ENB, Enbridge revisited

enb sept 25 2016

We have been wrong more than once on this stock, just to give proper disclosure!

This company is involved in all the aspects of “energy”, drilling, storing, transportation and distribution for both oil and gas as well as renewables. Given this diversity it is not altogether that surprising that it should have done relatively well. But this well??  It is almost back to the all time high, virtually the only one to do so in the energy sector. This after losing only perhaps 15% after years of going up in a fairly clear, 5 wave, EW cycle. Equally amazing is that the forward looking P/E is presently, according to the G&M, at a mere 24.73X.

This brings us to accounting, always a touchy subject for most people. In this weekend’s “Report on Business” (again, from the G&M), there is a four page article mostly based on info and calculations provided by Veritas ( Investment Research Corp). The article starts off with the question if it matters if you the investor understood the P/E ratio to be 22.7X on average for the stocks in the S&P/TSX composite index and you then find out it is in reality 48.9x. That is if you were to strictly apply the GAAP, General Accepted Accounting Principles as we used to do instead of the vastly more flexible adjusted accounting practices routinely used nowadays in much of the financial reporting, including that which is used to determine the P/E ratio. The objective is, of course, to present the reader with a more realistic and flattering description of what is actually going on. To what extent this is legitimate and with that to what extent the results are still “the Truth”, is the question. Also the use of non-GAAP accounting is increasing at an alarming speed. A study cited by the article had reported earnings for 308 companies in the S&P500 for 2015 at Us$804 bln., whereas the “real” earnings were $562 bln. implying that the earnings are overstated by no less than 43%. This would imply that if the S&P is trading at a fairly lofty 21X earnings, it is actually trading at about 30X earnings.

Veritas has calculated the absolute percentage difference between their non-GAAP and GAAP earnings for all the S&P/TSX 60 companies. Gold and other miners feature prominently at the higher percentages, usually because of non-cash items such as write-downs of (inflated) acquisitions, but Enbridge takes the prize at 5,143%. Roughly speaking, if my math is correct, that means that the trailing p/e of 40x is actually more like 2040x.

Not sure what that all means but we do recall that once upon a time, just 16 years ago, there was this company Enron that did a few accounting liberalizing activities. Not only did that end with the largest bankruptcy in  US history but it also took down Arthur Anderson, one of the big 5 accounting firms then, in the process. The temptation to flatter results is always there and irresistible in a time when there are many practises but few principles.


P.S  Just as the P/E ratio is derived from a division of two numbers, so is this Veritas metric. A very high number, as is the case here, does not necessarily mean that the company is one of the worst offenders. If the denominator is very small it will influence the outcome disproportionately! From Enbridge’s 2015 Annual report we extract the following reconciliation;

enbridge 2015 annual report pge 27

The number 5,143% is derived by 1,866/(37)=5,043+100=5,143%. If we were to do this for all three quoted years we get (1,866+1,574+1,434)/(-37+1,154+446) = 4,874/1,563 = 312%, which is substantially lower. However, the non-GAAP earnings are invariable higher on average and not by a small amount. Why is not entirely clear as the largest component seems to be unrealized derivative gains/losses, presumable as a result of “non-qualified” hedges. In contrast the differences with the gold miners most often stem from asset impairments/write-downs, that are non-cash items.

FFH update

Then and now charts;

FFH feb 11 2016FFH sept 25 2016

Nothing much has changed for almost two years. We remain bearish as for the last 13 years this stock has most probable been forming a B wave , shown in purple. Alternatively this could be counted as a 5th wave all though that is far less probable. Either way the outcome is ultimately the same, a drop to 200/50.

POW, Power Corporation of Canada.

It is amazing that this company has not been featured in this blog earlier. It is a very “classy” conglomerate or oligarchy created by the Desmarais family, more specifically by the pater familias, the late Paul Desmarais. He was always very well connected in political circles and was highly regarded by everyone.

     The chart is a textbook model of an EW pattern or cycle that is as yet not complete ;

pow sept 23 2016

The main assets are Great West Life and the Investors Group. Life insurance and wealth management. Both are under siege by the relentless determination of the Fed. to continue with a misplaced policy of ultra low interest rates. Life insurance because it has become next to impossible to invest policy premiums at rates that compensate for the risks taken, and wealth management because we are living in a world where everything is “macro” driven and binary. Given that fundamental backdrop it should not surprise anyone that this stock has been and will remain under pressure for the foreseeable future.

     In EW terms we are no doubt looking at a large A-B-C correction that will erase a good part of the ten or so fabulous years going into 2007. The B wave is exceptionally clear having two equal components a and c and travelling right into the level of a previous b wave within wave A. Wave C started more than a year ago and wave 2 of C is already most likely complete. That means that we are starting wave 3 of C now. It targets about $10 in another year or two which, coincidentally, corresponds quite well with the wave 4 of previous degree ( or alternatively wave 4 of 3 on the way up).

     Large chunks of stock have been sold over the past ten years or so, some of it for estate planning purposes whatever that means. We hope the family continues to do well.  Having said that we also have it from good authority that generally speaking about 70% of the wealth is gone by the time the second generation “handles” it and an even larger 90% once the third generation gets a turn at managing it.

BNS, update

Then, Sept. 2014, and now charts, as usual;

bns may 28 2014 bbns 23 sept 2016

Precisely two years ago when the stock was trading at about $70, our expectation was that it would trade to the other side of the channel in which it had been for most of our (working) lives. That blog is still available for you to see. The rational for this expectation, at least in EW terms, was that we had, or were about to complete a very large and irregular B wave. In reality the stock traded from a slightly higher level of about $75 down to $50, a drop of 30%! It failed to reach the other side by only a few dollars, but it did overlap with the all-time orthodox high of $55 set in 2007, potentially a very bad sign.

     The B wave is on the border of what might be considered acceptable for the size of a B wave, i.e. 30% higher than the previous top. This leaves open the possibility that it wasn’t a B wave at all. Instead it could have been a 5th wave. Either way the next big move should take the stock down to about $25, alternatively the low of wave A, or the low of the 4th wave of previous degree. Depending on that the wave C down in the former case should start its third wave down any moment having finished wave 2, or, in the latter case it has just completed a wave b to be followed by a 5-wave (smaller) wave c.

For comparison purposes we show HCG and CWB below. These are small Canadian banks and consequently perhaps a bit more volatile. We expected HCG to go a little lower before closing the gap. It did not but the it did close the gap. But now we are close to the lows for both of these banks supporting the notion that lower levels for all banks may be in the cards,

hcg sept 23 2016cwb sept 23 2016