Tuesday, August 25, 2009

For GT Blog August 26, 2009

Let us have some fun with a skill test on how to spot price divergence. Spotting divergence is a valuable asset because most analysts overlook this important signal

Divergence occurs when two lines on a chart move in opposite directions vertically. Analysts often look for divergences by comparing a stock's direction to a technical indicator or to another related stock or index. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.

In all my years of teaching this is the most difficult study to explain

Question: Can you spot the "buy" signal on Talisman Energy?

(1) The divergence at A-B and 1-2?
(2) The divergence at B-C and 2-3?
(3) The divergence at C-D and 3-4?
(4) The divergence at D-E and 4-5?
(5) The divergence at E-F and 5-6?
(6) The divergence at B-G and 2-7?
If you selected 4 or 6 you would be correct - find out why on our Technical Analysis Level 1 seminar - to register http://www.gettingtechnical.com/07_seminars/index.shtml

Friday, August 21, 2009

GT Blog August 18, 2009

More on socially responsible companies and their investors

As pointed out in my previous entry there are three types of companies - value, growth and socially responsible. A value company can also be socially responsible, and a growth company can also be socially responsible.

We know that socially responsible can include, no forest clear cutting, no open pit mining, no child labour, no guns, no raping of small third world countries, and no toxic pond tailings. Optional candidates include the legal gaming companies and the producers of tobacco and alcohol products. Socially responsible companies are also sensitive to the issues of Free Trade and Fair Trade.

Free trade means buying and selling anything to anybody as long as you can make a buck. Fair trade takes into consideration the social damage of the exploitation of the exploitation of the weak. One example was the destruction of the Jamaican dairy industry which before the early 1990s was healthy, and growing. But when the Jamaican government opened up the dairy market to imports (free trade) in response to pressure from the World Bank - that changed overnight. Shiploads of cheap milk powder from Europe, produced and exported with the aid of massive EU subsidies, spelt disaster for Jamaica's dairy farmers

In my Banana Republic item I singled out Metro, Inc. (TSX-MUR.A) and Empire Company Limited (TSE-EMP.A), both engaged in food retailing to be socially irresponsible because they make no attempt to support fair trade bananas. Free trade workers work for the biggest fruit companies, receiving no benefits, no pension, no medical care, no guaranteed wage and no holidays. They are routinely sprayed with pesticides deemed illegal in North America for more than a generation.

Apparently Loblaw Companies Limited (TSX-L) is the only major food retailer supporting fair trade bananas.

There are three types of investors. Some will support socially responsible companies no matter what the loss in investment opportunity. Some will avoid socially irresponsible companies as long as there is an alternate choice and there are investors who simply could care less about anything except making a buck.

Let us now set up a hypothetical investment dilemma wherein an investor is concerned about the current over-extended equity markets. He or she now wishes to include some consumer staples stocks into the portfolio to reduce risk and volatility .

There are currently no exchange traded funds available so the investor must choose from the eleven stocks that make up the TSX Consumer Staples Index.

The table below lists the components sorted by their relative weekly price momentum as compared to the broader TSX Composite Index - we need to buy at least three components to retain some sector diversity

Note the bottom four - all food retailers - so what to do?

The supporter of socially responsible companies will select the top ranked Couhe-Tard and Saputo along with Loblaw. The avoider of socially irresponsible companies will seek out alternate choices - in this case Couhe-Tard, Saputo and Jean Coutu. The could-care-less make a buck investor will buy anything that is top ranked.

Observation - the group is currently an under-perform Vs. the broader TSX Composite - see below

Tuesday, August 18, 2009

GT Blog August 18, 2009

Dumb or annoying companies and stupid CEO commentary

There are three types of companies - value, growth and socially responsible. Now a value company can also be socially responsible, and a growth company can also be socially responsible. Occasionally you will find a company that is just plain dumb – all hype and an endless stream of bull dust press releases.

I also tend to run away from annoying companies who blow away their cash on share buybacks in order to create the illusion of earnings growth. The easiest way to spot both a dumb and annoying company is to identify a stupid CEO – who when questioned by the business media will say “my first responsibility is to the shareholders.”

Hello? Your first responsibility is to society and then your customers – do that and the shareholder "problem" will resolve itself.

Now I know that socially responsible can include no tobacco, no alcohol, no forest clear cutting, no open pit mining, no child labour, no guns and no toxic pond tailings. Socially responsible companies are also sensitive to the issues of Free Trade and Fair Trade.

If you are not clear on the difference between free and fair trade follow this link http://www.thestar.com/business/article/681602 to a stunning item in the Toronto Star - Saturday August 15, 2009 - an item called Banana Republic - a must read

Did you know that Bananas are the most popular fruit in Canada and around the world? with the average person eating 14 kilograms per year. Some 275,000 Ecuadorians work in the trade and one in every four bananas consumed in North America comes from this corner of Latin America

Despite the size of the industry, only a fraction of bananas exported around the world are considered fair trade, a certification that guarantees a degree of equity and equality for farmers. In a few countries, fair trade bananas have a big share of the market a quarter in the United Kingdom, for example. But in Canada, barely 1 per cent of bananas are fair trade.

Free trade workers work for the biggest fruit companies, receiving no benefits, no pension, no medical care, no guaranteed wage and no holidays. They are routinely sprayed with pesticides deemed illegal in North America for more than a generation.

Free trade banana workers have blamed cancers, respiratory diseases, birth defects and sterility on routine exposure to pesticides. Some, like the 16,000 workers from Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua and the Philippines who took several fruit and chemical companies (including Dole, Chiquita and Del Monte) to court, have received settlements to compensate for their injuries.

Only 1 per cent of farmers in this region work on a fair trade organic banana plantation. One worker is quoted "They don't spray me any more," he says. "I get medical help if I'm injured at work. I even get a basket with a chicken in it at Christmas time."
Where can you get fair trade bananas in Canada? Apparently at Loblaws food stores. Loblaw Companies Limited (TSX-L) is a Canada-based company. The Company is engaged in food distribution and is also a provider of drugstore, general merchandise and financial products and services. The Company is a subsidiary of Weston Limited (Weston). The Company offers the Canada’s (private) label program, including President’s Choice, no name and Joe Fresh Style brands

Where can you NOT get fair trade bananas? Apparently not at Metro, Inc. (TSX-MUR.A) is a Canada-based food retailer and distributor. The Company operates a network of supermarkets, discount stores and drugstores in Quebec and Ontario. As of September 27, 2008, Metro, Inc. operated 558 food stores and 268 drugstores. It operates 380 supermarkets under the banners Metro, Metro Plus, A&P, Dominion and Loeb

Don’t look for fair trade bananas at the Empire Company Limited (TSE-EMP.A) which is engaged in food retailing, real estate, and investments and other operations. Food retailing is carried out through wholly owned Sobeys Inc. (Sobeys).

It seems to me the best way to punish socially irresponsible companies is to turn rich investors into poor investors by refusing to invest in the shares of these companies

Fair Trade Supporter Loblaw needs our vote

Thursday, August 13, 2009

GT Blog August 13, 2009

Technical Analysis – myths and urban legends continued…

We know that energy stocks in both the US and in Canada are not participating in the current global stock market advance. The problem could be investor fears about a double dip recession which could kill the demand for crude. It is with these fears in mind that investors are unwilling to bid for energy stocks.

The obvious strategy for the technical analyst is to study the price of crude and natural gas in order to predict any movement in the related energy stocks. In other words the price of crude leads the price of the stocks.

On the other hand why not study the price of the energy stocks in order to predict any movement in the crude & natural gas complex. In other words the price of the stocks leads the price of crude and natural gas.

The problem is that sometimes crude leads and sometimes the stocks lead – so we must find another somewhat over-looked way to study the energy complex. I find the oilfield service stocks will often lead the energy complex. The chart below displays two oilfield services companies that are advancing during a period of little investor interest in an otherwise dull energy market. Not a sheep in sight – could be time cut your favourite energy stock from the herd

Friday, August 7, 2009

GT Blog August 7, 2009

Technical Analysis – myths and urban legends continued…

The implication that a stop loss strategy is for amateur investors who lack the education to understand a company’s financial statement or to dissect an earnings release is voodoo analysis. In fact any portfolio manager or CFA, CA, CIM or whatever who issues a public buy recommendation without a protective selling strategy should carry the following designation after their name - IDIOT

The biggest offender in the public recommendations game is BNN’s Market Call where on a daily basis the talking heads issue buy recommendations and never tell the viewers when to sell.

Did you buy the shares of Timminco Limited (TSX-TIM) last $1.39 when on May 27, 2008 Jean-Francois Tardif commented on his past top pick TOP PICK Timminco @ $24.05 (A Top Pick Aug 7/07. Up 238%.) “Think they can have 30,000 more tons of production. Still has confidence in this one.”

Then on July 7, 2008 with Timminco @ $27.90 Tardif is quoted (Market Call Minute) “HOLD Potential is still to come. (source stockchase.com)

I never got a call from this guy when he sold – did you?

On August 14, 2008 Michael Spring recommended Crescent Point @ $37, Sun Life @ $39.90 and Thomson Reuters @ 37.10 all without stops because he does not use technical analysis

On August 5, 2008 Peter Brieger recommended CDN Natural Res @ $75, Agrium @ $82.78 and Deere & Co @ $66.67 all without stops because he is not a technical analyst

Just to review – according to Investopedia on stops - Setting a stop-loss order for 10% below the price you paid for the stock will limit your loss to 10%. This strategy allows investors to determine their loss limit in advance, preventing emotional decision-making

So here is the tragic reality of failing to protect the downside – as an individual investor yes, you may be in for the long term but, you may be forced to sell if your circumstances change at the wrong time in the stock market cycle. Your forced sale losses at bear market lows could ruin your life. The talking heads on TV don’t have to sell – it isn’t their dough. So they can hold on through the peaks and valleys – they still get paid to wait – you on the other hand, do not

The table below sets out the above buy recommendation dates and price along with the subsequent bear market lows. Note the horrific potential losses if you had to sell at the low. The same six stock picks are listed with stops set at a simple trailing lowest low of 10-weeks ago – a 10-week low price channel – now the big surprise – four of them broke down before the buy recommendations – they were already road kill

Wednesday, August 5, 2009

GT Blog August 4, 2009

Technical Analysis – myths and urban legends continued…

The use of daily charts along with the popular MACD may be suitable for traders but for investors it is a bad idea because the daily chart can mislead and the MACD is over-used by too many investors and traders

The chart below seems to be flashing a buy signal as the stock holds at support and the MACD signal line is about to cross the slower MACD line – note also the histogram is bottoming – so all-in-all a perfect opportunity for a buy under $15 and a sell at the upper trend line in the high $16 range

Now that is OK for a trade but technically Biovail is not a suitable investment as we will see when we look at the longer term chart

Biovail – a perfect trade?

Below is the longer term monthly chart which displays a stock in a long term down trend as set out on the declining parallel price channel trend lines - note the last MACD buy signal back in mid 2008 along with the current histogram beginning to flatten - Biovail is currently at the top of the longer tern trading range and so is not the screaming buy as displayed in the short term daily chart - clearly one must always look at the longer term trends before acting and remember to use a semi-log scale on those long term charts

Biovail - a not so perfect investment