Sunday, May 29, 2016

Index Analysis and Voodoo Science:

Technical analysis gets into trouble when the art from migrates from the study of stocks, commodities and currencies and into the price forecasting of the major stock indices such as the S&P/TSX Composite, the S&P500 or the NASDAQ Composite.

Not a day passes when some technician looks at a major stock index and sees a head & shoulders top, support or resistance at so-and-so level, a double top or a double bottom.  Pile on seasonality, moving averages, price momentum, historical comparisons and you get an index forecast that may be correct – about one-half the time.

The problem is that a major stock index is a basket of diverse sectors (like financial, energy or consumer) that – for the most part – do not advance and decline at the same time. Remember the great dot-com bust of 2000-2002? It was a non-event if you owned financial and energy stocks. Our own TSX Composite is dominated by three sectors – financial, energy and materials. If you add in the industrials we have about 76% if the index covered.

Our chart – the monthly bars of the TSX Composite spanning about 10-years. Note the two great advances that followed the 2007-2008 financial crisis collapse. The 2009-2011 advance was lead by the financials (XFN), energy (XEG) and materials (XMA). The second great advance of 2012-2014 was lead by the financials (XFN), energy (XEG) and index heavy-weights BCE, CNR and VRX. Now we have a pending third advance to be lead by (once again) the financials (XFN) and energy (XEG). The materials sector looks weak but a strong industrial sector (ZIN) may do some lifting to bost the TSX Composite at least back to the 2014 highs of the 15600 level.

Thursday, May 19, 2016

The Problem With Street Consensus:

The problem with “street” or analyst consensus is the interests of the “street” and the private investor are not closely aligned.

In my last post I referred to an item on Tesla Motors Inc. by Toronto Star columnist David Olive - - “Is the Tesla excitement just magical thinking?” Olive hammers home some valid problems with mounting losses, production questions and the debt levels.

Now a few days latter - an item from Business Insider - Myles Udland – relating to Goldman Sachs and Tesla Motors

I quote in part -

Well, here you go.

On Wednesday, before the stock market opened in New York, Goldman Sachs analyst Patrick Archambault upgraded shares of Tesla.

Archambault put a "Buy" rating and a $250 a share price target on the stock because of what he sees as the market's failure to "fully [capture] the company's disruptive potential."

On Wednesday, after the market closed in New York, Tesla said it would sell $2 billion worth of stock, $1.4 billion of which would be issued by the company.

Tesla CEO Elon Musk would sell $600 million worth of stock to meet a tax obligation related to his buying even more Tesla stock. It's complicated. You can read about that here.

Running the book for that new stock offering? Morgan Stanley and ... Goldman Sachs.

Now if you believe that banks — and specifically Goldman — are bad actors, this sort of deal makes sense. You might, in this scenario, say, "Well, of course: Goldman says nice things about Tesla and then Tesla does a nice thing for Goldman."

This would, however, be a breach of what the banks call a "Chinese Wall," or a separation of various divisions that could come into conflict one another.

Research and investment banking are examples of divisions that could create a conflict of interest and between which there exists said wall — meaning that research analysts don't know who investment banks are doing deals with and investment banks don't know what analysts think of companies outside of published research.

In an email to Business Insider, Goldman Sachs said: "Our Research is independent. We followed all of our standard policies and procedures with respect to our research publication [on Wednesday]."

It seems unlikely that a coordinated breach happened here. That would be illegal and, while I'm not a criminal or a lawyer, it would seem that the point of breaking the law is not to get caught.

But here's what this looks like to many:

The stock upgrade is a detailed argument for why you, the investors, should buy the shares. As a result, investors buy.

This report is delivered just as Goldman's sales force is about to hit the phones to push $1.4 billion of those very shares for a nice fat fee for Goldman and a dilutive hit to the shareholders.

So then there are investors who, based on Archambault's note, bought the shares in the morning only to learn by that afternoon that Goldman would have a hand in diluting their newly acquired ownership stake.

And the popular view says Goldman knew this was going to happen the whole time.

There's an additional potentially uglier mess if you also think Goldman clients were told by Goldman sales-trader types not to buy the stock on the upgrade: What did they know, and so on.

End Quote

Our chart – daily bars of Tesla displaying the big volume spikes of the early April 2016 price peaks of $260 and the subsequent decline to the Goldman pop of May 18, 2016. It seems the investment shepherds were selling in April and the investment sheep are buying in May.

Saturday, May 14, 2016

Is the Tesla Motors dream a nightmare?

A good item on Tesla Motors Inc. by Toronto Star columnist David Olive - - “Is the Tesla excitement just magical thinking?” Olive hammers home some valid problems with mounting losses, production questions and the debt levels.

Olive then loses credibility when he forgets to say that Tesla cars just use energy from somewhere else – perhaps from that local gas or coal fired power utility. Olive also makes a big mistake when he claims “the auto industry has not changed its essentials since the advent of the internal combustion engine in the 1880’s.”  .

Wow – today we have radial tires, modern suspensions, lighter weight, fuel injection, direct injection, variable valve timing, turbo-charging, seamless shifting auto transmissions, disc breaks – airbags – I could go on. By the way today’s internal combustion engine has almost zero emissions.

Last January auto retailer AutoNation Inc. (NYSE-AN) - said it will trim marketing costs and vehicle inventory by about 10 percent from year-end levels. The nation's largest new-vehicle retailer already has cut jobs in light of increased discounting, plateauing sales and declining vehicle margins, which combined to reduce its fourth-quarter net.

Our chart – weekly bars of Tesla above the weekly bars of AutoNation displays a reasonable price correlation – so there is a relationship and the January 2016 negative warning by AutoNation did impact the Tesla share price. Note the recent Model 3 price rebound which is likely a selling opportunity.

Tuesday, May 10, 2016

Investors: What to do if Trump gets in?

As investors we need to seek out the beneficiaries of a possible Trump presidency.

One choice would be to buy the companies that would build a wall along the U.S. Canadian boarder – to keep the Americans out. I see that SNC-Lavalin Group Inc. (SNC) printed a new 52-week high and Aecon Group Inc. (ARE) also had an up day on good volume.

In reality the wall strategy is a goofy idea because neither country has the money to fund such a silly project. I guess SNC and ARE were up for other reasons.

A few weeks ago I wrote this item for BMO Asset Management Inc for posting on their BMO Canadian ETF Dashboard web site –

Begin ------------

Bill Carrigan, CIM, Technical Analyst,
Will that be guns or butter?
Summary of Recommendations:
BMO S&P/TSX Equal Weight Industrials Index ETF (Ticker: ZIN)

Paul Anthony Samuelson was an American economist and the first American to win the Nobel Memorial Prize in Economic Sciences. His textbook Economics (ISBN- 0-07-0 092863-0) has become a classic in which he states in a chapter entitled “Central Problems of Every Economic Society” that a nation has to choose between two options when spending its finite resources. It may buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both.

U.S. President Lyndon B. Johnson used the phrase to catch the attention of the national media, while reporting on the state of national defense and the economy. Another use of the phrase was British Prime Minister, Margaret Thatcher's reference in a 1976 speech that, "The Soviets put guns over butter, but we put almost everything over guns.”

When it relates to investing – there are three strategies.

1. We can invest in the sector beneficiaries of guns over butter, such as Materials, Energy, Technology and Industrials.

2. We can invest in the sector beneficiaries of butter over guns, such as Financials, Consumer Discretionary, Consumer Staples, Health Care or Industrials.

3. We can also invest in both because there is one sector common to the guns and butter choices: Industrials. Investors can now enjoy one investable product: the BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN), a diverse basket of cyclical companies that includes Railroads, Aerospace, Infrastructure and Engineering Companies.

The BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN) has been designed to replicate, to the extent possible, the performance of the S&P/TSX Equal Weight Industrials Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index. ZIN gives investors exposure to companies engaged in Construction and Engineering, Aerospace and Defense, Trading Companies, Railroads, Airlines, Trucking, Industrial Machinery, and Marine Parts.   

The chart below shows long-term plot of the S&P/TSX Industrial Index, which is a reasonable replication of the S&P/TSX Equal Weight Industrials Index. The long-term primary trend line joins the significant lows of early 2009, mid-2011 and the recent 2016 lows – all investment opportunities.

End -------

Now today I still agree with the Gums & Butter issue but why not drill down into the sector and seek out the Aerospace and Defense names – just in case Trump wins in November?

In the U.S. there are lots of aerospace & defense related companies - Lockheed Martin Corp (LMT), United Technologies Corp (UTX), Honeywell International (HON), Boeing Co/The (BA). General Dynamics Corp (GD), Raytheon Co (RTN) and Northrop Grumman Corp (NOC). Many of these names are at or close to new 52-week highs.

The related ETFs are the iShares U.S. Aerospace & Defense ETF (ITA) and the PowerShares Aerospace & Defense Portfolio (PPA) :

In Canada the choices are slim with a few thin traders – such as Magellan Aerospace (MAL) and Heroux-Devtek Inc (HRX). We are left with CAE Inc (CAE) a liquid pure aerospace play. Our chart – monthly of CAE displays a pending new bull cycle and a point & figure (not included) predicts blue sky on a break over $16.50. By the way – CAE is a component of the S&P/TSX Industrial Index