Monthly Archives: May 2014

I’m on Market Call!

On Thursday, May 29th, 2014, I will be on Market Call on the BNN network (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Mark Bunting.

Take this opportunity, open our Model Price Facebook application and follow along while I’m on the show answering viewer’s questions about individual stocks.

Would you say anything different based on your interpretation of Model Price Theory and chart?  You can make your comments via Facebook.

Should be fun!

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Death to a ‘Tape Reader’ with a Happy Ending!

 

I dropped out of the ‘technology race’ in 2001. I couldn’t do it any more. I was on the edge of total mental and physical collapse. Or let me put it this way, either I was going to have a nervous breakdown or my office was going to look like this.

 

Hum…Certainly NOT the way I wanted to spend my working days in front of!

Hum…Certainly NOT the way I wanted to spend my working days in front of!

 

I needed to rethink how my company and I were doing business and how future gains would accrue to new and future clients.

 

The Art of ‘Tape Reading’ Dies

 

I used to be a ‘tape reader’!

 

All of us in the equity business who were any good – back-in-the-day – were, so called ‘tape readers’.

 

What is a ‘tape reader’ you ask?

 

Long before computers, stock trades were recorded on a long paper rolls about 1” in diameter. As an equity trade occurred the transacted price, number of shares and a company’s stock symbol were electronically sent to a mechanical printing type of machine that would sputter ‘clickety-clack’ sounds during market hours. Brokers would spend hours reviewing this long piece of paper looking for patterns in individuals stocks. Yes, one had to have a good memory but substantial gains could be deduced by looking for trading patterns especially when thousands of shares would trade in a ‘block’, suggesting either accumulation or distribution of shares by a large trust company or pension fund. This was laughingly an old fashion version of ‘front-running’ that Michael Lewis writes about in his book Flash Boys.

 

Alternatively if I were pressed we – ‘Tape Readers’ – were mentally connecting the dots or doing simplistic forms of Technical Analysis.

 

This paper tape was replaced with a wall mounted faux-digital tape that measured some 15 feet in length. During market hours as trades were displayed, men – never women (at least I never saw any), would sit for hours looking for trends – price movement – and block trades on hundreds of stocks with a transacted price. They would mentally piece together whether a stock was being accumulated or under distribution. Over a period of a few days one could get a feel of the market as a whole. If the equity markets were being accumulated all observed stocks would have positive price movement. One could ‘feel’ how ‘healthy’ or ‘sick’ the stock market was by observing individual trades.

 

I would make it a point when walking home from high school (early to mid 1970’s), unfortunately the long way home (when I didn’t have much homework) to pass by the picture window of a large storefront location where a brokerage firm (A.E. Ames) operated a wall mounted ticker tape with about twenty chairs positioned theatrically for their clients. Anywhere from 5 to 10 old men would sit transfix to the fast moving lime green letters and numbers moving right to left ignoring a curious passerby looking on with fascination.

 

Jim Cramer – ‘Tape Reader’ in Action

 

Want another example of ‘Tape Reading’?

 

The best example I can give is Mr. Jim Cramer on his CNBC television show Mad Money. When Jim does his ‘Lightening Round’ segment that’s a ‘Tape Reader’ in action and reminds me of the old days.

 

Jim has a prodigious memory (like all ‘Tape Readers’) combined with lots of energy to try absorb each and every trade. Jim regales his audience with theatrics and bluster but after 2000 – 2001 the equity market trading internals changed and his (and my) acquired skill of ‘tape reading’ went the way of the Dodo bird.

 

What Changed?

 

Two forces came together in 1998-2000 that rendered the art of ‘Tape Reading’, that ruled Wall Street for over 100 years, meaningless. The first was computer technology, fiber optics and instant mathematical analytics. The second was the frenzied volume and the hundreds of new companies ‘IPOed’ in the technology bubble of 1998-2000. If there was an old fashion wall mounted ticker tape the symbols, price and the amount of shares would zip by at such a lightening speed I doubt that any human being would be able to discern any information.

 

Like a proverbial caged hamster on his running wheel and unbeknownst to the hamster no amount of running speed the animal could ever expel would allow for the animal to keep up with the increasing speed of the wheeled contraption.

 

Jim gave up managing money and went into show business. I walked off the trading floor I built at Acker Finley and moved into a small office exhausted. All I had was an Internet connection and a burning desire to start over.

 

Starting Over or Act II

 

I like to compare the investment business to that of a miner. Everyone in the trading and equity analysis business tunnels down the same mineshaft. I reasoned back some 15 years ago this metaphorical mineshaft would lead to its ultimate conclusion. Where millisecond algorithmic trading by the fastest and most expensive technology wins at the end of the day. In this world, today’s world, first place wins everything second place goes bankrupt (Yikes!). As for Fundamental and Technical Analysis, nothing has changed in these two fields since the mid-sixty’s! Yes, you read this right.

 

As a miner – keeping with my analogy, I gave up digging where the rest of the industry was tunneling. Picked up my shovel and digging materials and started tunneling a new mineshaft of my own. We at Acker Finley just completed our math on Model Price Theory (MPT) about this time – 15 years ago – and I jumped in with both feet. What you see today on our Facebook App ‘Model Price’ is what I started with back in 2001.

 

Conclusion

 

All industries including the financial industry are impacted by technological change. Wall and Bay Street lived in a cloistered world for over 100 years where the ‘inmates’ tightly controlled everything to do with equity trading. This all changed in 2000. What is amazing and what I ask myself daily is did anyone notice this transition? Certainly by watching financial professionals on television I doubt whether substantial intellectual career transitions were made. At least Cramer is honest enough to know his market edge disappeared and transformed his career as a showman and NOT an investment professional.

 

Which mine shaft are you mining for your investment ideas or strategies? Today’s CFA or MBA and CMT (Chartered Market Technician) investment professionals think the road to riches is paved by relearning past financial concepts either in Fundamental or Technical Analysis. Really? Is there any more ore to be found at the end of this long and well-mined mineshaft? What is your advantage trading and investing in today’s equities?

 

(I write this blog NOT to be ‘preachy’, but if you are suffering from a string of investment and trading losses maybe this blog will give you something to think about.)

 

 

P.S. I thought I would include a picture of my trading station in 2014. What does your trading station look like?

I feel better sitting in front of this computer screen, anywhere in the world!  You?

I feel better sitting in front of this computer screen, anywhere in the world! You?

Shout Out to BNN – New Amazing Resource for Investors.

I have spent the last couple of weeks trying out BNN Go’s new service. (At least I think it’s new. Michael Hainsworth recently had a video link showing how to use this resource about a month ago on his Tweeter feed and is available on BNN’s website, here.)

 

Type in a company’s name or stock symbol in the search bar at the top of BNN’s homepage and BNN produces analytics and video links to your enquiry.

 

Canadian and US equity analysts and portfolio managers expound liberally on the fundamentals on any company of interest to investors on a chronological basis. I really like the focus on mid to smaller companies in the S&P/TSX Composite Index.

 

As Michael explains in the above link there is literally hundreds of thousands of hours of video content at your disposal. An amazing FREE ‘new’ service for investors and a perfect companion for Model Price Facebook users – myself included.

 

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Torstar Corp. (TSB) – Textbook Example of ‘Coming Out of the Blue’


With over 2,000 companies in our Facebook Application database there can be many daily examples of our Model Price Theory (MPT) at work.  However when I observed what transpired over the last few quarters with Torstar Corp. (a Canadian media property with a majority of its assets and revenues in the newspaper business) I had to write a blog detailing the trading action of its publicly traded stock.

Here is our model price chart of Torstar as of May 1st, 2014.  As some of you know on the morning of May 2nd, Torstar announced that the company sold its Harlequin division – book publishing division – for a reported $455 million.

 

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

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

 

Observables from our chart

 

1.         Since August of 2013, Torstar’s publicly traded common stock tried and failed several times to trade – in a sustainable way – above our last EBV line or EBV-3 until March of 2014.  I have annotated several attempts in the latter part of 2013 and early 2014 where the company’s stock attempts a transit.

 

2.         Finally, in March of 2014 – also annotated – Torstar convincingly demonstrates a positive transit of EBV-3.  Based on our Model Price Theory (MPT) this positive transit represents investors’ confidence, transmitted through TSB’s share price, in the company’s recorded assets on the company’s publicly available and audited balance sheet.  Also note the ‘up’ volatility in the length of our recorded weekly price bars on the positive transit.

 

3.         Once the positive transit of EBV-3 did occur, at the end of March, notice the trading action in the following 5 weeks.  You can observe not only the weekly trading volatility diminish substantially but also Torstar’s stock consistently trading above EBV-3.  Yes, almost waiting for something to happen.

 

And something did!

 

On May 2nd the corporate transaction (above) was publicly announced.  Below is our model price chart after the close on May 5.

 

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

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

 

Amazing you say!

 

We – the users – see this all the time on our Model Price app.

 

May 2014 – Monthly S&P 500 Monthly Strategy Update

‘They’ tried to push the US equity market down, but it didn’t work.

 

We tried to have a correction in the S&P 500 in the month of April but like a beach ball submerged under water by a six year old the submerged ball keeps on floating to the surface of the water when the child’s hand is released.

 

Let’s have a look at the 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).

 

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.

 

The US equity market, as defined by the S&P 500 Index, is in the middle of the zone between EBV+3 and EBV+4 as you can observe from our calculated model price chart. Upside to EBV+4 is 13% and downside or risk is almost 10% from the May 1st S&P 500 Index close.

 

As you can observe from our model price chart and weekly price bars the market tried to sell-off in the second week of April only to rise again in the following week. The market, again as defined by the S&P 500 Index, is very close to hitting all time highs as this blog is being written.

 

Couple of Key Positive Points

 

The month after any calendar quarter-end is always a busy time for us. Model price chart updates are being computed as fast as possible with the requisite evaluation on behalf of interested users. As April 2014 disappears in the rear view mirror I had two thoughts on this last month. One observation I would like to make is on April’s overall market trading action and the other on the general economic climate.

 

  1. The Market seems to be more Discerning and Rotational!

 

It has been a long time since the US equity markets has been rational or logical, from the vantage point of looking through the filter of our model price charts. What I liked about April’s market action is the market appeared to me more what a call “discerning”. What I mean by this is the expensive/momentum stocks heavily sold off while the true value stocks either held there own or had positive performance. In other words, investors and traders seemed to be rotating from the very expensive to the value names that in my mind are a sign of a healthy market.

 

Expensive valuation names like LinkedIn, Amazon, Tesla and other market darlings cratered. While the value names like Cisco, Intel, and Microsoft held their ground or gained slightly. This to me is a sign that money is finally staying in the market and acting somewhat rationally in that investors/traders are selling expensive stocks and seeking out value.

 

My sense and looking at long-term money flows, since the ‘Financial Crash of 2008’, was that when investors made any money or gains on their individual positions they would exit not only their positions but also the market entirely.

 

In order to have a healthy US equity market going forward we need to see money stay in the market and rotating through or finding value in stocks and the market as a whole. In my opinion we haven’t seen this discernment on behalf of money mangers in valuation in quite sometime.

 

Why, you may ask?

 

Value names are more at risk in a slow or worse a deflating economy. Cheap valuation names or companies carry more downside risk than companies that are growing double digits and exceeding analysts’ expectations. I’m NOT saying we are completely out of the woods yet, but there are healthy signs of US equity market maturity as investors are more discerning of the valuation of their stocks in their portfolios.

 

 

  1. Don’t tell the ‘Crash’ Bears, but the US has recovered all the job losses since 2007.

 

Certainly the chart of the month, if not the 2014 calendar year, is this one prepared by www.calculatedriskblog.com.

 

Chart courtesy of calculatedriskblog.com

Chart courtesy of calculatedriskblog.com

 

This chart does speak volumes. It speaks not only of the depth but also the duration of the ‘Financial Crash of 2008’ on US employment.  Well on Friday, May 2nd the US Department of Labor released employment statistics that now indicate the US has gained back all the job losses, dating back to 2007, that were lost during the last 5 and some years.  Yes, this is a good news story and a pivotal milestone has been reached.

 

Hopefully nothing like this will ever happen again and the next painful recession or economic downturn will be generations away.

 

Conclusion

 

All in all April was a good month, especially for value investors like us. Yes, we may have been close to flat, in terms of performance for the month, but for some of the growth and momentum crowd April ended up with negative rates of return not only for the month but also for the 2014 calendar year. Sometimes I have to admit market internals and economic progress is painfully slow to watch but baby steps (and I do mean little’s baby steps) are being walked in a positive direction.

 

Combining a painfully slow long–term recovery with a long and brutal winter season hasn’t impeded overall first quarter earnings that, when viewed from 40,000 feet, weren’t too bad.

 

The ‘Crash Bears’ were out in force this month when the high-flying momentum stocks started to correct in mid-month. However they were quickly silenced when the overall market quickly recovered and cash rotated to cheaper equity names. And then the economy added an exclamation point by printing a jobs number that even the ‘Crash Bears’ have to admit was a good number!