Friday, November 29, 2013

Fairfax Financial is confusing the experts:

Over the past several days I had many questions on the outlook for the price direction of the Canadian bank stocks. So here is the technical opinion based on my work.

First, there is great cyclic commonality among all of the big five banks and so we have a monkey-see, monkey-do situation. Secondly all of the banks are trading too far above their respective 50-day simple moving averages as measured in historical terms. Third all are trading above their respective rising 200-day simple moving average. Fourth is the peaking momentum studies and finally all have posted recent new 52-week highs.

So a reasonable strategy would be for long investors to reduce because the group is likely to correct down to their respective 50-day moving averages BUT retain some exposure as the banks will likely resume the upward trend which remains in place as evidenced by their rising 200-day (or 40-week) moving averages along with the recent string of new 52-week highs. The ultimate top is not yet apparent and so the bull market in most of the financial sector remains in place – except for Fairfax Financial Holdings Limited (FFH) which closed today at $405.00

According to the company Fairfax is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

The experts are divided on the outlook for FFH as published on the web site. According to, “This site is used by investors to track what stock experts say. It is useful as an online investing tool for due diligence, and for getting a feel for how companies are thought of by investment experts. This site should not be your only resource or reference, but it should be one of the investing tools in your arsenal for wise investing in the stock market.”

Some recent opinions:

Hank Cunningham 2013-07-17 DON’T BUY on FFH then $422.00: “How comfortable should a person be in investing in this companies debt, dated 2020 to 2022? He would not be very relaxed as he is not very comfortable with companies that he doesn’t understand. He doesn’t understand their balance sheet or their strategy. It is a fluid situation and this is a long-term corporate bond with a rating of BBB minus, not strong credit.”

Barry Schwartz 2013-10-09 BUY on FFH then $435.50. “He owns a series of rate reset shares.  If they are trading below $25 then the market thinks they won’t be called.  They are fairly illiquid.  They have not recovered since the announcement of tapering and may be a good investment.”

Don Vialoux 2013-10-11 BUY on FFH then $440.60. “One of the more volatile financial services company in Canada. Chart shows a nice breakout over a long period of time, which is very positive. Trading above its 20 day moving average and is outperforming the TSE. This gives it a technical score of 3. Looks very interesting.

Cunningham is a fixed income guy who does not do technicals. Schwartz is a fundamental value guy who hates technicals and Vialoux is clearly voicing a technical opinion.

When I look at chart #1 which is a weekly plot of FFH displaying poor relative strength vs. its peers the TSX Financial index – in this case the clone XFN, Note the 2+ years of relative under perform. Clearly FFH has missed the greatest financial bull since the 1990’s. The recent collapse is very negative – see the money flow on chart #2

When I look at chart #2 which is a monthly plot, I see a string of cycle magnitude failures from 2009 and recent declining money flow numbers. I think Cunningham has made the correct call on this one.

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