Year: 2011

DOG, I love dogs

Hamilton

dogbig DOG

There is one thing that I never quite understood, that is the reluctance to go “short”. Every trade that you do involves getting something and giving up something else in return, in other words , there is a trade-off, a quid-pro-quo if you wish. But most people cannot get their minds around “shorting”; it is bad, very bad  , even more so, if you are catholic. But the world has come to your rescue, you can now go “long”  and still be an example of probity. If , like myself, you started life as a FX trader, you simple do not understand the problem, because there is none.

Here is the solution, buy the DOG , once it breaks out .  You might find that dogs are man’s best friend and that that is a certainty, at least for most of us.

GE, Si Siemens and PHG Philips Electronics

Hamilton

Just some rough stats;   Cap.        P/E          Yield

   General Electric           206 bln.   16.6         2.91%

   Siemens                      110          20.54       2.89

   Philips                           30          17.5         3.26

Supposing you wanted to buy one of these what would be the best choice?  all three yield about the same percentage, Philips having a slight advantage. From a P/E perspective General Electric would be the winner by a fairly wide margin. If you like heavy industry Siemens might be your choice but the GE is well represented in that area as well. Medical equipment is made by all three.        Lets look at the charts.

ge2011 Si2011

The charts do not have the same time frame. Interestingly, when GE was still close to its highs Siemens was closer to its lows. This was when Jack W was superman and the guys at Siemens were ridiculed for their arterial sclerosis. One had 6-sigma managerial expertise envied by all and the other was viewed as a make-work project. After almost blowing up while trying its managerial skills on “banking” GE dropped 91% to just under $6. Siemens only lost 72% by dropping to a still respectable $45. So much for owning “blue-chips” at the wrong time.

phg2011

Philips , now Royal Philips is the baby of the three. It is best known for its lighting/glow-lamp division as its full name indicates. Interestingly, it is the only company of this size that uses replacement-cost accounting. Just to avoid the inevitable confusion, it also reports using the traditional historic cost method. As an aside it is somewhat ironic that the FASB in the US has been arguing in favor of mark-to-market accounting – arguable a form of replacement cost accounting but for valuation rather than depreciation purposes – precisely where it is inappropriate, i.e. traditional banking.  The chart for Philips resembles that of GE the most and at the low of the C leg it loses72%, the same as Siemens. Presently it is right in the middle of the range and for that reason alone should not be bought! Given the respective positions of the other two within their range of the last 10 years, GE should be bought and Siemens sold at a 6 to 1 ratio. See the chart on the left , below;

si,ge 2011 si,phg

This is not the best pairs trade chart but it will do. Each stock is given the same starting point and the charts simple shows how far the stock is deviation from that starting point in a percentage. The lower chart shows those two percentages added together. A few weeks ago we were at the widest point in the past ten years (and probable also over a much longer time-frame). This trade would be based on this gap narrowing as in 02 and 08. A drop by SI to about $90 and a rise for GE to $25 , both fairly reasonable assumptions,  would close the gap to about 65% from the present 135% , a gain of 70% on the notional investment. Observe that at the end of 2007 the gap was almost as wide as it is today. It took less than a full year to narrow to almost nothing. This is , of course , market neutral as the market’s direction is not relevant to the outcome.       The chart on the right does the same for SI and PHG. Clearly the higher degree of correlation makes that spread (now at +60%) a lot less robust.For GE and PHG the equivalent number is –60%.

PFE update.

Hamilton

pfemar2011  pfemar20112 

We have been bullish for some time now, if for no other reason that after 10+ years of going down odds  would seem to favor a bounce, at the very least. Now the stock is reportedly about to fall of the patent cliff, particularly with lipitor moving down to the pedestrian level. But they did buy Wyeth for that reason , so who knows.

In terms of EW the stock appears to have completed an abc X abc correction. From that low it is either in a new bull market or doing a Y in preparation of another abc. (3 abc’s is the maximum!). We simple do not know! What we do know is that if it a Y, it is likely to be nicely symmetric which would occur at about $22 . If it goes further, up to $28 it could be either situation and beyond that it is a real bull. We will keep an eye on it, but for the time being it should be up.

The World, still up?

Hamilton

aexworld ftseworld

bvspworld rutworld

daxworld tsxworld

induworld spxworld

stoxworld cacworld

nikkeiworld swissworld

australiaworld milanworld

Above are charts of 14 different indices , Italy, Holland, Switzerland, France , Germany, the DJ, the Russell2000, Brazil, Australia, England, Japan’s Nikkei and the Stoxx50, not in that order. I have deliberately used a different chart setting that is less articulate, more like what you get in the papers. This has the effect of smoothing things out a bit and making it easier to count. The one thing that is immediately clear is that they are all going in the same direction. Furthermore at least 10 out of 14 appear to be 3 wave affaires, not 5. This means that we are either in a wave 4 to be followed by a  new low for 5, or we are not going to get that and we are simple not yet in a bear market.

The Bovespa, (#3) looks much more like an a-b-c completed correction, ready to go to a new high. The Russell2000 (#4) is less pronounced but seems to want to say the same thing. The fellows in Milan are straddling the fence, either up or down is possible from here.

The TSX is fairly unique in this parade in that it can be counted as 5 waves down (see previous, more detailed blogs). But that still may not define a new impulse wave down as the leg up before it is not 5 but 6 waves and consequently the following 5 wave down could simple be a c of a larger irregular a-b-c. Canada with a minority “Harper Government” has been creeping towards a republic as opposed to a parliamentary democracy , and a few sordid little scandals involving doctored papers, 22 year escort girls and a rather dismissive attitude by our own Berlusconi may just be a little too much for the average Canadian, who patently lacks the savoir vivre of his latin counterpart. This government could fall in the coming weeks, which is fine except that there is no real alternative. This could become a game of Russian roulette with not one but three chambers loaded. (Our outlook on the Can$ also suggest a big problem around the corner, see a few blogs ago)

The last few months have revealed so many B waves that I am very much of the opinion that this market is ready to go south in a hurry. But I would just wait a week , perhaps two , to see if by some miracle this market still has an up-leg in it.

The charts may be difficult to read, but by putting your cursor on an individual one it will tell you what it is, by clicking it will enlarge itself)