RY, Royal Bank.

Hamilton

ry july 26 2011

Most of the Royal’s moves we got more or less right, just did not expect it to double top. It earns you 4+% in dividends, has a p/e of just under 14 and if you ask any broker who has no idea what to do with your money, invariable the answer is to buy the banks and the royal is just the cream of the crop, it does not get better.

Except for one little fly in the ointment; have you ever wondered why the LCBO has never lost money? The answer is simple that it can not. It can overpay it’s employees, it can have disgraceful services in certain areas, it can do whatever it wants but as long as it has an inelastic product and a monopoly you cant lose. They Royal has the same privileges , except that it is the price-setter in an oligopoly. The place is run by a group of high-testosterone guys, from the original Dominion Securities that after becoming scared shitless in the 1987 scenario- roughly where this chart starts -  begged to be taken over only to invert the process from within. They did not even have to build a horse!

So recently, after trying so hard, they vacate the only culturally comparable environment, the US of A, and withdraw to home base. But , amazingly as it may be, they now have the honor of being elected to the very elite and select few of the banks that matter, the too big to fail group. Together with the TD they give a pathetic display that vacillates between wanting to be the biggest bully in the sand box, and not wanting to be in the box at all.

I like the Royal, they have this “right or wrong but never in doubt” approach. An admirable character trait, certainly when compared to the CIBC which has more of a “I-have-no-idea-what–I-am-doing-but business model.

The point is that these banks are exceptionally vulnerable. If we believe in globalism in Canada (we do not) , competition may get serious one of these days. This is true for communications and real estate services as well. From one day to the next the game changes, supposedly completely unpredictable and unexpectedly. Not so in EW terms. This stock looks pretty sick, and should it break down much more from here, as I suspect it will, $30 is most definitely a realistic possibility. Perhaps even a bit lower than that.

AAPL and RIM

Hamilton

I have suggested a pairs trade on this couple before. It was a complete disaster which is why stop-losses should be used whenever and wherever  possible. Stocks in these markets are often traded on momentum , that is that they are bought on the simple expectation that there will be a greater fool down the road. There is until there isn’t. NFLX seems to fall in this category.

As predicted, before the recent earnings came out, AAPL went through $400 in after-hours trade and today it did it during normal trading hours. RIM on the other hand announced that it will lay-off 2000 employees and is suffering from minor palace revolutions. The stock is in the doghouse. Here are the charts;

aapl july 26 2011 rim july 26 2011

As you are aware from previous blogs, I think AAPL is topping and RIM is bottoming. For one thing AAPL is now worth over 300 bln, the second largest capitalization after XOM (Exon) at a little over 400 bln. However you slice it, it is difficult to make sense of that. RIM in the meantime is suffering from “confirmation bias”, according to David Olive in today’s Star. I had never heard of that term but I assume it is what you get when non-thinking people get together with like minded colleagues and go through the “misery loves company” exercise. We already know that stocks are the only thing that sells better at a higher price than a lower, but maybe this has gone too far. In the same article Olive gives the following facts; RIM outperforms Apple in return on equity 41.4% against 35.3%; in terms of R&D spending  RIM spends $1.4 bln or 6.8% of revenue for essentially a single product, Apple spends $1.8 bln or 2.7% of revenue on a multitude of products. Rim trades at a p/e of 4.5, Apple at 15.8. Rim has the ultimate security, Apple does not. Anyway , apart from fundamentals the chart tells the story. Here the two are combined;

RIM and APPLE

RIM is in beige and Apple in black. RIM has a count that supports the idea that it should go up from here. Apple  can be counted as having a top here. Most importantly is the difference which on BigCharts can be shown in the bottom window. Notice that for most of the past 10 years RIM consistently out-performed. That changes after 2009 1/2. The critical thing is the vertical distance between the two; it has never been wider! You can try the pairs trade again. Sell one AAPL and buy 8 RIM roughly, but keep a stop at whatever your tolerance is, 10%??

BGM (Barkerville Goldmines Ltd.) on Vancouver, by special request.

Hamilton

bmg

This is Barkerville Goldmines Ltd., a blue chip that trades on Vancouver and is, so at least the name suggests, active in digging gold, or, considering the length of its existence, trying to find it. This is how wealth is created or destroyed but EW works best with more participants, so the more the merrier certainly should apply.

One thing that is interesting about this chart is that both legs up are precisely equal in both magnitude and direction. This often happens when one is looking at a 1-2, 1-2 series of waves, more or less the way a duck or goose takes-off from water. If this pertains then the stock should, more or less follow the arrows as drawn (they too are drawn vector equal) , up nine blocks , down 5. Given the light grey lines that have till now defined the degree of freedom that the stock enjoys, a low of about $1.35 over the next month or two should hold the stock. It is already at the moving average and both the RSI and MACD have turned (hopefully).

The bearish case typically would be an A-B-C correction from the lows with the continuation of the bear starting from $2.20; this is not a believable scenario with a stock that already traded at pennies. Nor for that matter is any other bullish scenario as in 1-2,3,4,5. due to the overlap occurring at at least two different degrees. In short , expect wave 3 up to start soon . A stop at about $1.30 might be a sensible thing were it not that this is an all-or-nothing trade. You are, sort of, in the position that Watson found himself with this stock, on a rock and a hard place.

the hond