Month: August 2015

Shanghai, update

Hamilton

Then, 21 June 2015, and now charts as usual;

Shanghai Composite Index june 26 2015shanghai aug 24 2015

We use Bloomberg so that it includes today’s 8% slide.    We always expected that problems could emanate from China. It is after all the “new world” of today despite being one of the oldest countries on earth. Repeatedly we have expressed our amazement at what is going on there (see previous blogs). Colossal misallocation of capital is the fundamental cause plus, perhaps, a thoroughly misguided notion that the central government can do anything or correct what might be going wrong.

In our opinion at the heart of the problem, and this is true for all central bankers, lies an incorrect notion of what wealth really is. If a farmer plants and harvests his grain he ends up with a silo full of the stuff. This is physical, it is there and does not just evaporate. If, on the other hand, an investor buys stock which is then goosed up by central bank policies (300% in a year in this case), no wealth has been created un till the gains are harvested. Unlike with the grain, the process of harvesting destroys the wealth at more or less the same speed as it was supposedly created. In short nothing was ever accomplished other than the creation of a delusion. An individual can, of course, make a killing but collectively that is simple not possible, and China is nothing if not one big collective.

    Interestingly, the human mind is extraordinarily biased to the upside. Nobody complains when this index rises 300 to 600% in one or two years. But when it goes the other way something has to be done to stop the bloodletting. Short of creating the same conditions in perpetuity into the future, that gave rise to the gains,  that is the same growth, the same interest, the same everything, it is not possible to keep the illusion going.

There is still a long way to go before this is over. Essentially we are looking for the 1000 level. At this rate we could be there early next year. Our best guess is that we are presently in the 3d wave of wave 3 of C in a large, multi-year flat. The target is usually the 4th wave of previous degree. Please also note that “overlap” has already occurred which pretty well eliminates any possibility of this being a 5th wave to much higher levels.

DE update

Hamilton

DE aug 21 2015

So we were lucky, was it EW or the sweet smell of manure? Less than a week ago we suggested this was a sell despite the many shorts already on this stock. The company cut some expectations by about 25%, inventories are good for 7 months , for second hand equipment – this stuff lives forever! – it is twice as much. Prices for farmland are now dropping in the US. People are no doubt already wondering if this is not a good dip to buy. In our opinion it is not, not even close as we are looking ultimately for the stock to drop below $30.  Al we did today is complete wave 3 of wave 1 of C. Do not forget “Nothing runs like a Deere”

DE, Deere & Co. and Kubota

Hamilton

The usual then, Oct. 27, 2012, and now charts.

de oct 27 2012DE aug 16 2015

From the, almost 3 year old, blog you can see that we try to keep an open mind. EW is always about alternatives and the waves must show the way. If they do not, it is imperative that you do not draw unwarranted conclusions. Having said that we do think DE is a sell despite the fact that we are not sure what to make of the chart.

It took two years to regain all the losses during the great recession as the stock climbed to an all time high of $98.23. Another four years and the stock still has not been able to do better. Just for the historians among you, I have found some interesting bits of info that show how ridiculous the comparison with the Great Depression really is. From 1930 to 1932 sales dropped from $63 million to $8.7 million. Employment went down by 75% from 4,800 to 1,270 and salaried employees saw their pay cut by about 31%. The local bank was saved after two employees embezzled about $1.2 million and DE generously  injected a similar amount and effectively took over control. (see Sam Moore in Farm and Dairy).

We have referred to the tendency of stocks wanting to get to an even number, particularly $100 , as the Mount Everest phenomenon. If you ever tried that, I have not, you will know that if you do not succeed immediately you have to go back to base camp to recharge. Lately the stock got slightly above $97 so it succeeded at neither. It may still get to, say $105 but we would not hold our breath. About 10+% of the float is now held by shorts which may, for a change, be the right position to take.

If you live in the country enjoying the fresh smell of manure you are always amazed at how little tractors and other machinery is actually used. Most of the big stuff sits idle for most of the year and they do not wear out very fast. The purchase of these $150,000+ machines is consequently entirely discretionary and induced by income/wealth and tax considerations rather than “need”. Prolonged periods of buyer droughts are entirely possible and this would impact the stock. Between here and $105 we would be short this stock.

Kubota supports this view. It has a clear 5th? wave up from the lows measured in Yen terms. It is a formidable competitor with, in my view, a better product.

Kubota aug 16 2015

BLK, Blackrock

Hamilton

blk aug 14 2015blk aug 14 2015 m

Blackrock is one of the largest wealth management firms there is with nominal assets under management in the neighbourhood of 4 trillion or so. The EW labelling is pretty simple, there is either a large triangle wave 4 or a wave B. We prefer the first but point out that the consequences are the same for both. The thrust from the triangle fits the measure of it’s mouth, not precisely but close enough. The triangle might be one notch larger- wave 2 becomes wave e- and then it fits perfectly. The thrust itself (or c of B) is a clean 5 wave affaire and, so far at least, the move down from the top is impulsive.

Needless to say, the potential for much lower prices is excellent. If this would indeed occur with a company that is presently doing so well in the ETF space, it is worrisome indeed for the market as a whole.