10 Things I Did Differently in the Crash of 2008; That I Didn’t Do in 1987 and 2000 – Reblog

I will be on Market Call tomorrow, March 9, 2016 and I will be referencing this blog so I thought I would reblog it here for the convenience of BNN’s viewers to read. Yes, it was seven years ago that the S&P 500 Index hit its financial crisis low and hasn’t look back. These were my thoughts, my internal analysis, of what transpired and lessons that I learned. I hope these thoughts will help others who went through this difficult experience and help them prepare for any possible crashes that may lie in our future.

(Five years ago.  It hardly seems possible that 5 years ago the S&P 500 Index hit an intraday low of 666, on March 9th, 2009, the mark of the beast – coincidence, I think NOT.  Officially, I have now lived through three equity market crashes of 1987, 2000 and 2008.  Each ‘market event’ has taken their own personal toll on my soul in the same way as others in the industry.  My goal here is write something personal.  I did some things in the last crash – 2008 – that I learned from the other two.  Allow me to examine my scar tissue long since healed but visible in its own way.)

They don’t tell you about the pain.  Physical pain.  When you are nauseous and you can actually feel the cortisol levels spiking in your body – that’s bad by the way.

Blood pressure?  Off the charts!

Welcome to the field of finance.  Do professors talk to students about what happens physically when their market positions severely go against them in MBA School?  Do they simulate calls where students call their best clients or better still their own mother and father explaining they lost millions of dollars on their best recommendations and they won’t have the retirement they had always dreamed of?

Probably not, is my guess.  Even if they did it’s hard, if not impossible, to simulate this feeling in some ‘Ivory Tower’ setting where everything is knowable and risk can be calculated.

(I know personally a handful of brokers who had to make this brutal call to their parents.  After I overheard two tearful calls after the 1987 crash, I always shied away and never did handle my parents investment account, as little as it was!)

That’s what wrong with the movie “The Wolf of Wall Street” – which I reluctantly watched while on my last vacation. Jordan Belfort, the protagonist, was shown to be all hype, drugs and sex.  Antidotes and crude stories never make this movie very interesting – we in the finance business have our own share of stories as well.  But the movie never tells you why he acted this way?  My interruption, for what’s it worth, is the physical and mental pain Mr. Belfort felt when losing his blue-collar clients money.  Even though in Mr. Belfort’s case, he and his firm lost their clients money on purpose!  Only a true psychopath, like Bernie Madoff, could steal people’s money – especially Jewish (like himself) clients’ money – and not feel anything.

Want more proof!

The website ZeroHedge has been keeping a tally on suicides of traders/bankers over the last while including one that occurred early Thursday morning, February 13th, last week, by one Mr. Edmund Reilly.  Mr. Reilly (47) – trader/banker jumped in front of the Long Island Rail Road (LIRR) Commuter train at 6 am.    ZeroHedge’s tally is up to 10 recent souls!

Why so gloomy?  Have you never read anything about the dark side of the financial business?  Don’t get me wrong I do love what I do.  I have professed my love for equities in this blog “Why do stocks go up and down?” here.  Similarly I have also professed my hate for the business “Blowing Up the Financial Business” here.

With any endeavor one pursues whether sport, career or that special someone there is heartache.  It comes with the territory.  Starting in early 2008 – Martin Luther King Day to be exact, I knew it was highly probable I was about to enter my third ‘market event’.  Here are the 10 things I did differently based on the knowledge and experience that I learned from the previous two ‘market dislocations’ to survive this on coming financial tsunami.

1.  Anticipate, don’t react to the market or stock price in or of itself.  Always ask “What if” questions.

This is where Model Price Theory (MPT) came to my rescue.  I was not flying blind.  Actually this is an apt metaphor because some days I felt like I was in a cockpit of an airplane using only the instrumentation, blocking out all the financial noise both in the financial press and television.  A negative transit was a negative transit, simple and don’t over think it!  I could look at the next EBV level down – from EBV+6 to EBV+5 – and get a sense both in terms of dollars and percentages where the next possible support level would be.  Also stocks having negative transits of EBV-3, or “Going into the Blue” was an easy sell signal.

Our Index charts (S&P 500 and TSX Composite) were invaluable.  We had Index Model Price charts for the above indices going back to 1980.  There wasn’t a day that didn’t go by in 2008 and 2009 that I didn’t consult these charts and asked, “What if” questions.  I had a SELL strategy for each negative transit.  More importantly I had a BUY strategy for each major index support EBV level.

Technical and fundamental analysis, were no use to me when every stock on the board is falling!  At least EBV levels gave me a sense of certainty in a very uncertain world.

2.  Visualization

Elite Athletes do it, why not investment managers.  On the front of our Acker Finley website we place the performance of both public mutual funds we manage – Canadian and US.

Throughout 2008 and 2009, believe it or not, I visualized our future five-year rate of return chart (the future 5 years from the date of the market bottom) on our Acker Finley website, comparing our investment performance versus our selected benchmark after the market bottom, wherever that market bottom eventually would have happened.

Here is our performance chart, screen captured, from our website as of March 10, 2014.  This chart shows our performance for the Acker Finley Select US Value 50 Fund (costs and fees included) versus the S&P 500 Index (Total Return in Canadian $) over a five-year period beginning March 9, 2009.  I visualized this performance chart over 5 years ago and it came true!

Voila_Capture 2014-03-11_10-02-33_AM

Daily Performance of the Acker Finley Select US Value 50 Fund (CDN$) over 5 years compared to the S&P 500 Index (Total Return in Canadian $)

Visualization the future 5 years, back 5 years ago, helped keep everything in perspective, especially being fully invested if and when the bottom occurred.  If we were not fully invested when the market hit its bottom this chart would be totally different (far worse) including (probably) underperforming our benchmark over the last 5 years.

3.  You can’t time the market so don’t!

You hear this all the time and its true!

The bottom of the US equity market occurred on March 9, 2009, five years ago.  Did we know this at the time?  Nope!  For this particular crash – 2008 – I was fully invested unlike previous crashes where I tried to time the market resulting in very unsatisfactory long-term rates of return and personal regrets that I didn’t purchase quality companies at generational low prices.  Yes, I could have minimized my physical and mental pain short-term by selling equity positions only to have anguish longer-term in not buying great assets at a discount.

(Maybe a partial explanation for the suicides mentioned earlier.  This US equity market has gone straight up since September 2011.  Who would have thought this would have happened with all the seemingly worldwide bearish economic news especially considering a US Federal government shutdown.  An equity investor may have guessed right on the timing of the ‘market crash’ but sitting out the ‘market recovery’ can be equally as painful.  Or how about selling and going to cash on March 9, 2009, realizing your losses, staying in cash and watching over a 5-year period US equities recapture previous highs.  Painful indeed!)

4.  Be prepared both mentally and physically.

Woody Allen said, “Showing up is 80 percent of life.  Sometimes it’s easier to hide home in bed.  I’ve done both.”  So have I.  Physiologically it is painful to me to have my net worth and more importantly my clients net worth reduced on a daily basis.  In past crashes I did hide underneath the covers, trying to avoid the pain – it didn’t work by the way.  For the crash of 2008, I came to work everyday.  Yes, I would start fresh and energized every morning only to go home after market hours drained and defeated (and poorer).  Knowing this behavioral grind from past market crashes, I increased substantially my physical workout schedule including switching my workout routine from the local gym to an Ashtanga Yoga Studio for a more complete and physical workout.  My alcohol consumption, which I would call moderate (red wine only), was reduced to sparingly and infrequent.  I faced each working day with bright clear eyes!

5.  Communicate with everybody…staff as well as clients.

Like a good marriage communication is key.  I took the time to communicate with everyone, from our valuable support staff answering the phones, executive team, to clients who called daily and especially the clients who you don’t hear from.  Everyone knows the financial markets are under stress so why add to peoples stress unnecessarily by being uncommunicative.  Talking drained my daily energy faster, a precious resource, but it needs to be done.

6.  Have empathy with clients who want to bail (sell) but you are running money for the silent majority.

For every client, you have to recognize they have different agendas and pain levels when equities start to head south.  The vocal clients get your attention and maybe too much of your focus.  Always do what’s best for everybody’s financial interest, to the best of your ability and not the few who you hear.  Short-term decision-making may boost your rates of return quickly – going to cash in a down market – and keep the vocal clients happy with the cost being exceptional long-term rates of returns for everyone.  Clients have shoes, they do walk from time to time, and it’s usually the vocal ones you tried to appease in the first place that are first in line out the door.

7.  Government and Central Bankers will work day and night, pushing and pulling every policy tool imaginable to right a sinking economy but sometimes it just takes time for new policies to work.

I observed in past crashes the Federal Reserve Board (FED) do extraordinary things to right financial markets in past crashes.  I have learned the FED has incredible powers with policy options – real and made up – and when the FED wants financial markets to go up, they go up!

Financial markets viewed from 40,000 feet are feedback mechanisms.  Good economic policy drives societal financial wealth upward.  Poor policy does the opposite.  Central bankers are the smartest people on the planet because we trust them with the most valuable piece of machinery on earth.  The “money-printing machine”.  Print too much money and we as a society have to deal with inflation.  Print too little and society would have to deal with deflation.  We, as a society, don’t hand this power over to a village idiot.  Mr. Ben Bernanke, in my opinion and others, was slow to respond to the unfolding financial crisis of late 2007 and 2008 but once he was on the case every monetary policy device was brought to bare.

Have faith in the “Greenspan, Bernanke, or Yellen Put”.  It’s real!  Or alternately your house is on fire.  You and your community know that the fire department is coming.  Whether they save your house is another matter entirely.  They are coming, we just don’t know when!

8.  Each crash had a different charactistic or theme.  Try and pick-up what is going on – some stocks going down faster than others – in the markets as fast as you can.  This is the key for capital preservation, if possible, and stock selection on the rebound.

Of the last three ‘market events’, each had a different footprint or reason for plunging equity values not necessarily tied to equities themself.  The result however was always the same – equities prices plunging appreciably worldwide.

The ‘Crash of 1987’ was about the value of the US dollar.  Both the US dollar and stocks went down significantly but it was the stock market that received all the media attention.  Once the US dollar stabilized, at a lower value, the stock market rallied to new highs two years later.

The ‘Crash of 2000’ was a valuation correction in the NASDAQ induced by the Federal Reserve (FED) – remember them – restricting monetary policy, and raising interest rates to 6.5%, to a point of negatively impacting the real economy.  Subsequently after the market crash, the FED came to the equity markets rescue and lowered interest and mortgage rates significantly leading to a housing boom and eventually lifting equity markets, at least the S&P 500 and Dow Jones, back to previous 2000 highs.

The ‘Crash of 2008’ was a garden variety ‘financial crises’ – where declining home values triggered substantial declines in an alphabet soup of newly devised fixed income financial products – CDO’s, Asset-backed SIV’s and Sub Prime Mortgage-back securities – bankrupting an over-leveraged regulated banking system including much of the unregulated shadow banking organizations.

For example, in the ‘Crash of 2008’, with the help of Model Price Theory (MPT), we were able to quickly observe that lower valuation and priced stocks faced the greatest risk in a deflationary world.  Ever-lower stock prices implied a real possibility of the company going out of business that was a precursor to an even lower future stock price.

This was a wrinkle never observed in the previous two crashes and hurt ‘Value Managers’ rates of return during the two years following the market bottom of March 9th, 2009.

9.  I instituted a two-part question when I thought about selling anything in the 2008 ‘Market Crash’.  “Why was I selling?” (Answer, probably to feel better) and more importantly “When would I repurchase the position or increase your asset allocation in equities?”

My first two market crashes – 1987 and 2000 – involved what I call one-dimensional selling.  Selling for selling sake.  It felt good in the moment.  At least I was doing something.  Protecting capital.  Only to see, you guessed it, the stock(s) you sold rally hard (higher) the next day.  I felt like a proverbial cork in the middle of the ocean.

This time around, I forced myself to answer two questions before I sold anything.  Why was I selling?  Whatever my answer, probably very rational – knowing my rationalization – the real answer was I just probably wanted to feel better, physiologically.

Knowing buying during a ‘market crash’ is much harder physiologically than selling, at least for me, I instituted a follow-on question to the “Why was I selling?” question.  I would ask myself “So big-shot ‘When do I buy?’”   The answer inevitably lead to the stock value or price the company was trading at, on that particular day!  So instead of feeling the need to sell, I felt better in that I was buying by not selling a high quality company at a discount to fair market value.  Yes, you read this right, buying by NOT selling.  Confusing, but it worked!

10.  Keep to your personality type.  Keep true to yourself.  Recognizing that ‘Market Crashes’ changes your daily route and forces you out of your comfort zone.

I have a procedural personality in context of the equity markets – I’m an accountant after all.  I like process.  Again my first two market crashes took me out of my comfort zone and who I was.  Declining markets seem to demand assimilating tick-by-tick news developments as well as rapidly changing stock prices – mostly down.  You’re on the edge of your seat trying to assimilate everything because that’s what you think the job entails.  With the help of Model Price Theory (MPT) I was able to largely keep to my personality type or mental makeup on track.  I say largely because on very active days and weeks the market does twist you into being something you’re not.  At least recognizing this is half the battle and a simple mental readjustment can be made to get me back on track.

Once I realized the potential of a market crash (2008) and future equity markets being non-procedural, I looked for ways to enhance my procedural goals away from equity markets.  Like how many gym visits did I achieve over a certain period of time that eventually evolved into learning the various Ashtanga Yoga positions that make up what is called the ‘Half Primary Series’ almost four years ago with daily practice.


Will there be another ‘market crash’ in my career, my lifetime?  Probably.  Will I be ready?  As we have seen in past crashes, severe equity market ‘corrections’ can be extraneous events impacting equities as a consequence.  Shit happens in this complicated interdependent world.  Financial excesses are built up; policy responses are thought out and implemented.  Capital excesses are wiped away, setting up the rebuilding phase all over again.

Yes, I made mistakes in the crash of 2008-09.  I was not perfect.   Can anybody be perfect when presented with a bunch of unknowns and much uncertainty is an open question.  But the fact remains, I have three ‘market events’ under my belt and I have learned much not only my physiological makeup but also another fact set of accumulated numbers, data, captured in my database – Model Price App – that will help me – and hopefully you a Model Price App user – ‘keep on top’ of the next market dislocation.

Thanks for listening.


I’m on Market Call

On Wednesday, March 9th, 2016, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

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 (MPT) and chart? You can make your comments via Facebook.

Should be fun!


February 2016 – S&P/TSX Composite Market Strategy Update


OK… in my career in the financial markets I don’t think I have ever seen anything like the month of January 2016 in the Canadian equity markets!

From the end of 2015 the S&P/TSX Composite dropped 11.4% without a meaningful up day in the first 13 trading days of 2016 then reversed and climbed 11.2% in the last seven trading days, again without a meaningful down day. Leaving the index down only 1.44% for the month.


Let’s have a look at our Model Price chart to see what happened.


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

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 our Model Price Chart is Saying?

You can observe the downward spike in the market hitting an index low of 11,531 and the rally back up to and almost reaching EBV+1. Could the Canadian index have a positive transit of EBV+1? Not likely was my guess in my comments [Comment Section] on our Model Price app. EBV+1 would be huge in terms of fundamental resistance according to Model Price Theory [MPT].

As I have said in my previous blogs on this Canadian index, I believe we will see the market fall to our EBV Level (Green Line) that is calculated at 10,809 as of Friday, February 5th close. That’s a fall of over 15 percent for those at home keeping score.

So what was the market action about in January? Well, the Canadian market was falling with every other equity market around the world. Up until the time Premier Li made a comment in Davos, Switzerland that the Chinese would not devalue the renmimbi (RMB). Again, as I stated in my blog on the US equity market (see here) this comment seemed to go unnoticed in the front pages of the international business press however Twitter participants were tweeting up a storm.

Since Li’s comment at Davos global equity markets went from a risk-off sentiment to full bore risk-on. And Canada’s resource heavy equity index saw heavy buying, or was it short covering, to satiate traders’ risk-on appetite.

Unfortunately none of this wild and whacky trading does nothing to change my mind in terms of where this market is heading in the future. Again, unfortunately… we have to feel the pain of the market’s fall in the first part of January all over again.



What a wild ride the month of January was. And I’m glad it’s over. However with the rally at the tail end of the month left us at the top of the EBV zone with nowhere to go but down.

No economic or company specific news in the month of January convinced me that a bottom had been reached and that we were on a new course, a new bull market. Just more falling share prices. Again, what makes me excited about the Canadian equity market is if and when this Canadian index does fall to EBV… this will, or I should say has a high probability, of being the bottom for the Canadian market/index.

In my last blog on the Canadian market (see January’s blog and reproduced here below) I gave readers our long-term Model Price chart going back to 1995. You can see the start of the Bull Market in the late 1990s started at this EBV Level or Green Line. Also the market bottom of the March 2009 market crash was… you guessed it the same EBV Level. So it just makes sense, doesn’t it, that a potential bottom in this current market is… EBV.

Again, see what happens.


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

February 2016 – Monthly S&P 500 Market Strategy Update


Well, that was one hell of a January!

Thank goodness it’s over.

Unfortunately the issues that caused the volatility are far from over.

The world financial markets are worried about two big macro issues here, in my opinion. The first being the artificial peg the renembi (RMB) – China’s currency – has with the US dollar. And the second being actions or should I say future actions of the US Federal Reserve. As we all know the Fed has increased interest rates in December along with preparing the market with rhetoric about further increases in 2016: What in heavens name do they do now with the world economy and the US economy clearly slowing down from the albeit low growth levels of 2015?

Until we have answers to these questions… that will reveal themselves over time, obviously… the US equity markets and global markets will be under stress, in my opinion.

Let’s deal with these two issues.

Renembi (RMB) Currency Peg

As I have said in my January market comments (here), China’s economy has clearly and currently slowing down. And at the same time the government wants to transform its economy from a high investment spending/growth economy to one where the consumer leads future economic growth. Again as I said previously, China is doing this transition with large amounts of foreign reserves and the best economic brainpower on the planet. That being said China’s central bank, the PBOC, is literally spending billions on a monthly basis to maintain their RMB currency peg to the US dollar. For example, in December authorities estimate that the PBOC spent $120-$150 billion US dollars buying/purchasing RMB to help maintain the value of RMB against the US dollar. The result? The RMB still depreciated by over 2% against the US dollar in the month of December!

We are waiting for the PBOC numbers but leading experts estimate that the Chinese central bank was more aggressive buying RMB in January than in December. [News Flash – Goldman just estimated that the PBOC spent $197 billion US dollars for the month of January.]

As we all know money is not infinite and experts (and markets) are wondering whether how long the PBOC can keep this up.

The other observation I will make is on this topic is the S&P 500 was down heavily in the first two thirds of the month of January and reversed course and rallied hard for the final third of the month.

Why did the S&P 500, and other global markets rally so hard, at the same time you maybe asking?

I believe little noticed in the business press was a rare interview with Premier Li in Davos, Switzerland – I saw his quote on Twitter and not in the leading business papers. (Premier Li, for those who don’t know is the number two guy in the Politburo and is responsible for China’s economy.)

Mr. Li simply stated that China will not devalue the RMB and the equity rally was on!

But the S&P 500 Index was still down over 5 percent for the month of January.

The world’s leading hedge fund managers are lining up and shorting the RMB believing China will inevitably devalue the RMB against the US dollar. This push/pull will last certainly for 2016 and beyond.

For what’s it worth, I believe China will not devalue its currency. If China wants to become the global superpower of the next 50 years, displacing the United States, the RMB needs to be viewed as safe for international transactions and a store of value for global savings. In lieu of devaluation, China must work hard at internal reforms so transformational that economic change can occur in their domestic economy spurring economic growth and ultimately supporting the value of the RMB.

US Federal Reserve

What will they do?

Will the December interest rate increase, be the only rate increase this business cycle? What happens if the US economy slows markedly in the coming months? Would they reverse course and lower interest rates they just increased? Would they reinitiate Quantitative Easing [QE4]? And what would be the impact of the Fed’s credibility if future policy decisions were to reverse course and additional non-traditional monetary experiments were put in action.

What if we just hit an unexplained soft patch in the US economy in the fourth quarter and the US economy re-accelerates economic growth for the balance of 2016? And the Fed stays the course and continues with hiking interest rates and draining excess bank reserves. Certainly this policy response would result in the US dollar gaining strength in the foreign exchange markets, further increasing the pressure on the PBOC trying to maintain the currency peg I was describing previously.

Model Price Chart

Let’s have a look at our current Model Price chart for the month of January, leading into the month of February 2016 of the S&P 500 Index.


S&P 500 Index Model Price Chart with EBV Levels and Weekly Price Bars

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 February 1st at 1939.38. If the market rallied to EBV+4 (2199) this would represent a gain of some 13%. If the market corrected back to EBV+3 (1766) investors would be suffering Index losses of almost 9%.

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.


I believe the most amazing thing about the US equity market is we are not at EBV+3, yes some 9% lower! The market is throwing some big macro issues at all financial markets and the S&P 500 index seems to be the most resilient of any global equity market. Yes, stocks in the S&P 500 index have been getting crushed and are in their own BEAR market. However others, admittedly few, are reaching new all-time highs keeping the index value above our calculated EBV level.

Obviously this could change at anytime. And, if or when, the S&P 500 were to fall to EBV+3 the market could crawl along this EBV level for quite sometime.

But, in my opinion, global macro issues are in control here and we need some clarity certainly on the two issues raised above before equity valuations go substantially higher.

As always we’ll see what happens.

I’m On Market Call

On Thursday, February 4th, 2016, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

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 (MPT) and chart? You can make your comments via Facebook.

Should be fun!


January 2016 – S&P/TSX Composite Market Strategy Update

The selling continues.

But you should know this.

Model Price Theory [MPT] has been very good; scratch that, excellent, in telling you what was going to happen. (And what will happen!)

Backing up we saw a negative transit of the S&P/TSX Composite of EBV+2 back in June of 2015. This negative transit was a sell signal for those not familiar with our Model Price work. Subsequent to this negative transit, the Canadian index went to the bottom of our EBV zone (between EBV+2 and EBV+1) in late August. Since August we have been bouncing along EBV+1 ending 2015 with two negative transits (yes, another sell signal) of EBV +1, one in the middle of December and the other, believe it or not, on the last day of the trading year (December 31), giving Model Price users a heads up on what the opening of 2016 would look like – down about 8% in the first week and a half.

Here is our Model Price chart


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

I have been negative on Canada since the negative transit of EBV+2 back in June 2015. And I have expressed so in my comments on Facebook on our Model Price app. We are in a BEAR market and it’s obvious to me we have to go to a place on the Canadian index that represents value. What is that EBV level? Well, our green line or EBV of course.

Is this the first time I’m saying this? Again, of course not. Here is an excerpt from my November 12th, 2015 blog here:

“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…

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


Here is our long-term Model Price chart for the S&P/TSX Composite Index


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

How do I know we are going to EBV?

Looking back we can see (and I have annotated (above)) where the S&P/TSX Composite Index bottomed out during the financial crisis of 2008-09. Yes, it was at EBV or our green line.

Yes, no rocket science. No MBA or CFA required. An obvious spot where the S&P/TSX Composite is going to go and hopefully stabilize.

So we will wait.

Again, as I stated in my last blog in November, we could get at this valuation level quickly or very slow. Starting off 2016 one has to be thinking the former. But who knows…


The Canadian BEAR market continues. And the selling seems to be building to a crescendo as most BEAR markets do. This should not be a surprise to anyone who have been reading and looking at our Model Price charts.

And if you’re sitting on a bunch of cash (preferably US dollar cash), Canada does represent a buying opportunity at our EBV Level (Green Line). I know for myself, I will be purchasing both Canadian dollars (converting from US dollars) and the Canadian Index at this level. Looking out 3 to 5 years from now…returns on these purchases/decisions will look impressive I’m guessing.


January 2016 – Monthly S&P Market Strategy Update

Welcome to 2016!

And what a start it was. All negative of course, as you know.

In the first day of trading in 2016 the Chinese market sold off 7% and their regulators closed the market. And all this occurred before the opening bell on European and North American markets for 2016. China giving its version of Adele’s “Hello It’s Me” to the rest of the world.

And so everyone, globally, hitting the sell button for the rest of the week…save for Friday…giving us a day of rest not knowing what to expect in the following weeks.

Being in the financial business I hate and bored by the hundreds of financial predictions that will occur for the forward-looking calendar year. Back in the old days, when financial news was very hard to come by, predictions from ‘old sages’ (Bob Farrell and the like) seemed to have good value and laced ‘nuggets of gold’ giving myself a good reason to endure ink stained fingers for a day or two. Now I have to hear millennials giving predictions based on regressed data that has as much nutrients as a fast food meal.

The only prediction I can make is that the financials markets will be open this coming year and stuff will happen. And the market will telegraph whether the economic fundamentals will be improving or getting worst. Yes, that’s right. The market will tell you what’s going on…and it communicates through Model Price Theory [MPT] and all we; as users of MPT, have to do is observe. Prediction is easy however it occurs all year round and not just at the end of December/beginning of January.

The other observation I will make is we are entering the 7th year, marked by March 9, 2009 S&P 500 market bottom, of the financial crisis. Central banks, including the US Federal Reserve, have been experimenting with monetary policy trying to get the global economy back on track of pre-financial crisis global aggregate demand. The preferred policy tool of choice has been printing money or quantitative easing (QE). Asset prices have been boosted including equity valuations and real estate. And I have to admit this is a good thing. The business press is filled with what I call the ‘liguidationists’, who would like asset prices to fall to some 1930s level, so a very small minority, could benefit. This policy response would certainly skew income inequality even more than it is today.

As the US Federal Reserve increased interest rates in December, the market seemed to take this policy action in stride. The financial press and the man on the street was focused, of course, on the 25 basis points increase in Fed Funds. What they don’t see, and is critical, is the ‘reverse repro’ financial mechanism that was introduced at the same time. The New York Fed has been testing this financial instrument for the last two years. Not to get too technical but the Fed through this new instrument will start to drawdown the excess reserves sitting on the banks balance sheets. Estimates range from $3.5 to $2.5 trillion of excess reserves the Fed pumped into the banking system during the financial crisis, that the banks, collectively, have been sitting on and the Fed wants to take some of this back. Of course, they will start slowly at first, say $300 billion or so, but the important thing is the Fed is starting this process.

So over the last year or so, the US Federal Reserve has stopped QE and are in the process of withdrawing excess bank reserves. This is healthy and signs of the US economy returning to normal. Yes, good news…but you won’t hear this anywhere else.

So let’s look at our Model Price Chart of the S&P 500 Index.


S&P 500 Index with weekly price bars and EBV 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 Thursday, January 7th at 1943.06. If the market rallied to EBV+4 (2208) this would represent a gain of some 14%. If the market corrected back to EBV+3 (1766) investors would be suffering Index losses of almost 9%.

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 is our Model Price chart saying?

Simple, we are in the zone between EBV+3 and EBV+4, as we have been for a year and a half, and nothing much as changed. Yes, within the S&P 500 Index itself, stocks are winning and losing, based on their top line and earnings growth estimates. And this has occurred, cyclical and secular rotations, since public markets were invented.

As I have said previously we could trade down to EBV+3 some 9% lower. But would this be the end of the world? Not according to Model Price Theory. It would suggest, if we were to go there, more upside potential than downside and obviously a good reward/risk scenario for investors.

Is there anything in our Model Price chart that is worrisome? Not that I can see. As you can see the S&P 500 fell to 1867 back in the last week of August 2015. And by the end of October we were within 4% of an all time high!

Obviously the world is focused on China right now. For the last thirty years China has been nothing short of a major economic miracle. From a poor fourth world economy to a $60 trillion dollar economic behemoth and will soon rival the US for economic supremacy. Their next stage of economic development is to transition their economy from an investment lead economy to one of a middle class and consumption. In the history of the world this has not happened to any nation without a deep recession/depression. However, China is doing this transition with large amounts of foreign reserves and the best economic brainpower on the planet. As Bank of England head, Mark Carney said to Charlie Rose in an interview several years ago, it’s in everyone’s interest, globally, that this transition happen without economic repercussions for the rest of the world and every central bank is willing to help China with this transition.

The reason I mention this China has a big decision to make in relation to their currency. They have been pegged to the US dollar and have been feasting or reaping the economic benefits as the US dollar has been low compared to other currencies especially the Japanese Yen over the last few decades. However the US dollar has been rallying because, as I have said previously, the US is emerging from the financial crisis and their currency is appreciating against all other currencies worldwide. So what is China to do here? Because of the currency peg the renembi (RMB) is stronger than most of their competitors (i.e., Japan, South Korea and the like) and putting downward economic pressure on their economy.

The Chinese have been trying to devalue their currency slowly and intermittently against the US dollar over the last few months and this is causing everyone concern. Thus your seeing panic selling in the Chinese markets with ripples out to the rest of the world. For if China devalued the RMB, say 30 to 40% against the US dollar, this would send a wave of deflation out to the rest of the world as China’s manufacture goods would be competitively priced compared to other exporting countries.

And what if the US dollar rallies higher from these current levels? As readers will know I’m predicting a large and secular rally for the US dollar against all global currencies over the longer term 5-7 years. If China is having a tough time at these present levels…what happens if the US dollar rallies substantially higher?

So you can see why there is cause for concern by global investors and they are re-pricing asset prices/valuations in case things go badly.


As last Friday’s job numbers have pointed out the US is finally emerging out of the financial crisis that started nearly seven years ago. The problem at this particular time is much of the global economic world is monetarily out of sync and is either losing their economic strength (China and the emerging economies) or have been mired in very slow growth (Europe) over the last several years. These ‘macro’ considerations have taken over the narrative in global financial markets leaving all participants to be cautious and worried.

Hopefully this ‘marco’ narrative changes in the coming weeks as US companies start reporting their 4th quarter financial results with guidance for the rest of 2016.

Yes, the market could fall to EBV+3. And, yes the S&P 500 Index could rally up to EBV+4 and make all-time highs for the S&P Index. Good companies, will show their stuff in the coming weeks and we will see how the market reacts to possible forward fundamentals.


TMX Group – Dead Stock Walking (Reblog)

TMX Group has been in the news in the last few days. First NASDAQ, a US-based equity exchange, said it was looking north to Canada for expansion. And second, Aequitias Innovations, a Canadian competitor to the TMX Group filed a complaint against TMX to the Canadian Competition Bureau over data pricing.

The stock has been hit over the last few days as investors focus on the impact of this recent news. However TMX Group has larger issues according to our Model Price Theory (MPT) math. I wrote this blog back in June, 2013 saying at best the stock would go sideways for the foreseeable future and at worse investors would lose some of their capital over the long haul.

It may take time but the Model Price math always works in the end.


If you haven’t figured it out yet, I love stocks.  Not only do I love stocks but I want to know what makes them tick.  Why do stocks go up and down?  Why “the market” gives stocks valuation and ultimately takes it away?

As I mentioned previously when I was first introduced to the initial mathematical concepts behind what I call Model Price some 20 years ago, I got it right away – especially the concept of Theoretical Earnings (TE).  Simply stated the calculation of TE of any public company yields what one can call benchmark earnings or what the company should be earning, again in theory, given the capital structure of the company and the capital employed in the business.

Once TE is calculated, you can compare the result to the actual earnings (AE) of the company.  If AE is greater – which it usually is – the market gives additional valuation in the public financial markets for this differential between TE and AE.  If a company is dynamically increasing its AE with TE staying the same or marginally increasing over time, equity markets usually signal its approval of this expanding ratio by increasing the valuation of the company.  The antithesis is also true if dynamically TE and AE as a ratio is contacting, the equity market will take away valuation.

This should make sense to a lot of people.  In essence we are comparing a public company to itself in terms of its own benchmark earnings or Theoretical Earnings.  I like to think of individual companies as unique as fingerprints, each being individually different even though they may compete in the same industry.  CEO’s have a large influence over their own TE calculation in the way they manage their business and can have a direct impact on their company’s valuation, again this should make sense.

If you think my line of logic is sensible – on the concept of TE – and wanted to seek out more information on the topic you will be disappointed.  Unfortunately this financial concept (TE) is NOT taught in any business class, MBA or CFA program.  So by reading this blog you‘re ahead of the other financial professionals in terms of equity analysis.  TE analysis is embedded in our calculation of Model Price in case you were wondering.

We – at Acker Finley, including myself, – are constantly scanning our database of some 2,000 companies looking for any aberrations from past histories in terms of our computations on theoretical earnings and other model price concepts.  This screening process is what I consider fun.  It’s about being curious.  It’s about asking the question “why” and not stopping until I get an answer.  It’s about finding potential catalysts that can have a large price impact on an equity security sometime in the future.

TMX Group (X)

While scanning the database this week TMX Group (X) jumped out at me.  Actually I was scanning the 52-week low list and X was on the list.  I thought this was odd so as usual I call up the model price chart on TMX Group and this is what I see.

TMX Group (X) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

TMX Group (X) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

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

This model price chart looked weird to me.  TMX was a quality company since its IPO in early 2000: has anything changed?  Also notice where the stock is trading – just over EBV-2.  TMX is a profitable company with good earnings, so why is the company only trading at EBV-2?  Interestingly our model price calculation seems to support the current market price of the company.

So I start to do some digging.  And wouldn’t you know, TMX Group is NOT the TMX Group!

Come again?

The original TMX group was purchased by a consortium of banks and pension funds commonly known as the Maple Group back in July of 2012.  So the old TMX Group that had a good history of earnings and dividend gains no longer exists.  Once the Maple Group purchased the company – old TMX Group – along with Alpha Trading Systems Limited Partnership (Alpha) and The Canadian Depository for Securities Limited (CDS) it renamed itself TMX Group.

Are you with me so far?

So, in essence this is a new company, with new financial statements.  The model price chart illustrated above is correct (prospectively) but any financial history, including the history of our long-term model price chart is inaccurate.  Keeping this comparable data may be informative from a historical perspective so I will keep the data and chart as is, but meaningless in terms of a financial data continuity and history.

What is the “Theoretical Earnings” of the new TMX Group (X)?

Here is our calculation of the TE of the new X with the past history of the old TMX Group.


Again, you are looking at two separate companies here. The history of our model price numbers no longer exists as stated on this chart.  But it’s instructive and teachable analysis so I’m keeping it the way it is.

When our computers calculated a TE of $9.69, I didn’t believe it.  This is massive.  Remember this means this company, the new TMX Group, theoretically should be earning at least this amount in order to have any market valuation at all.   I quickly looked at published mean earnings estimates for the company and discovered estimates $3.16 for 2013 and $4.00 for 2014. This is quite a shock.  So like a good accountant I start digging through the financial statements, double checking the numbers – and they were correct!

This is way TMX Group is hitting new lows.  This new company can’t earn their “Theoretical Earnings” the way the new owners constructed their balance sheet.

I could go into the mathematical minutia of why the TE is so large, but it would make this blog post too long and complicated.  In a nutshell the primary cause for this substantial ‘TE’ number was the acquisition of CDS or The Canadian Depository for Securities Limited for a paltry $167.5 million.  This was a terrible mistake, in my opinion.


Maple Group’s acquisition of CDS moved CDS’s balance sheet from private quasigovernmental ownership to public ownership.  Unfortunately CDS’s balance sheet is too large relative to the earnings the public company actually receives and will ultimately crush the valuation of the public entity.  In order to restore any sense of valuation to the new TMX Group this CDS subsidiary must be placed back in governmental or regulator hands where it previously existed.  In other words this organization, CDS, cannot exist in the public marketplace for valuation purposes however performs a critical market function of clearing financial transactions in the Canadian financial marketplace.


As my title suggests TMX Group is a “Dead Stock Walking”.  This company will never have earnings come anywhere close to its calculated “Theoretical Earnings” number.  The best shareholders can hope for is lackluster to sideways action on the stock price.  The worst is very dark indeed.  If the stock does suffer, which I think it does, TMX Group will have to undergo a major corporate restructuring which may yield interesting profit potential for sharp-penciled investors down the road.

The other question I have is the confusion over the name of the company.  I am in the industry I didn’t know the material changes of the transactions involving Maple Group and the old TMX Group resulting in the new company called the TMX Group.  Without considerable digging and if I didn’t know any better I just thought TMX Group was the…. TMX Group!

I do feel sorry for the current and future high yield dividend investors making an investment in this company.  As I said previously the old TMX Group was a good equity performer with a solid dividend yield.  On the surface the new TMX Group appears to be the same company.  This has disaster written all over it for investors looking for a quality company with a safe and growing yield.

P.S. During the week a new consortium of financial players in the Canadian market place announced the formation of Aequitias Innovations to compete directly with TMX Group.  This is not good news for TMX Group that may face earnings pressure down the road with a sky high ‘TE” placing further potential pressure on the future stock price.

P.P.S.  One of the investors in the Maple Group is the Canada Pension Plan Investment Board.  Great to see my (and your) retirement dollars potentially going up in smoke on this one!

P.P.P.S. I love counter-intuitive situations in business and flawed common sense thinking.  Everything Maple Group did in this transaction seemed perfectly reasonable.  I’m sure the well-intentioned Board of Maple Group with the best minds in Canadian finance congratulated themselves on a job well done.  Also, I would bet money that there were more MBA’s and CFA’s on this file then any other business transaction performed in Canada in the last decade!  Will be interesting when this situation turns south who is left holding “the bag”.  (Hint…. It’s usually the CEO!)

P.P.P.P.S. The last company I saw in the past that had this relationship, too high of a ‘TE’ relative to ‘AE’ was AOL-Time Warner back in 2000.  Yes, you are correct, that didn’t end well either!


I’m on Market Call

On Tuesday, December 8th, 2015, I will be on Market Call on BNN (Canadian Business Show) 1:00 pm – 2:00 pm (eastern standard) with Andy Bell.

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 (MPT) and chart? You can make your comments via Facebook.

Should be fun!


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.