NAV, Navistar and PCAR, Paccar (DAF)

January 7, 2012 Hamilton

Navistar’s B-wave from the lows of $15, is either an A, running flat B, C (shown in green), or an A-B-C with the C as a diagonal, wedge (shown in blue and purple). It does not matter which is correct, both are perfectly plausible and the ultimate outcome should be a new low, that is a low below the $15 level.

The drop from the $70+ recent high was pretty rapid and erased about $40 or 60+% of the B-wave. So far at least the stock has been unable to regain much of that and is presently sitting at about $10 off the recent $30 low. This is a little odd as heavy vehicle manufacturing is booming (see also Paccar, PCAR owners of DAF). As with so many other stocks we suspect that a triangle of sorts is forming in this stock. The count is not entirely clear. The triangle could be complete right now but the plausible alternative is that we are only in c of the triangle with d and e yet to come. Either way the upside is limited to $42 or so (just $2 above today’s value. The downside is about $15 judging from the size of the mouth of the triangle, but considering that a new low should be made, it could be substantially more than that. For completeness we have added the PCAR chart below. It does not have a triangle but the count is essentially the same.

BNS/RY pairs trade

January 7, 2012 Hamilton

On Dec 5 we recommended a pairs trade, long BNS short RY, simple on the basis that the two stocks were out of phase. BNS was still dropping whereas the RY had already rebounded a good part of its most recent fall. For those not inclined to do this relatively “safe” trade , we suggested just buying BNS. Here are the charts;

From Dec 5 BNS has gained about 51.43 – 48.25 = 3.18 and RY 52.05 – 49.10 = 2.95, for a net gain of only 23 cents. Going long BNS only clearly worked out best with an 6% gain in just a week. We would exit both trades acknowledging that there may be a little more to go for BNS

ABT, Abbott laboratories

January 5, 2012January 5, 2012 Hamilton

Abbott Laboratories did very well for ten/fifteen years or so and then it started to flat line at around $48. In doing that it differentiated itself from the rest of Big Pharma that for the most part dropped like a stone, see for instance MRK, PFI, LLY and so on. The question now is whether or not it is ahead or behind the group. We would sell the stock as we are in the process of triple topping, always a reason to step aside. There are 3 possible triangles here, one of which has already had its thrust leaving only the possibility of the 10 year triangle thrusting to just over $72 or the present one (see below) going to $69. The alternative count is of course a 1-2 or a series of 1-2’s making the next wave down a little more dramatic.

The risk/reward is such that there is no justification to hold on any longer. There is about $10 to the upside (very maybe) and $30 to the downside (an almost certainty), comparable to playing Russian Roulette with four bullets in the chamber.

Unintended consequences, the end of the DB plan ?

January 5, 2012January 5, 2012 Hamilton

Towers Watson is an international leading professional services firm. They maintain stats on a hypothetical defined benefits plan. Their model plan is 60% in equities and 40% in bonds. They use the corporate 10-year bond rate as the discount rate as they believe that is most applicable to the corporations that sponsor these plans. Their plan is at that stage where distributions are equal to the contributions so it is essentially assumed to be mature. Over the past 10 years, coinciding nicely with the low-yield environment, the value has dropped by slightly more than 47%, from a small surplus to a large deficit. In most cases the corporations are responsible to take corrective action (often too late) and or make good the shortfall. Little wonder then that they are bailing out in droves and are stopping to provide DB plans (Royal Bank recently did just that). Governments have stepped to the plate by providing insurance in the event of bankruptcies etc. but have no credible funds set aside so the taxpayer is ultimately on the hook.

With regard to employees of the government itself the largesse continues unabated. The CD Howe institute just (Jan 4) published a report that is worth reading in its entirety. For the sake of brevity below is the focus of the message;

Unlike corporations governments are not obliged to fund these obligations, and , apparently are not even required to report them properly. In rough numbers, the Federal obligations are just under $150 bln. According to the CD Howe institute the “real” liability is a little over $225, $80 bln. more than they acknowledge. (The Federal deficit in total is around $795 bln.) The institute goes on to calculate that using the Real Return Bond yield as a discount, the government has to put aside 40/45% of the total payroll to keep up with the increasing obligations! In other words the gap the I have added in the above chart is going to widen exponentially if interest rates stay at these levels.

The easy way to understand all this is when you use the extreme case of interest rates at zero. Then there is absolutely no compounding and consequently you have to save a dollar for every dollar in retirement. If a person works 30 years and then retires for 30 years he/she would need to put aside 50% of income to receive 50% for the entire 60 years. This, by the way, is not that far from reality. As this is unreasonable where does it end?

This chart is from one of J Mauldin’s letters. Canada is not on there but had it been it would have blended in quite nicely. Greece is the poster child in this array of countries. Obviously pension obligations are not the only government programs causing this imbalance but they are growing in importance.

Most papers publish annuity rates over the weekend. If you want to figure out what a DB plan “costs” at the time of retirement, say 65, all you have to do is pick the joint-last-to-die at age 65 column and presto you have the answer. Right now the average you get per month for $100,000 is $396. Suppose you want a $50,000 annual pension you would have to put down $1,054,852. It is easier to marry a government employee.

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