Monthly Archives: February 2014

$76 Billion Reasons to Sell Gold Stocks – Reblog


Selling is everything in the investment world and nobody talks about it.

I started my official career in the investment business in April 1986.  I observed and participated in the equity market run-up of 1987.  And then the impossible happened, the ‘Crash of 1987’.  This market event was the most formidable of my career.  Back then it hit me like a ton of bricks, everyone and I mean everyone knows when to buy, NOBODY knows when to sell.  Knowing when to sell became my obsession.  Some twenty years ago, the early beginnings of model price math were introduced to me.  A revelation!

A year ago today, I wrote a blog on an observation in equity markets I have rarely seen.  Three of the largest gold mining stocks all had a ‘negative transit’ – see my blog below for an explanation – not only on the same week but also on the same day!  This was one of the most extraordinary ‘Sell Signals’ I have ever seen in my career and I wrote this blog.   Over the last year, to Friday’s close – February 21st, 2014, these three stocks lost $20 billion in market capitalization.  Each stock at their various 52-week lows, combined, lost over $30 billion in market cap.

Our Model Price application is about improving your financial outcomes with financial algorithms never seen before in finance.  Hopefully increasing our users portfolio returns with endless strategies both in purchasing and selling your equity investments.  Selling any investment before a large loss is rarely seen in the financial press and finance textbooks as leading to improved equity returns not to mention steering away from financial ruin.  Selling anything gold related in the equity sector was a ‘no brainer’ according to Model Price Theory (MPT) since the date of my original blog.  Hope you improved your financial outcome by acting on these observed ‘negative transits’ and if not, no need to worry for dedicated Model Price users, there are endless future ‘negative transits’.

Original Blog, Dated February 24th, 2013

$76 Billion Reasons to Sell Gold Stocks!

I have seen some strange things in the almost 20 years since we have been tinkering with our model price charts but this one takes the cake.  Have a look at these three model price charts.

Barrick Gold Corp.

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

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

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

Goldcorp Inc.

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

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

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

Newmont Mining Corp.

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.

All three companies, all major gold mining companies, had negative transits not only on the same week but also on the same day!  Wow, I have to admit I haven’t seen this in quite some time – if ever.

Just for fun I added the market capitalizations of all three of these companies with an aggregate total of $76 US billion – hence the title of my blog.

All three of these companies had a negative transit of either EBV+2 or EBV+1 this week implying lower prices for all three of these companies in the future.

Who do you believe, analysts or the market?

As you will notice, all three have calculated model prices substantially above where the companies’ shares are trading.  Remember we are delivering two separate calculations for our readers.  The model price calculation or fair market value and our Economic Book Value (EBV) lines.  Our model price calculation is largely influenced by analysts’ mean earnings estimates.  Our EBV lines are a function of the company’s balance sheet.  The market is signalling lower prices in the future, by a negative transit, where the analysts may be late in recognizing that lower earnings estimates may be warranted in the future.  In other words, analysts are usually wrong, as a group, especially at secular tops or bottoms, until future negative news is well known with resulting adjustments in downward estimates are made as a result.

In this instance I believe what the market is communicating – lower prices ahead – and in time I’m sure the analysts will follow with lower estimates thereby reducing our model price calculations.

Maybe a more interesting question is “Are we seeing a secular decline in gold or gold related investments?”  Time will tell however something is surely going on when a sell signal is clearly given this past week with these three major gold producers.

What to Make of ‘Old Tech’ with a Spotlight on Cisco?

We call these names ‘Old Tech’.

What is going on here?  How can one, especially myself, explain such a wide variance between the stock prices and our calculation of model price or our so-called ‘fair market value’?

Yes, I’m getting ahead of myself.

We (at Acker Finley) can do sorts on our Model Price database.  Let me share with you a sort I did this past weekend.  The output (below) is the results of ranking the most upside to our calculation of model price in the S&P 100 – outlined in red.  The S&P 100 population being the largest capitalized companies in the S&P 500.

Voila_Capture 2014-02-17_01-34-18_PM

The top 4 names, with the biggest differential, are Cisco Systems (CSCO), Intel Corporation (INTC), Oracle Corp. (ORCL) and Microsoft Corporation (MSFT).  Yes, we call these names ‘Old Tech’ because they have been around for a while, since the late 1980’s, and everyone seems to know whom you are referring to when you mention this colloquialism.

Or maybe we call this group ‘Old Tech’ for a reason.  Larry Ellison of Oracle Corp. is now 69.  Bill Gates of Microsoft is 58.  Cisco’s CEO, John Chambers, who seems to me to be around forever and is currently 64.  Intel just changed CEO’s bringing in Brian Krzanich at 53.  The tech stocks that currently seem to be working in this market; Facebook, Yahoo and Google have Mark (Zuckerburg) 29, Marissa (Mayer) 38 and Larry (Page) 40, respectively.

Coincidence, maybe!

Having fun with some numbers, these four companies represent $728 billion in market value, certainly not an inconsequential number.  If these 4 companies were trading at our calculated model prices – fair market values – the market value increase would be over $350 billion dollars.  Yes, a staggering amount of latent wealth not in use in the global economy.  Undiscovered potential wealth that would help underfunded corporate pensions, individuals retire sooner with more robust 401K plans, and US Federal Government fiscal revenues with substantial increases in capital gains taxes.

Who is the blame for this differential?

Equity markets give valuation to those companies that are growing, both top line revenues and profits.  These 4 tech behemoths are profitable however their fastest growth years are certainly in the rear view mirror.  New technology entrants are inventing and growing in new market categories – taking the spotlight and buzz that these companies once had.

Each of these 4 companies started as minnows that became whales.  As Bill Gates pointed out in a recent interview with Charlie Rose for every 1,000-technology company startups, 999 fail.  And the CEO’s who won this start up lottery are paranoid, egotistical, and are sitting on stockpiles of cash.  Yes, way too much cash for each of their companies to use efficiently but they have a good excuse… the US Federal Government.

Much, if not all, of this cash pile these 4 companies hold is held in offshore accounts.  If any these 4 companies and others repatriated these funds from abroad they would be subject to a 35-38% corporate tax rate, one of the highest in the world.  So you guessed it, a Mexican standoff, where the US Federal Government hungry for tax revenue sees a day when these foreign monies migrate home to the US over time and US Multinational Companies, including the 4 mentioned, lobby for a tax holiday on their foreign profits.  Stupid I know, but this is America in 2014.

Focusing on Cisco Systems

Cisco System reported their second quarter earnings this past week so I decided to do some extended model price homework on the company when I saw the eye popping 60% upside from the close on Friday, February 14th, 2014 to our calculated model price.

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

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

As some of you come to expect on ModelPrice Guy blog, below is our unique chart showing our calculated Theoretical Earnings (TE) along with Cisco’s 12-month EPS forecast on a semi log scale.

image003 copy 2

For those not familiar with our calculation of Theoretical Earnings (TE) see under – Key Concepts Tab – above.

For ease of analysis we chart the two variables (above) as a ratio.

image0038

As you can observe Cisco’s earnings have clearly stalled over the last 5 years.  With stalling earnings and an ever-increasing Theoretical Earnings (TE) the ratio between these two variables is getting squeezed.

Here is our long-term chart of CSCO over the last 7 years.  Observers can see the valuation of the company being reduced by the market as earnings stagnate and our ratio between earnings and TE is slowly getting pinched.

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

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

Conclusion

1.  The upside potential in CSCO is great – a potential 60% return.  This is why investors should consider a portfolio of stocks.  Place CSCO in a portfolio of stocks, with our calculated upside and who knows what will happen.  Simply stated, CSCO will have their day ‘in the sun’, I just don’t know when.

2.  What is the downside to owning CSCO?  Not much – certainly potential of outperformance in a down market.  So if the equity market corrects or better still investors wake up one morning and decide NOT to ‘pay up’ – valuation wise – for the growth stories of the day, investors could always rotate back into ‘Old Tech’ from ‘New Tech’ if valuations between these two groups get stretched giving value investors potential significant market over performance.

3.  Nature and public companies ‘abhor a vacuum’.  Shareholders are getting increasingly restless and not only want some their cash back – locked away in these companies and others (Apple, for example) – but also want growth, both in top and bottom lines.  If and when this ‘Mexican standoff’ ends between multinational corporations and the US Federal Government these huge cash stockpiles can be tax efficiently distributed, thereby increasing valuation – by lowering our Theoretical Earnings (TE) calculation – and help grow the global economy – mobilizing latent capital and increasing its velocity.  Yes, everybody wins.

Canada Bread – Another Third Party Transaction Confirming Model Price

Maple Leaf Foods (MFI) owned 90% of Canada Bread Co. Ltd (CBY) , both publicly traded Canadian companies.

Here is long-term model price chart of Canada Bread Co. Ltd.

Canada Bread Co. Ltd with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Canada Bread Co. Ltd with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

 

As you can observe since the 1st quarter of 2009, CBY shares have been trading at a discount to our calculated model price or fair market value.  On October 20th, 2013 MFI declared its intention to sell CBY.  We can see the jump in CBY shares on this announcement – see up arrow on the chart above.

Mexico’s Grupo Bimbo SAB purchased CBY yesterday at an agreed price of $72 per share.  This third party transaction for the company confirms our calculated model price for CBY that has been consistently around the $72 dollar mark – sometimes a buck or two above or below this transaction level on a daily basis since the intention to sell CBY was made clear by MFI.  Last night our calculated fair market value (FMV) price was $74.54.

Our algorithms perform these calculations on a nightly basis and helps users of Model Price – the app – to see what fair market value of a public company either they are interested or invested in.  Is there any free service in the public marketplace can do such a thing with such accuracy?

Not that I know off.  Tell your friends.

This model price algorithm must be easy to figure out?

This model price algorithm must be easy to figure out?

Going Through the Garbage, Can Be Profitable!


Do you like going through other people’s trash?  No.

OK, do you like going to yard sales?  Maybe.

How about going through the garbage, metaphorically speaking, in terms of stocks.

Count me in!

I love doing this.  Maybe it’s my Nova Scotia roots but I love buying things at a discount.  Others may call this schadenfreude – yes, enjoying other people’s pain – and I would have to say “Guilty, your Honour”!

There is a free lunch in the financial markets – OK, no more metaphors – and that’s buying stocks that nobody else wants.  There always seems to be a handful of stocks or a sector of stocks in every market that have caused other investors emotional and perhaps physical pain in owning them.  Yesterday’s stock winners that seemingly everyone was invested have turned inexplicably into today’s losers.

Humans love to purchase investments making all time highs.  This somehow validates their decision-making and quite frankly makes you feel good – dopamine in action.

Purchasing stocks at their 52 week-lows is NOT dopamine inspired.  In fact it’s quite the opposite.  With over thirty years of market experience, I now know myself physiologically enough that when my ‘Flight-Fight’ response is triggered – by a strong sick pre-vomit stage feeling – a market bottom is at hand.  (Try being 100% equities in the first quarter of 2009.  I spent more time in the bathroom than looking at my quote screen. Ah, memories!)

So I needed a system.  A system that logically could over ride my ‘Flight-Fight’ response nervous system.  And when I saw Model Price Theory (MPT) math and understood the philosophy behind the Economic Book Value (EBV) Lines, I was all in.

My stock trading system is incredibly easy.  When a stock, any stock, has a positive transit of EBV-3, I invested in the company.  I didn’t care how name company names I had in my portfolio – the more the better – I would make the investment no ifs, ands or buts.  When do I sell?  Again easy, when the stock I purchased had a negative transit of any of our EBV Lines.  And when the investment is a small portion of your portfolio it is an easy action to do.

I digress!

So what stocks am I looking at in terms of ‘Coming Out of the Blue’ or aka ‘Garbage’?

Aurico Gold Inc.

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

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

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

Centerra Gold Inc.

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

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

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

Turquoise Hill Resources Ltd

Turquoise Hill Resources Ltd.  with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Turquoise Hill Resources Ltd. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

Legacy Oil + Gas Inc.

Legacy Oil + Gas Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Legacy Oil + Gas Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

Detour Gold

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

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

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

Am I recommending these stocks to you?

Nope!

Just being a bird dog here and pointing out what is going on.  These stocks have been crushed over the last year.  Checking the long term charts on our Model Price App some of these stocks were trading at and over EBV+5!  Representing an amazing loss of value for holders of these companies over the last three years – again happy schadenfreude!

What kind of garbage is in your portfolio?

Is Apple a ‘No Brainer’ Investment?

Both Icahn and Apple, the company, seem to think so.

Billions of dollars have been invested and divested in Apple stock since their earnings release on January 27th and two parties on the buy-side have gone public.

Mr. Carl Icahn, who I affectionately call Uncle Carl because of his crazy unshaven look these days, tweeted this on January 23rd, the Thursday before the Apple’s earnings release on Monday night, the 27th.

From Twitter @Carl_C_Icahn

From Twitter @Carl_C_Icahn

The day after Apple’s earnings release and with Apple stock down 8% (and having a negative transit of EBV+5 that I will get to later in the blog), Uncle Carl tweeted this.

From Twitter @Carl_C_Icahn

From Twitter @Carl_C_Icahn

Hope you’re with me so far?

Then on Thursday night, February 6th, 2014, Mr. Tim Cook, Apple’s CEO announced through the Wall Street Journal – not Twitter thank goodness – that Apple, the company, purchased $14 billion of its own stock or 3% of the company subsequent to its earnings release on the 27th.

Folks, this is business history occurring here.  Rarely, if ever, have I seen two major buy side buyers making very public comments on what they were doing – spending (investing) billions and telling everyone what they are doing.  This is unprecedented and real-time disclosure.

If this couldn’t get any better Uncle Carl writes two more tweets on Friday afternoon, February 7th, 2014 stating:

From Twitter @Carl_C_Icahn

From Twitter @Carl_C_Icahn

In the old days of the stock broking business it was not uncommon that someone out of the blue or a casual acquaintance would telephone you and whisper about a penny mine company had hit the mother lode of one precious metal or another (diamonds were popular once) that was not publicly known.  We called these men – they were never women – touts.  Well-funded touts opened brokerage accounts with you and purchased a hand full of shares to give you the feeling of being authentic.  The goal for the tout was to get you and your clients purchasing the stock creating demand thus driving up the stock price.  Yes, almost like a chain letter.  The early participants were rewarded the others suffered financial losses.

I’m sure the act of touting still thrives in some dark corners of the equity markets but Uncle Carl takes touting to a whole new level calling his investment in Apple a ‘no brainer’!

So what do we make of this activity?  Billions of dollars are flying around with unprecedented disclosure by buy-side participants.  Both parties, Uncle Carl and Apple, are not only making claims as to the valuation of the company but also backing their claims or assumptions with cold hard cash that each controls.

The Greatest Spectator Sport There Is!

This is where I have the most fun asking myself questions:

Did Apple make the right decision for shareholders by being so aggressive with its stock purchases?  Is Uncle Carl’s assertion correct that an investment in Apple is simply a ‘no brainer’ for every investor/trader?  Apple, being the most valuable company on the planet, can afford the best finance brains in the world in making this buy back decision.  Who did they consult and what was their logic?  Uncle Carl makes an assertion that if Apple had the same P/E ratio as Google, now the second most valuable company on the planet, as of Friday, that Apple would be worth $1,245 per share.  Is this assertion correct?  Who is going to argue with Uncle Carl’s analysis?  Are both parties using the same analysis that Apple shares are undervalued and if so what is this analysis?

And most importantly can financial math solve any of these questions?

So many questions, so little time.

Model Price To The Rescue!

Our goal and business idea was to have a unique service where financial participants could readily observe what we consider model price or fair market value of the public company in question.   We have created a database of companies that inputs selected pieces of financial information and calculates, through our algorithms, robust and unbiased – no matter the company or industry it participates – fair market value for each company.  This is a service we call Model Price.

Critics will charge that such a calculation is not possible with the current state and knowledge of finance.  We agree.  We had to create and acquire new financial concepts that are not known nor written about in finance textbooks.  For skeptics we have included these new financial concepts under our ‘Key Concepts’ tab, above.

Back to Apple

Let’s start with our 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)

What’s the fair market value of Apple?  We have calculated Apple’s fair market value or what we call model price at $596.42 on Friday, February 7th, 2014.  Friday’s market close on Apple was $519.68, representing an upside potential of 14.8% for investors.  Nice upside, but would I mortgage the house on this upside potential, no.

As users of Model Price know we provide two pieces of original financial information for users.  The first is our calculation of model price as I have mentioned.  The second is our calculation of parallel lines we call EBV’s or Economic Book Value lines.  These parallel lines come from the balance sheet of the company.  By charting a company’s stock price along with our EBV lines gives users of model price unique perspective on how the fundamentals of the company interact with the publicly quoted stock price.

When Apple reported their earnings on January 27th, Apple had a negative transit for EBV+5 or our yellow EBV Line.  (See arrow on chart above)

What does this negative transit mean?

This is not the first time Apple has had a negative transit of EBV+5.  I noted the first time here in a blog and explained its significance.  In summary, the significance of this negative transit is the fundamentals of Apple are deteriorating.

Here is a more thorough analysis of Apple earnings and its calculated Theoretical Earnings (TE) value.  (For more on Theoretical Earnings and what TE means see Key Concepts.)

image00112

For ease of analysis we calculated a ratio between EPS and Theoretical EPS.

image0036

Apple has been a massively profitable company in the past.  With the invention of the iPhone and especially the iPad you can clearly see in this chart how profitable Apple has been.  Much of these past profits reside on Apple’s balance sheet in the form of cash – $158.8 billion as at the end of Apple’s 1st quarter.  The critical question that nobody knows, probably including Tim Cook and his management team, is what products can Apple invent or produce in the future that will produce as much earnings as the iPhone and iPad have produced in past years.

Well, unbelievably, we do have an answer to this question.  Apple, the stock price, had a negative transit of EBV+5 after its 1st quarter earnings release.  The market is taking away valuation and a negative transit of an important EBV level are signs that the collective wisdom of the market says we have seen peak earnings from this company probably for the foreseeable future.

Was Tim Cook’s purchase of Apple’s shares a wise move?

There are two issues here that need to be separated when thinking of this question.  First, what happens to the past profits accumulated by Apple?  How are the spoils of past innovation and great products to be divided?  Interested groups include shareholders, of course; future R&D (product innovation) and payment of past and future management.  Apple initiated a dividend, the first in company history.  Management also last year initiated a share buy back program, again rewarding shareholders.  This latest news of Apple management spending $14 billion is by far the most aggressive share buyback to date.  Mr. Icahn point is that shareholders of the company should get this cash as owners of the company.  He does have a point.

The second issue is how Apple should be valued going forward based on future prospects, products and earnings.  This again has been answered by the negative transit of EBV+5.  This action, in my opinion, is the ultimate arbiter on the future prospects of the company.  Collectively, through the buying and selling of Apple’s shares, the market is making its’ decision in taking away valuation of the company.  Even with the buying power of both Apple and Mr. Icahn couldn’t help support Apple’s shares above EBV+5.

So what is the answer?

The answer from our perspective would be for management of Apple to achieve a stable and balanced EPS/Theoretical EPS ratio, if at all possible.  If earnings do start to fall then Apple’s theoretical earnings should also fall in direct proportion thereby keeping the ratio stable and balanced.  (This can be illustrated when we do an analysis on Google later in the blog.)  Apple’s EPS/Theoretical EPS ratio has been very cyclical in the past 20 some years probably reflecting the inherent nature of the product life cycle of each for Apple’s very successful products.  This ratio’s cyclicality probably ultimately reflects in the low simplistic Price/Earnings ratio market watchers comment on repeatedly.

Mr. Icahn compares Apple with Google

Finally, Mr. Icahn tweets that if Apple had a Price /Earnings multiple of Google (19x) Apple’s shares would be $1,245.  This rather simplistic ratio, Price/Earnings, can and will get investors in trouble and can lead to massive investment losses.  Hopefully and I truly believe Mr. Icahn, a veteran of many decades in the investment game, wouldn’t rely on this simplistic ratio to invest billions for himself and others in his hedge fund.

First, let’s look at our model price chart on Google, Inc.

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

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

As you can observe Google now trades at a substantial premium (35%) above its calculated model price.  As discussed previously, Apple trades at a slight discount (15%) to its calculated model price.  So does comparing Apple with Google with a very simplistic ratio relevant to anything valuation wise?  Of course, Mr. Icahn assumes the market is valuing Google correctly and not Apple.

Again, this is why we invented our model price algorithm.  We are comparing apples to apples (no pun intended) in terms of valuation.  So comparing a slightly undervalued stock (Apple) with an overvalued one (Google) is a stretch.

For fun, let’s wave a magic wand and say Apple trades at Google’s P/E ratio as Mr. Icahn suggests, this would place Apple’s shares above EBV+7.  (For readers to get this reference you have to go to our Facebook app and see where a stock price $1,245 would place Apple in terms of our EBV zones (link here).)  Apple never traded close to these levels even when the company was delivering peak earnings back in 2012.  Can Apple shares trade at $1,245?  Absolutely!  Markets can and will do anything.  However Apple would trade around 50% above its fair market value.

For fun, and to finish this blog, let’s have a look at Google’s EPS and our calculated Theoretical Earnings since the company went public almost 10 years ago.

image00113

Ratio of the two variables

image0037

Hopefully the difference in the fundamentals of these two companies is illuminating.  Google, Inc. provides a service – search.  Google is a dominant player in this space (near monopoly) and provides shareholders with an ever-increasing earnings stream.  Apple, in comparison, is mainly a product company highly dependent on new and high margin innovative products.  Apple has a formidable challenge of revisiting past peak earnings with new products.  Google, on the other hand, as yet to show any signs of peak earnings.

Compare these two companies for valuation reasons?  Not a chance.  Mr. Icahn probably knows better but a tout is always very cavalier with facts and figures, even though they seem to cite them for authenticity and credibility sake.

Conclusion

So where does all this analysis leaves us.

First, my main goal here is to talk about valuation.  Implied and explicit claims and counter claims have been made both in the market reaction to Apple’s 1st quarter earnings report and two individuals response to this market reaction.  If you’re interested in corporate maneuvering our Model Price App can help keep score in terms of actual valuation of the companies in question and the likely winners and losers.

Second, tens of billions have been flying around in the last two weeks surrounding Apple.  Apple has become a battleground and with two of Apple’s biggest proponents going public in their actions is, as I said, unprecedented.

Mr. Icahn wants Apple’s cash.  This is the ‘no brainer’ of which he talks about.  Mr. Tim Cook was repurchasing shares of Apple at an accelerated pace over the last two weeks because he thinks he’s being opportunistic and appeasing Uncle Carl at the same time.  This repurchase move was probably a good political strategy but not necessarily a financial one.  (This strategy clearly worked because on Sunday night Proxy-advisory firm Institutional Shareholder Services (ISS) Inc. on Sunday recommended that Apple shareholders reject a proposal by Mr. Icahn that the company buy back $50 billion of its stock.  Subsequent to this announcement by ISS Mr. Icahn dropped his proposal.  Mr. Icahn said he also supported Apple’s recent move to repurchase $14 billion in shares within the last two weeks.)

For me, a past owner of Apple shares, the decision is straightforward.  A negative transit of EBV+5 was my sell signal and I will wait on the sidelines until either Apple has a positive transit of EBV+5 (again) or probably more likely when Apple trades at support in its current zone or EBV+4.

February 2014 – Monthly S&P 500 Monthly Strategy Update

This blog should be read in conjunction with my earlier blog, “In a Year of Multiple Transitions: This one is the most Important to your Financial Health!

Which camp are you in?

There are two camps of thought about this equity market.  The bearish camp, where deflation and hyperinflation are the topics of choice, and so much can go wrong in an interconnected world where financial transactions can occur with a push of a button on one’s iPhone.  The bullish camp, as I posited in an earlier blog, must take a ‘Leap of Faith’ that the economy can grow on its own without US Federal government help – both fiscally and monetarily – or said differently increasing business confidence can encourage the private sector to invest, spend and hire.

We are at a critical juncture with the US economy with everybody taking sides – bullish versus bearish views – with no middle ground in sight.

Add this uncertainty with having a US equity market that hasn’t had correction for close to 600 days and one has to conclude the inevitability of the equity markets taking a powder.

Model Price Chart of the S&P 500

As long time readers have come to expect, here is our calculated model price chart for the S&P 500 up to February 3rd, 2014.

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).

For new readers 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.

“Stuck in the Middle with You”

Remember the song by Stealers Wheel, “Stuck in the Middle With You”; well that’s where investors are finding themselves when talking about the S&P 500 in terms of Model Price Theory (MPT).

For new readers to MPT, stock and index values can trade (move) within our calculated EBV Lines without consequence.  It’s only when market values have negative or positive transits of our EBV Lines that signify changing fundamentals.  So markets can roam within EBV zones without consequence and for a period of years.

The only actionable steps users of MPT should consider as S&P 500 Index falls closer to EBV+3, allocations to equities can increase.  Market corrections are a time investors can initiate purchases of companies included on their wish list for lower prices or better still adding to already established profitable portfolio positions.

As you can observe from our model price chart (above), and after Monday’s downward action, the S&P 500 Index is less than 100 S&P points away from EBV+3 or 1646 or on a percentage basis this differential represents only 5.5%.  To have the S&P 500 back to EBV+3 or support this would be a welcomed opportunity for those who wanted to add additional exposure to US equities.

The upside is of course EBV+4 or some 18% higher than the market close last night.  The risk reward for equity investors is getting skewed in favour of rewarding investors.  This is as it should be.  As the market goes lower the more potential value accrues to the investor.

Conclusion

You can almost hear the sucking sound.  Investment dollars are being sucked out of emerging and secondary markets and heading towards the United States.  I’m sure global investors were shocked when the Canadian dollar and other peripheral currencies were trounced in January as investors fled in droves.

In times of transition, all markets go down and over a period of time strong fundamental markets will drive to new highs.  Obviously we are in the ‘all markets go down’ phase of this transition giving opportunistic investors or followers of Model Price Theory (MPT) confidence in increasing their asset allocations in favor of US equities.

Macro forces are at work; with global investment flows being the primary driver to both currency and equity markets.  This could be a confusing time for investors because company specific data, such as earnings, will be taking a back seat.  Friday morning will be interesting with the monthly US employment numbers from the Department of Labor.  Severe winter weather along with seasonality adjustments will make this number a ‘crap shot’.  Seat belts may be required for both, upside and downside action.