Monthly Archives: December 2013

BlackBerry – Reports 2nd Quarter loss

Market (equity) prices are about feedback.

This is why the Soviet Union failed. Market (equity) prices provide feedback mechanisms needed to run a complex open society giving important market price signals for the efficient allocation of scarce resources.  Don’t allow market pricing and transactions, humanoid existence wouldn’t evolve much from caves and bearskins.

Speaking of caves and bearskins, that’s how I would describe the current state of finance.  Spend all the time in the world studying finance in textbooks, earn your MBA, spend countless hours doing your CFA, you will never be able to hear or decipher what the equity markets are communicating?

Nope!

Professional fundamental equity (PFE) analysts insist on viewing the world with one eye.  They assiduously work on a company’s financial statements – usually the ‘best in class’ type of companies – believing this will yield the Holy Grail, an appropriate albeit simplistic valuation metric that can be regressed to the rest of the companies in the industry.  How does this group – PFE analysts – view the stock price of the firm?  A relative measurement of fair value that fits into their make believe world of ‘Efficient Market Hypothesis’ (EMH).  All of which leads to a world of ‘grey’ subjective reasoning, and nonsensical circular buy-sell-hold recommendations.  No clear buy/sell decision points in this world.

Technical Analysts’ (TAs) have the same one eye view, just the opposite eye from the fundamental equity analysts.  I would say they, as a group, are slightly more evolved than the PFE analysts.  They are willing to concede, the obvious, that the current state of subjective fundamental equity analysis doesn’t work – in terms of overt money making anyway – and that higher or lower stock prices signal something is going on with the underlying fundamentals of the company that is a predictor of future stock prices.  At least the investing world of the TAs is more objective.  Price action is black and white and is never grey.

Each group, PFE Analysts and the TAs, have created their own cul-de-sac of educational and training institutions believing each is more superior to the other.

On rare occasions I have observed these two groups in a conference room together – very rare occurrence indeed.  Each group giving their one eyed view on why the stock or market in question will go lower or higher is somewhat comical.  Each believing their professional worlds and opinion is sounder than the other.

Use Two Eyes to Invest!

Here is a thought!  Let’s open both eyes when it comes to investing.  A Model Price Theory (MPT) user can use both a company’s stock price and fundamentals when evaluating a company for investment.  By combining the two professions you get the best of both worlds.  MPT users can see three dimensionally, yielding higher probabilities for profit and outcomes.

Each of these two professions will be the last to use MPT.

Why?  Each professional group has spent too long learning there own witchcraft to give up these teachings for something new.  For early adopters, like you, this gives us several years of profitable investing without these two professions giving us much notice (and possible criticism).

I digress!

BlackBerry 2nd Quarter Results

Two important events occurred with BlackBerry.  Did anyone notice?

Firstly, BlackBerry is now a software company.  This is very important development in the company’s history.  BlackBerry has lost multi billions manufacturing their own phones.  In the last reported quarter, BlackBerry reported an additional loss of $1.6 billion on unsold phone inventory.  This is now a thing of the past.  Thank goodness.

Secondly, BlackBerry announced a write-down of $4.3 billion in assets from its balance sheet.  ($2.7 billion of goodwill and a further $1.6 billion in inventory – as I noted previously.)  This confirms why BlackBerry was trading below EBV-3 before Friday’s announced and that I have highlighted in my previous BlackBerry blog. (here)  The market, through the share price of the company, was telling Model Price users that the stated asset values on BlackBerry’s balance sheet were overstated.

BlackBerry’s shares rocket 15% on the announcement

Surprised?  Not me.  Whether the shares were reacting to the announcement of BlackBerry giving up production of their own phones or management recognizing reality with the stated asset values on the company’s balance sheet, or a combination of both, this market reaction (feedback) is welcomed and signaling that BlackBerry is on the right track – at least initially.

New Model Price Chart

BlackBerry now has a new model price chart.

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

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

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

The most important observation, from my point of view, is that the market has finally made a connection to the balance sheet of the company.  Notice the company now trades above EBV-3 (Blue line) and spiked almost up to EBV (Green Line) – our calculation of book value of the company.  This is a big positive.

Conclusion

BlackBerry has started a new chapter in its’ company history.  Mr. Chen, at least initially, has given markets a lot to cheer about that is critically important telltale whether BlackBerry is going to have a viable future.  As I have said in my previous blog, whatever BlackBerry is paying Mr. Chen, the market has confirmed, again at least initially, to be a good deal for long suffering common shareholders.

We will see what the future holds for the new BlackBerry, but investors are now looking at a software company in the mobile space – the fastest growing category in technology – that’s trading under EBV or at the company’s stated accounting book value.  In my opinion the market is giving investors a good deal.

As always we shall see what happens!

BlackBerry – Earnings Release on Friday.

What to make of BlackBerry?

Something is wrong here.  Something has been wrong with this company for a longtime.  Will Friday bring good news or bad for the former Canadian iconic company?

What does Model Price say?

Let’s start with our model price chart.

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

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

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

As you can observe BlackBerry trades under our last line or EBV-3.  What does this mean?  The equity markets, through the stock price, has no connection to the balance sheet of the company.  After all the write off of assets – inventory, goodwill and other soft unmarketable assets – over the last few years I’m thinking the asset side of BlackBerry’s balance sheet should be dependable and stated asset values close to fair market value or better still liquidation value.  Unfortunately the equity market markets are having none of this.

Enter John Chen, BlackBerry’s New CEO and Executive Chairman

This will be his first quarterly report since his hiring on November 4th.  Yes, it may be too soon for Mr. Chen to offer up any definitive corporate strategies or provide a future roadmap on the direction of the company.

But he could do one thing.

Somehow if Mr. Chen can, either through strategic actions or verbal assurances, give the equity market, confidence in the balance sheet of BlackBerry this will allow the share price to reconnect with the balance sheet of the company.

How will we know whether this reconnecting has occurred?

Simple, when the shares of BlackBerry has a positive transit of EBV-3 or $10.27 CDN.  (This calculation is based on the company’s second quarter August balance sheet.  We will endeavor, as always, to input the latest balance sheet on the company’s earnings to calculate a new EBV-3 for the end of November on the day of the announcement.)

In my opinion, if Mr. Chen succeeds in this one area – having the equity market through the share price of the company reestablish a connection to the balance sheet of BlackBerry – he will be worth every cent the company is paying him in compensation.  If BlackBerry has any future at all, a proverbial homerun at this point in time of the company’s history, the company must first reach first base – obviously.  First base being the market believing in the stated values on BlackBerry’s balance sheet.

So we will see.   This quarterly earnings report should be interesting.  I personally can’t wait to see Mr. Chen’s balance sheet and the market reaction to it.  Will Mr. Chen have a big write-off of stated assets that former managements and board members refused to deal with?  Confirming what the equity markets have been saying.  Will he give assurances of BlackBerry’s profitability sometime in 2014?  How will he sound on the conference call giving dispirited stakeholders reasons to cheer for 2014 and beyond?

Who knows, but our sharp pencils and computers are waiting.

Newmont Mining (NEM) – My Poker Tell

Keep an eye on Newmont Mining!

A tell in poker is a change in a player’s behavior or demeanor that is claimed by some to give clues to that player’s assessment of their hand.  The same can be said in using model price charts.  A user of model price charts is looking for ‘tells” that may point to a change in trend and obviously higher share prices sometime in the future.

My ‘tell’ in gold stocks is Newmont Mining Corp.

Let’s start with our long-term model price chart on NEM.

Newmont Mining Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Newmont Mining Corp. with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

As you can see from the above model price chart Newmont has been in a downtrend for two straight years and the company is approaching a secular low made in 2008, some 5 years ago.  This model price chart screams at me ‘bottom’ and it has all the qualitative stuff I look for.  A universal despised sector where investors are throwing in the proverbial towel where merchandise is priced at wholesale prices.  I love buying stuff at wholesale, never retail (see blog).  That is the most fun and it gets me up every morning; buying stuff that other investors/traders are throwing away.  ‘One man’s trash is another man’s treasure’ is an idiom that certainly puts a spring in my step and hopefully yours.

My other qualitative test is asking, in passing of course, other market participants what they think of gold stocks as an investable thesis and stand back so I don’t get slugged in the nose.  Granted only about half of the people I have talked to about this wanted to cause me physical harm.  This probably means the gold share sector is still in a downtrend and more financial pain is warranted for the other half of the gold bugs to throw in the towel.  So we will see.

Beware of the Value Trap!

Just because a stock or an equity sector is cheap doesn’t necessarily mean that investing in this company or group is advisable.  I prefer to wait for a catalyst and with model price charts this is easier said then done.  All I have to do is wait for a positive transit of one of our EBV lines.  Again having a look at Newmont’s model price chart – short-term chart this time, I would wait for a positive transit of EBV or $25.83 as shown in our model price chart below.

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

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

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

So a possible ‘Value Trap’ for investors is unnecessary.  A positive transit will alert investors that fundamentals are turning positive or something positive is occurring in the sector.  Easy.

Maybe, as I said, I’m too early in my campaign.  Maybe more pain is necessary for investors holding gold shares.  Maybe Newmont trades down to EBV-3 giving opportunistic investors/traders even more of a possible upside or profit.

Irrespective of what occurs, I can strategize to my hearts content because our EBV lines and their respective values can give me easy entry/exit prices that give me a very high probability for profit.  Newmont is my ‘tell’ and possibly my trading vehicle for a sector turnaround where everybody else is looking the other way.

“It’s though to make predictions, especially about the future”, was one of Yogi Berra expressions and one of my favorites.  Who knows maybe gold bullion does go to $5,000 US dollars an ounce as the gold bulls predicted some years ago.  But if it does maybe I will have several gold stocks that I have picked up at wholesale prices that investors will gladly purchase at luxury prices somewhere down the road.

As always we’ll see what happens.

Apple Inc. – China Mobile (or Legal insider trading made easy!)

This deal happened seven weeks ago.

In the past week Apple and China Mobile struck a deal publicly announcing to make the iPhone available to the telecom’s 740 million subscribers.  This announced partnership has been a long time coming, with rumors of a possible China Mobile iPhone offering dating back years.

With China Mobile’s unique TD-LTE network rollout coming in mid-December equity analysts are well on their way of ratcheting up Apple’s earnings estimates expectations for the coming quarters.

How did Apple’s shares preform last week, the week of this publicly announced blockbuster of a deal?  Apple shares were lower on week.

Huh?

How could this make any sense?  This is what people hate about the stock market.  This seemingly illogical price movement in relation to a bullish publicly announced material business transaction.  Of course there is the well-worn Wall Street cliché ‘Buy on rumor, sell on news’ crap.  But as far as I can see this deal, as I said earlier, was rumored for years and just fell out of the blue.

Or did it?

Back on October 27th I wrote a blog, “Apple Inc. – Breaking Out of EBV+5!” highlighting Apple’s positive transit of EBV+5.  Here is the model price chart at that time.

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)

I professed in another blog; a previous blog (August 19th) that I thought it was unlikely that Apple would ever have a positive transit of EBV+5 in the future.  I was wrong and Apple did have a positive transit of EBV+5.

So I wrote this in my October 27th blog post:

For those who have reading this blog for a while know that EBV+5 is a significant EBV level and that any positive transit would have importance.  My first response was to check whether earnings were about to be released.  I quickly found out that Apple’s earnings would be released on Monday (October 28th), probably after the close.  Wow, could this be a coincidence.  Will the Apple earnings blow away what the street is expecting?  Will there be corporate action, such as a special dividend, that will make shareholders and the market happy?  My guess is as good as yours.

But I don’t have to over think this move.  I can be just a part of it.  Yes, I took a position in Apple.  That was the easiest thing to do.  Go with the flow.  I have seen this occur so often over the last 10 or so years it is of little surprise.  See people always know corporate events before they are publicly disseminated and they act according for their own interests.  Isn’t this insider trading, you ask?  Maybe!  I know I’m not trading on any inside information.  Model price is telling you something is up and I’m just going with the flow.

And I conclude

Who knows what will happen?  But as I have said before, the likely hood of Apple having a positive transit of EBV+5 was a low probability event.  That low probability event occurred just before Apple’s year-end financial results are about to be released.  Call me crazy but Model Price is telling everyone who will listen there will be good news coming! 

After the market close on October 28th Apple’s year-end earnings were released.

Apple’s Earnings were released with little fanfare.  Yes, they were good and met analysis expectations but there were no blockbuster announcements.  However look at the trading in Apple’s shares subsequent to their earnings release.  Apple’s shares still traded above EBV+5 (see chart below) albeit with little volatility.

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)

The week before last  – the week of November 25th – Apple’s shares spiked with no apparent news. (See arrow on chart above.) Obviously news of the China Mobile deal started to leak in the public domain.  Finally culminating in the publicly announced deal last week.  Insiders and others probably used this opportunity to dump Apple’s shares for a quick profit after holding over sized positions awaiting the publicly announced news giving short-term downward selling pressure on the shares.

What can I say?  Fortunately (or unfortunately depending on your point of view) I see this all the time.  This is what gives the stock market a bad name or leaves a bad taste in peoples’ months.  Insiders profiting on non-public news while outsiders are stuck holding the bag when things go wrong.  Model Price Theory (MPT) can go a long way to level the playing field and help investors profit from potential non-public news.

Remember our EBV lines are fundamentals and transits of any kind are very important signals.  Obviously people knew about this coming China Mobile deal and acted in their own economic interests sending an important signal to model price users that something big was in the works.  I took a trading position in Apple, as I said in my blog on October 27th because of this positive transit and yes, I profited from the China Mobile news, happily.

Just another profitable day in the life of a model price user.

December 2013 – Monthly S&P 500 Market Strategy Update

Bubbles, Bubbles everywhere!

Huh?

In my almost thirty years in the financial business – it seems longer – I have been through a few market cycles.  What is inevitable is a chorus of money managers and analysts screaming ‘Bubble’ when equity markets start to recover from cyclical lows.  In most instances the people yelling ‘Bubble’ are the ones who have under-performed the market indices by a wide margin.  ‘Misery loves company’ is a popular idiom that comes to my mind when I see these people interviewed in the business press as bearish equity market strategists and investors love to hang out with each other and share the same echo chamber.  Hopefully by the end of this blog you will be scratching your head along with me when the plethora of ‘Bubble’ interviews and press stories that will be written on the spectacular returns for the S&P 500 for 2013 in the closing months of December and early January 2014.

Another item I would like to get off my chest is this whole subject of ‘Quantitative Easing’ thing.  Market experts have commented that because of ‘Quantitative Easing’ the equity prices are somehow fake or artificially high and cannot be trusted.

Really.

In our highly mathematical world of Model Price Theory (MPT) there is no evidence that I can see that links ‘Quantitative Easing’ to unjustified or artificially high equity prices.  Equity markets in general represent a complex system that can have many influences. Do I think ‘Quantitative Easing’ is a positive in the hundreds of thousands of potential agents acting upon individual equity prices?  Yes I do.  Is ‘Quantitative Easing’ wholly responsible for the levitation of equity prices?  This I cannot agree.

Equity returns over the last 5 years, since the financial crash of 2008, are largely a function of how far the US equity markets crashed in the first place.  I sense market professionals are only looking at the rates of return – that are good BTW – without consideration of where or what valuation level the market crashed in 2008.  As public policy and US Federal government found the right mixture of appropriate policy actions, including ‘Quantitative Easing’, the equity markets have returned to a ‘normal’ valuation level, in my opinion, that is commensurate with the economic activity of the US economy.

How can you call this a ‘normal’ valuation level for the S&P 500?

Listen carefully to these ‘Bubble’ talking heads in the financial press and they start talking price earnings ratios.  Here we are in the 21st century where every industry has been touched by scientific innovation and technological advancements and finance professionals are still using a simple ratio of equity price versus earnings as a guideline to evaluate equity market valuation.

Laughable!

Want a more sophisticated filter to view equity market valuation?  Try Model Price Theory (MPT).

Let’s first look at our super long-term model price chart of the S&P 500.

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

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

Before I detail what our model price chart is communicating let me tell you how it’s constructed.  First, every company in the S&P 500 has a calculated model price chart (data).  We then aggregate all companies by market capitalization, like the S&P 500 Index, on a daily basis. We then construct a time series by amalgamating the daily data over a selected period of time.  We use our calculated constant EBV lines to ensure users can track visually EBV (valuation) levels over time.  The number of calculations to do this is in the hundreds of millions.

A little more robust than the simplistic Price/Earnings ratio, don’t you think?

Observables from our chart

1.  This model price chart goes back to 1995.  Hopefully you can observe the S&P 500 Index is at the same valuation today as we were, some 19 years ago.

2.  From the valuation level of the S&P 500 in 1995, the Index almost reached EBV+6 in the early months of 2000.  (Our calculated EBV+6 for the S&P 500 Index today would be 4448 or 147% higher)

3.  After the tech ‘bubble’ crash of 2000, you can observe where the equity market bottomed in terms of the S&P 500.  Just over EBV+3.  Yes, the market bottomed – approximately – where the S&P 500 is today. (If intellectually honest the market mavens screaming ‘Bubble’ today would have been doing the same during the market lows of 2002, yes?  Probably not.)

4.  From 2002 to July 2007 the S&P 500 Index crawled along EBV+4.

5.  You can observe the waterfall decline in the S&P from July 2007 to March 9, 2009.  The S&P bottomed at EBV+1.

6.  From the market bottom of EBV+1 or March of 2009 the S&P 500 has been working its way upward with a positive transit of both EBV+2 and EBV+3.

A Closer look at our model price chart of the S&P 500

Let’s have a look at our short-term model price chart of the S&P 500

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

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

Observations

1.  Back on the last week of June the S&P touched support or EBV+3 (red line).

2.  From the end of June, the S&P 500 has been working upward through 2nd and 3rd quarter earnings.  Also don’t forget the US Federal government was shut down from October 1st through to the 16th of 2013.

3.  The potential upside for the S&P 500 is EBV+4 or 2029.  This represents a 13% upside from the December 2nd close or 1800.90.

4.  The potential downside, or EBV+3 (red line) is 1622.  Representing a 10% downside, again, from the December 2nd close.

Conclusion

Do you see a ‘Bubble’ in US equities?  I know it’s hard to fathom what the ‘Bubble Heads’ see but I certainly don’t see froth in this US equity market – at least not yet.  Could the market, as defined as the S&P 500, correct to EBV+3 or our red line?  Absolutely.  Would a correction offer investors and traders a great opportunity to purchase US equities?  Again, absolutely!  Will a correction occur?  I don’t know.  Savvy investors are always looking to buy cheaper assets or for model price users equity prices closer to support or their respective EBV lines.  But my gut tells me this US equity market as measured by the S&P 500 is on a roll and momentum can carry this market at least to EBV+4 at which time we can collect our breath and see what this market and individual stocks look like at this EBV level.

See what happens.

MSFT – Calling an Audible (Breaking Out of EBV+5)!

Call it the Ballmer affect.

When it comes to valuation the market doesn’t play favorites or gives anyone a pass.  The last time I wrote on Microsoft was October 28, 2012, here.  Mr. Softie had a negative transit of EBV+5, the first such negative transit below this important EBV level in the 26 years that MSFT was a public company.  To me the writing was on the wall.  This observed negative transit, back in October, to me was the beginning of the end in terms of MSFT having a valuation above EBV+5.  The market was giving investors a signal and for those familiar with Model Price Theory (MPT), the signal was received.

Looks like company insiders received the signal as well.  Shockingly, Mr. Ballmer announced his retirement on August 23, 2013.  The question of whether his fall was voluntary or he was summarily pushed isn’t much of a mystery, at least to me, as his farewell tears and maudlin behavior was observed everywhere in the business press.

The question becomes who will succeed Mr. Ballmer as CEO?

The market seems hopeful the new guy (or gal) will be what this company needs in the short and long term.  The stock has transited above EBV+5 in the first week of November and has remained above this EBV level for the last three weeks. Maybe insiders already know Mr. Ballmer’s replacement and the news is leaking into the market – this occurs all the time BTW (By the way!)

Let’s have a look at MSFT’s model price chart

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

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

Observers can see the positive transit of EBV+5 in the first week of November, as I have annotated and the price consolidation above this EBV level.  Observers can also see the price gap between our calculation of model price or fair market value and MSFT’s current stock price – a 34% upside.  Selecting the right candidate for Mr. Ballmer’s former position will certainly go a long way to closing this gap.  If the board selects the wrong CEO, or the market “disapproves” of Mr. Ballmer’s replacement, Model Price Theory (MPT) will respond immediately with a negative transit of EBV+5.

This same situation occurred with Apple.  A negative transit of EBV+5, blog here, followed up with a positive transit on October 27th, 2013, here.  For traders these transits represent the simplest of trades.  A positive transit giving investors an entry point for a long trade, with a stop loss or sell signal at the same EBV+5 level.

As always we will see what happens, but from MPT point of view the market is anticipating good news either on Mr. Ballmer’s replacement, whoever he or she is, or improving corporate fundamentals…or maybe both!

P.S.  Wondering whether the US equity indices will levitate higher.  Having both Microsoft and Apple transit above EBV+5 and trend higher is a welcomed event for those bullish on the US equity markets.  Together these two companies represent 4.95% market weight in the S&P 500 Index.

AIG – Coming Out of the Blue!

“There are no second acts in American life”, the saying goes but sometimes there are exceptions.  I was surprised as anyone when AIG had a positive transit of EBV-3 meaning, as some of you know; AIG – Coming Out of the Blue!

Let’s have a look at our model price chart

American International Group (AIG) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

American International Group (AIG) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

As you can see from our model price chart, the first positive transit occurred back on the first week in August – noted on the chart.  Since August the stock has been ‘saw-toothed’, back and forth using our calculated EBV-3 level as support.  Again as you can see from our model price chart, AIG was performing well in October until its third quarter earnings release disappointed investors bringing the stock back to support or EBV-3.  As AIG has been consolidating just over EBV-3 our calculation of model price has been gaining strength during the period covered on the model price chart above.

For those unfamiliar with the history of AIG, the company was one of primary causes of the financial crash of 2008.  AIG was a recipient of US Federal government aid the day after Lehman Brothers went bankrupt.  The Federal government in the bailout of AIG used a controversial sum of $90 billion the day after they refused to give a financial bailout to Lehman Brothers.  AIG subsequently paid back all Federal monies and according to the US Treasury, the government had a net positive return on its AIG bailout of $22.7 billion.  Wonderful for the US taxpayer and saved the world from a global depression – great deal!

For those unfamiliar with our unique “Coming Out of the Blue” investment strategy here are some additional links from my blog posts that may help you.

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

“Do these EBV Lines Work?”

Model Price – Conversations About EBV Lines