Model Price Question #3

Facebook Comment or Question

Could it get any worse for VRX-us / VRX.ca ? The company and Bill Ackman are being charged with insider trading on Valeants failed attempt to take over Allergan Inc. Couldn’t happen to a nicer guy.

From ModelPrice Guy

If it rains…it pours! I wrote about this partnership set up between Ackman and Valeant that profited from the initial takeover bid on Allergan called PS Fund 1. Look at my blog on this here.

Follow up Facebook Comment

Brian simply amazing that you were on this back in April 2014. Well PS investments is about to be P…ss.d on by the Feds. You end your blog by saying “what have you been doing for the lst 6 years” Well having retired from the US, i’ve been playing craps with stocks on both sides of the border. Some great wins and a couple, shall we say less than stellar gambles. Ask in 5 years and I bet I will be saying ” Following MPT it has been win after win after win with only minor casualties. Thanks Brian.

From ModelPrice Guy

Great stuff here John. Yes, when I was researching Valeant/Ackman’s takeover of Allergan I couldn’t believe that Valeant and Ackman’s PS Fund 1 was legal, even though as I mentioned a former SEC enforcer said it was. William “The Butcher” Cutting (aka Bill Ackman) is having a hard time lately…this is what happens when you ‘fly too close to the sun.’

Interesting to me the business press, the lazy buggers that they are, didn’t screem ‘bloody hell’ about this arrangement at the time. I was watching Bill Ackman being interviewed by Charlie Rose some time ago and I almost puked in my office waste-paper basket. It was such a ‘soft ball’ interview, with Charlie’s intention of maintaining a friendship outside the studio than asking any hard questions about anything ‘The Butcher’ was actually doing in the investment world. Disgusting! But that’s the Big Apple…when you’re on top as Ackman clearly was at the time…people don’t look at what makes you successful but the end result…money.

The good news the opposite is also true. With trouble on all fronts, including his investors wanting to abandon his investment funds, I’m sure ‘The Butcher’ is having a hard time finding a lunch partner anywhere in the five boroughs.

Model Price Question #2

Facebook Question or Comment

Poor Irwin Michael the “deep value” guy looks to me like he is slowly throwing in the towel. During the 3rd quarter his funds purchased shares of Home Depot (HD-us). I use to watch what he was doing out of respect now I watch to see how bad the train wreck will become.

From ModelPrice Guy

Value and ‘Deep Value’ stocks as an asset class has been getting killed over the last two or so years. Why? We are living in a world of deflation. As stock prices drop this doesn’t necessarily mean they are cheap. The opposite may also be true…. they may actually carry MORE RISK! In a deflation world, what is prized by the market is growth. And with growth the valuation on the company shares go skyward. Companies that are not growing…or worse contracting continue to go down until they go into the ‘Blue’ or below EBV-3. (Materials and Gold Companies!)

Until the deflationary economic environment changes this investment style will continue to underperform in my estimation. We recognized this many years ago and modified our investment style to recognize this new economic environment. Others have not…and they, along with their investors or clients, have paid the price.

What does this mean longer term…we are all chasing the same stocks at the end of the day and valuations on the limited true growth companies are going ever higher.

Until they don’t…. gulp!

November – S&P/TSX Composite Market Strategy Update

Back in March of this year I warned readers that the Canadian equity market as represented by the S&P/TSX Composite Index would have a hard time staying above EBV+2. If you don’t remember my words maybe you will recognize the visual that I thought best represented what the market was doing.

My ‘Hanging in There’ kitten.

Hanging in There!

Well the obvious happened. Slowly at first for the months of June and into July, and finally with a selling crescendo being reached at the end of August; the S&P/TSX Composite traded from EBV+2 to EBV+1.

Here is a look at what occurred in the aforementioned months and where we are now:

S&P/TSX Composite Index with weekly price bars and EBV Lines

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

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – our EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

What Now?

Canada can be viewed in two different ways economically or better still a two-legged stool. The first is an energy/commodity superpower, largely represented by the western provinces of the country. The second is manufacturing and processing plants that export goods to the United States, located principally in southern Ontario and Quebec. Over the last 10 plus years, and with economic expansion in China, Canada’s energy/commodity sectors have not only driven economic growth in Canada, especially since the financial crash of 2008-09, but also made the country a darling of the hot-money hedge and sovereign wealth crowd driving the Canadian dollar to par with the world reserve currency – the US dollar.

With the Canadian dollar at or around par for a secular period of time Canada’s manufacturing and processing plant/equipment/infrastructure either was mothballed or worst; permanently destroyed as foreign companies pulled branch plants and relocated them back in the United States or built new facilities in countries such as Mexico.

Well, I don’t need to tell you what has happen to the worldwide commodity cycle in the last 12 months – hint: Commodity prices go down day after day. And that giant sucking sound you hear is all that hot money, that has been so favourable to Canada over the last ten years, leaving Canada in record amounts over relatively short period of time, resulting – not surprisingly – in the Canadian dollar selling off to the $0.77 dollar level relative to the US dollar.

So our exporters should be cheering, right? Unfortunately, little is left to export as worldwide commodity prices hit record lows and our export infrastructure is no where to be found.

Long story short, Canada has to rebuild. And with this in mind Canadians, especially with the help of Ontario and Quebec, have elected a new federal government – from the Conservative Party to Liberals – to spearhead efforts in this direction with new faces and emotional energy.

So the question on my mind is; at what valuation or EBV level should this rebuilding start?

My answer: At EBV or our calculated green line on our Model Price chart. This level is calculated at 10,566 as of November I that have annotated on the chart above.

Yes, that’s a full 22% lower than the S&P/TSX Composite Index close on November 5^th, 2015.

Gulp!

Now this can happen two ways, as we all know. Fast and quick (like pulling off a Band-Aid) or slow, first with a negative transit of EBV+1 and then with a downward grinding market – picture in your mind’s eye sandpapering your floor boards by hand – until the Toronto Index settles down at our calculated EBV support level.

So am I super bearish on Canada? No I’m not. We, as a country; and I being a resident of Toronto, am bullish on what Canada has to offer in terms of future growth – albeit slow growth because of unfavourable demographics that I will blog about later – and a good place to live. I am just pointing out the obvious in that Canada or more importantly southern Ontario restructuring or a rebuilding of infrastructure will have to occur. And as I look and drive around the City of Toronto what do I see? Massive infrastructure spending, both above and below ground, helping transform Toronto for the 21^st century for the millennial generation.

As the hot money rolls out – if there is still some left – Canada needs to get cheap enough where the smart money can invest in an undervalued currency and assets – assets whether left behind or freshly built new plant and equipment – for the next expansionary cycle sometime down the road.

Conclusion

In my opinion, the Canadian S&P/TSX Composite Index will seek a lower valuation level on our Model Price constructed chart featured above. This will bring this Index down another 20% or so, where I believe equity valuations, in general, will look interesting and cheap relative to global equity markets. The question, of course, will be one of timing and the speed with which said Index goes to this level.

Would I sell everything Canada and head for the hills? No, I would not. The tide, in terms of money flows, has been going out for a while but it’s not over. Selective good investments still do exist and will weather market downdrafts if they occur. Plus, having Canadian dollars invested at our EBV Level will probably look smart sometime down the road when the global money-flow tides start to reverse.

November 2015 – Monthly S&P 500 Market Strategy Update

When I last wrote about the S&P 500 back in August, the index certainly looked like it had a chance it would fall back to support or EBV+3. Circumstances or should I say non-events namely the US Federal Reserve NOT increasing short term interest rates in September has given this index a lift in valuation.

Since the end of September the S&P Index has lifted back to where it has been for much of 2015, hugging just underneath EBV+4.

Have a look.

S&P 500 Index with weekly price bars and 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 market, as defined by the S&P 500 closed Monday, November 2 at 2104.05. If the market rallied to EBV+4 (2214) this would represent a gain of some 5%%. If the market corrected back to EBV+3 (1771) investors would be suffering Index losses of almost 16 %.

For people new to Model Price Theory [MPT] the index value or equity price can move within an EBV zone with no real consequence. However when a transit occurs – index value or equity price crosses one of our parallel lines – one of our EBV Lines, either positive or negative, this gives Model Price users a signal that fundamentals are improving or deteriorating, respectively.

Back at the Top of the Zone

The market variability or correction in the last week of August and all of September was, of course, another opportunity for ‘buy the dip’ investors to acquire companies at discounted prices. We ourselves were excited to have this market correct back to EBV+3 and predicted in my August blog that if this were to happen a big tradable rally would occur off this level.

The rally obviously occurred without the S&P having to seek out support at EBV+3. Maybe the US Fed should be credited with the increase in valuation by continuing their accommodative monetary policy that some say is inappropriate for the current tight labor markets and other strong economic related data points.

Of course, others are pointing to sluggish, if not weak, economic data not only in the domestic US economy but also internationally as a reason to stay accommodative and not increase interest rates.

Reasonable men and women can either agree/disagree on where the US economy is headed and what the appropriate monetary response should be. Unfortunately, when the debate rages on at the highest floors Federal Reserve Board this can be disconcerting for the market participants and asset prices alike.

From a point of view of day-to-day the market may seem random or nonsensical: But it isn’t. As displayed in our Model Price chart the S&P 500 Index is trading between EBV+3 and EBV+4 is logical and rational to those of us with ‘Left Brains.’

Will the S&P 500 Index have a positive transit of EBV+4 in this economic uncertain environment? Probably not. So EBV+4 becomes resistance and a big barrier for the US market to go higher in terms of valuation.

Will the S&P 500 Index have a negative transit of EBV+3? Again, probably not. The economics aren’t so bad that equity valuations can drop precipitously triggering a negative transit (of EBV+3) indicating deteriorating economic fundamentals in the future.

So we sit and wait.

The Fed in its last meeting in October is talking tough again and threatening to hike short-term interest rates in December.

Jeez Louise!

And with the S&P 500 climbing to the top of the zone and closer to EBV+4, doesn’t this spell trouble if the Fed actually went ahead with its tough talk.

Hmm….

Model Price Question #1

Question

I’ve been spending time reading posts here and on your blog, listening to your analysis on Market Call, and overall just trying to get a better comfort level reading the Model Price charts. Generally speaking, it’s pretty straight forward, and is in fact exactly the type of thing I was trying to put together myself. Thank you, Brian, for saving me the time.

I have a couple of questions I would love some guidance with, hopefully clarifying a few grey spots I still have.

1. A company like Torstar Corp (TSB on Canada) is trading below -3EBV, which from what I undertand is a bad spot, forecasting writeoffs or some such things. Looking at the model price, however, it shows a decent support along EBV-1. How do I know when to read the price line, and when to read the model price line? I realise this needs to be used with some knowledge of the business as well, but from the MP chart, am I to read it as a danger sign, or a stock possible of doubling?

2. Generally speaking, you don’t want to buy into an equity that has a MP below the current price. That makes obvious sense. However, you spoke about cyclical companies on Market Watch, and when the MP shows a bottoming and a history of running cycles, it can be a sign that buying isn’t a bad idea. Would there be any other time, other than strong cycles in a company, where having a MP lower than the price would be anything other than a “stay away”?

Once again, thanks for your great work. It’s truly appreciated.

From ModelPrice Guy

Remember at Model Price we are giving you two pieces of information that don’t exist anywhere else. Our Model Price calculation (Purple Line) is highly dependent on the mean earnings estimates from the equity analysts who cover the company. Equity Analysts, as a group, can be a benefit and gives you knowledge when their estimates are used in our Model Price algorithm. In my opinion, Model Price – the calculation – is relevant in the majority of companies in our 2,000 company database. (Keep in mind I can say this because most of our stocks are large cap stocks…that has predictable ‘forcastable’ balance sheets and a large number of analysts covering the stock.)

Our EBV Lines (second piece of information we are giving here at Model Price) gives you two independent variables – stock price and balance sheet values – working together. I have not found in finance two independent variables complimenting each other in any analysis, so this is a first. Over a short period of time you can see these EBV Lines will become what Technical Analysts call support and resistance areas for past stock price movement and users of Model Price can see future areas of support and resistance as well. When a transit occurs (either positive or negative) this tells the user that changes in future fundamentals are/will be occurring that will have a direct impact on the valuation of the company.

I have been using Model Price for so long that snap judgments can be made by just looking at our Model Price charts. Sometimes our Model Price calculation is relevant (usually in Bull markets) or our EBV Lines (what the market is communicating) depending on the chart. Companies like TSB-ca are in the ‘Blue’ with the market communicating that the company’s assets are impaired and write-offs will be coming sometime in the future. That’s not to say the analysts are wrong in their earning estimates, it’s just the market communicating to you about the quality of Torstar’s balance sheet. (Not Good!)

As I said yesterday on BNN, cyclical companies share prices will always turn upward before earnings are apparent. Again our EBV Lines can help, in that positive transits will generally always occur at bottoms, before analysts mean estimates are apparent, and our Model Price calculation is above its share price. Likewise for market tops…. no one remembers this but I said sell Teck Cominco at $65 on BNN when the stock had a negative transit of EBV+3 with a model price of around $95 bucks.

Keep on with Model Price, especially with our ‘Speed Charting’ function, and you will (over time) properly weight the value or relevant information given between our Model Price calculation and EBV Lines in a blink of an eye. The equity markets (stocks) are communicating information everyday while the markets are open. And only through Model Price can interested observers can know what a company’s stock price is saying. Trust me.

Back To Blogging

I’m back.

For the last year and a bit I went on what Australian’s call a ‘walkabout’. After three years of blogging it dawned on me that I needed to up-grade my skillset not only physically, learning to touch type, but also find a multi-dimensional theme for my blogging.

See when I started to blog I thought the subject matter would be simple rules or tutorials in how I use Model Price everyday. A positive transit here (buy signal), a negative transit (sell signal) there. Then I progressed into why some stocks are successful and will probably be successful in the future, in terms of rates of return, by using Model Price Theory (MPT) and why others are not. I have to admit I’m most proud of the blogs that didn’t have anything to do with MPT like 10 Things I Did Differently in the Crash of 2008; That I Didn’t Do in 1987 and 2000.

This of course led to something unexpected. I loved blogging. More to the point, I loved writing. Now for an accountant and a numbers guy all his life, this was a revelation. And when I wasn’t writing something, anything, even practicing my touch-typing: The best way I can describe my feeling was I felt a hole in my soul. Weird I know, but this is the best way I can describe that feeling of not touching the keyboard on a daily basis.

Furthermore, Model Price Theory (MPT) is pointing to a future that in my opinion is disconcerting. Since the market crash of 2007-8 the balance sheets of governments, financial institutions and publicly traded companies are pointing to a direction that causes me concern. We are witnessing symptoms of my concern in negative interest rates, currency devaluations, asset price valuations and slow, if any, worldwide economic growth on a daily basis. The traffic light is flashing yellow and modern economic thought – whether you’re a Keynesian, Austrian or monetarist (or some of each which seems popular these days) – seems at odds not only explaining what is going on but more importantly how to return our global economic performance back on track of where it was or what we remember.

That’s right, balance sheets matter. And no matter how mixed up this world seems to have become every individual, company, government (local, regional, national and super-national) and central bank have a balance sheet and by extension solvency issues. Model Price Theory (MPT) can help interrupt and analyze said balance sheets and their impact on the economy.

Also, I spend an ordinate (and happy) amount of time and writing on Facebook. Our Model Price App on Facebook is a bigger success than we imagined. I’m convinced we have made a material difference in rate of return outcomes for our Model Price community and I’m so excited about our members’ future portfolio profitability. For a world where public attention can be impossible to get, our Facebook app has a community that returns day after day as part of their daily routine. Why? Model Price is relevant to people’s investment decision-making process. From time to time I will reproduce on this blog community questions and my answers for a written record that for some newcomers maybe more simple to use. As at this writing there are over 3,300 comments on Facebook on various companies and subjects in what seems to be random or hot topic basis. Far too many comments and subjects for anyone person to reasonably go through in a single/multiple sitting. Plus with blog tagging Model Price blog readers (modelprice.wordpress.com) can search more easily possible MPT subjects or companies of interest instead of trying to scroll down the comment section on our app.

Enough said.

So I’m happy to be back.

And ready to write.

The ‘walkabout’ is now over!