Interest rates, US 10y bond

Hamilton

The usual then – 22d of August, a year ago – and now chart. You saw it here first!

US 10year bondus10y bond aug 16 2013

This near perfect diagonal triangle (even if it did not quite make it to the trendline), and the fact that interest rates had gone up from 1947 to 1980, 33 years or so, and then down again for an equal 33 years (markets just love symmetry for some reason) and also the often overlooked fact that rates were at an unbelievable low of 1.4% made us make the call that rates would go up. All this despite evidence to the contrary provided by the Fed. promising a new form of never ending QE. By the way it is worth noting that every time the Fed. came out with a new variation on that theme rates went initially went up, not down. Here we are a year later and every and any central banker all over the world is reading from the same page of Keynes’  Alice in Wonderland in which he opines that the only good interest rate is a zero rate. Oddly enough this otherwise consummate economist did not, in his heart, believe that there is time value to money and consequently there need not be a market determining that time value.

     Which brings us to the present value concept. Basically discounting the proper math itself, every cash flow in the future, be it from a bond , a stock, an annuity, rent or whatever has a present value equal to the sum total divided by the interest rate. As the interest rate is the devisor, the value of everything starts approaching infinity as rates drop closer to zero. At the margin miniscule changes in the rate has enormous effects on valuations. The moves in the 10y bond over the last year has not been miniscule, in fact it doubled and that is huge. Put in this light, it is absolutely amazing that stock markets are still valued as they were a year ago. We really are in Wonderland.

For ease, here is that analysis, from June 2012, again;

interest rates 2012

Another way of looking at it, is demonstrated clearly by a look at MFC, Manulife;

mfc aug 16 2013

Notice that the stock has nearly doubled in precisely the same period that interest rates did. Contrary to talking head opinions this is not because life insurance etc. is that much easier to fund at high rates (which, of course, it is), but because the actuary value under present accounting requirements changes instantly with the rate (but that does not help the wealth management side).

AAPL update

Hamilton

aapl aug 16 2013

So we guessed incorrectly. Here is another guess.  The stock came from $688.66 and dropped to $380.06, so the distance travelled is $308.60. Multiplied by 0.382 gives $117.88. Add back the low of $380.06 and you arrive at $497.94. Given that other services have the high more like $702, the result is remarkable close to a minimum rebound level. Insider trading is defined as trading on info that is not readily available to the public. How that works when a hedge fund has a chat with the CEO and then tells the world is not entirely clear. In any event it may be time to step aside. Big buybacks are the equivalent of pulling yourself up by your bootstraps which, according to a lot of financial types, is the equivalent of a fat dividend and therefore good. The only minor fly in the ointment is that it can also be viewed as recognition of the fact that there is nothing left to invest in, not what you want to hear from a company that supposedly keeps creating it’s own future. The pot now sits at $146 bln. A sell nevertheless.

BCE update

Hamilton

In a previous blog, back in March, we opined that we very much doubted that the stock would trade above $48.50. It did not. Here is the detailed picture;

bce aug 16 2013

From the peak of $48.27 it traced out an initial 5-wave sequence down (about 16%). It then did an A up right to the apex of a 4th wave triangle and then collapsed again, almost to where it started the rebound. That is clearly a B-wave. Now the C should take the stock to about $45, the highest level in that triangle ( and possible a little higher). There is an alternative, the B could become a triangle which really doesn’t change anything except the timing. As it happens $45 is also a clean 62% Fibo retracement. So a buy here if you play for small gains and then a sell again as you get closer to $45.

FTSE, Footsie update

Hamilton

ftse aug 15 2013

This Bloomberg chart of the London stock index shows that our (and the boys in Gainesville) opinion that an initial 5-wave down may indicate the start of something much bigger could be correct. The Dow did manage a new high, a possibility that we had considered, but the FTSE did not and, in fact, stopped retracing within a hundred points or so of our target of , roughly, 6500. We shall see what comes next but what is clear now is that the bear side is gaining traction.