. Gross and the financial press.  To say it bluntly the risk investors face is NOT being in the US equity market and enjoying the possible gains on a secular basis.  In other words, there is more easy money to be had.