It has taken a fortnight – that is 14 nights in case you grew up on this side of the pond –, a long time if you are waiting for it but here we are. It appears that we completed an A-B-C correction down right into our target of below $13. (see our previous blog). Not only did we do that but we hit the 50-day moving average and we are ending today with a beautiful Japanese candlestick formation known as a Doji, in this case a Hammer. This is supposed to announce a reversal! If you bought at $13 your patience is already rewarded but things should get a lot better in the next little while. Just back to where we were a fortnight ago generates a return of roughly 50% but we would expect higher prices than that.
One of the hardest things in this business is to do nothing. At the low today we were $7, roughly, below the peak set just two weeks ago.
I think that this is either a 4th wave (of wave 1 up) or, a wave 2 with wave 1 completed at $20.75. Either way I would expect the stock to find a low at just above $13 and in the worst case at $11.50 where the 50-day moving average is. These numbers correspond to, give or take a 50% and 62% retracement of the entire move up since the low of $5. In any event I would expect the stock to trade above the $20.75 level in the not too distant future so the question is really do you want to make 6, 7,8 or 9 dollars!
Warren Buffett can afford to make offers the victim cannot refuse. On the Goldman Sachs deal he made a small fortune in a very short time. This is a little different and on a smaller scale, but the underlying principles are the same. There is close to a 100% certainty that he will win, and win big and not just break even. At the lower end of the above range you are in at close to the same price as the oracle is.
The gap is now closed and we are approaching, possible, a 4th wave of previous degree. The RSI is getting overbought and things are getting to be “too good to be true”. We would exit today if it was our money. 4x your money in 40 or so days is not bad.
I am not a great fan of Warren Buffett. Using your persona as a way of creating “investment” results ranks with me on a par with getting your book on Oprah’s list of books to read. It does not mean that you have suddenly become a good author. Moreover Oprah does not necessarily gain, at least not as much, as does Buffett from his fame. So far about $400 mln. but that is just on paper. Lion hunting in a zoo?
The G&M attributes the discovery of this opportunity to an octogenarian with contacts with the Bank of Montreal – we think that Buffett simple is an avid reader of this blog – which just happens to be one of the banks that was charged with finding a solution. Not sure that this is the way it should work but no doubt the OSC, which arguable is partly to blame for the loss of confidence in this bank, is right on top of this and happy with the “progress”. It will, for the first tranche, require the use of a “financial hardship exemption” under the TSX exchange’s rules, a mechanism that makes highway robbery perfectly legal.
The repercussions of this deal may, repeat may, make the stock price at about this level more or less fair, so we would exit today and be happy that we got both the top and the bottom (see 2012 blogs) essentially right.
Home Capital did not quite make it to our potential target of about $4. Nevertheless we had made it perfectly clear that we did not expect a move much under $6. See previous blogs. So if you were smart and happened to buy some of this stock in anticipation of a rise to at least $8, you are doing well having already doubled your money.
From this point on we feel fairly confident that there is more room to the upside. A closing of the gap at about $16 is realistic regardless of what particular count applies. We would exit at that level even if much higher levels are still a possibility.
In our view the problem with this bank has been totally mis-characterized as a solvency problem. With real estate up 30% or so just in the last year that is ridiculous. It is a liquidity problem which, unlike a solvency problem can be totally resolved, at little cost, by injected the necessary funds. It would be an attractive take-over target for most financial institutions that are not part of the big five or six that might have a philosophical problem digesting such an addition. It might be a good fit for quasi banks such as Manulife Bank or even one of the large credit unions with an aim to completely demutualize one day.