PV, Present Value (again)

Hamilton

If you prefer $95 today to $100 a year from now, the PV or present value of that $100 a year from now is $95. This is the time preference that we all have and it is objectively calculated by using a discount rate that reflects the interest that we forgo by having to wait a whole year, or, alternatively the income we forgo by not being able to invest for a year.

In simple terms the formula is  PV= amount/ (1+ interest rate) . This can then be compounded to incorporate multiple periods and multiple amounts. We will keep it simple, in our example you are indifferent to receiving $95 now or $100 a year from now. Using the formula we get 95=100/1+0.05=100/1.05= 95 (not precisely).

When things get a little more complex you either do financial acrobatics or use a table.

PV

You can make your own table on a spreadsheet if you want a wider range but for our purposes this will do. Suppose you are to receive $1000 a year renting out an apartment for 30 years (anything else that pays a same amount will do), what is that worth today? At 12 %, $8,055.18, at 6% $13,764.80 and at 2% $22,396.46. (of course at the extreme of 0% the present value is simple 30x $1000=$30,000.) No big revelation here except when you look at the impact interest rates have. We all know that a rising tide lifts all boats, but this much? From 12% to 2% is 2.8X and from 6% to 2% is 1.7x. Put a different way, a stock that was worth ,say $20 in the late eighties should now be worth $56 . If rates go back to equilibrium at, say 6%, that same stock will drop to $33. All this courtesy the US Fed.

TLT (30year US Treasury Bond)ETF.

Hamilton

st lois fed 2011

There is a gap in this chart simple because at one point they stopped issuing 30 year bonds, they did not think they needed that maturity given the budget surpluses. Hard to believe now.

The TLT does pretty much the same but on price . not yield, so it is the inverse.

tlt 2011

I did not anticipate the jump to 110 on the right shoulder (see previous comments). Ironically the drop from there coincides almost perfectly with the Feds announcement of QE2, not exactly what they had in mind! So here we are at about 90 (4.24% yield), about the average of the past eight years. But it certainly looks like the peak at around 2.30% is behind us. If the head and shoulder pattern is correct the TLT should drop to at least 70 over the next few years which would equate to roughly 7%. Perhaps a level where interest rates should be anyway.

In Canada the XBB ETF , based on a broader bond index (not shown), has a very distinct wedge like structure to it, suggesting it too is about to turn .

Perhaps it will take the same 34 years for yield to go down as it took for them to go up (1945 to 1980). In that case buying a zero-coupon 30-year bond would be very profitable. But this to me is a little like an “after us the deluge” kind of trade, one that does not logically combine with owning any stock.

SU Suncor / COS Can. Oil Sands

Hamilton

Suncor reported earnings, not surprisingly they were very good, exactly what the chart was suggesting. Here it is;

su 20112 Su 2011

The big charts is like most, 5 up followed by a correction that looks a lot like an incomplete a-b-c. Normal target is in the order of $50 or so in order to get symmetry (c=a) and get to the 50/60% retracement level (see detail chart). The pattern is pretty straightforward with the b as a triangle. (the triangle may be shorter than shown!). The stock at about $42 should therefore have about $8 potential.

Canadian Oil Sands is a different kettle of fish;

cos 2011 l  cos 20112

Notice that in the big picture both stocks look pretty much the same. However short-term COS has not really budged at all of the lows. Perhaps this has yet to happen but nevertheless it raises the caution flag! Last September we already expected the stock to start moving up , see chart below. So far the move is rather anemic which may be telling us something.

cos.un sept 2010

Use stops at around $22.