sharpsicle's blog

Charts for Pelc

sharpsicle — Thu, 31 May 2007 17:18:10 -0400

That was Can$ vs JapY

This is US$ vs JapY

Knives and trains

sharpsicle — Mon, 28 May 2007 18:01:46 -0400

We’ve all heard the old adage “don’t try to catch a falling knife”, in reference to our natural, but flawed, instinct to try and pick market or stock bottoms as prices tumble. Creating an opposite saying can also save us a lot of money: “Never jump on a runaway train”.

Reading Theo’s article about his QID position I was thinking to myself that if we are indeed in the middle of a global mania fuelled by nothing more than exuberance about China and India, then we could easily see the NASDAQ push its way towards 4000 and the Shanghai Composite double again to top 8000. By my calculations these two markets were overvalued long ago but unfortunately the shoe shine boys don’t ask, nor care for, my opinion. Nor are they old enough to remember just seven years ago when the Nasdaq jetted past 5000 on the back of the idea that liquid gold would be flowing through our DSL wires in no time flat.

So where am I going with this? Well, if you would like to protect your portfolio against a major collapse in global market, a strategic and calculated hedge is never a bad idea. A calculated hedge is normally designed so you don’t lose money no matter which direction the market moves. However if you, like me, would like to place a BET (thanks for clarifying the two Jan) on the overvaluation of the Nasdaq or Shanghai, perhaps trying to pick this market top is a poor idea.

One of the basic rules in technical analysis is “the trend is your friend” and that to bet against the trend you either have to be a genius or suicidal. Moreover, in order to benefit from a change in direction of the trend the change must be obvious and confirmed. For those who don’t like the thought of mixing their pure value styles with the voodoo technical world, please just think of it in terms of the runaway train mentioned earlier.

The trend is still intact. The train is still barrelling down the tracks.

History: If we look at charts from the past we see that even after the major earthquake that disrupted these markets, there was still plenty of money to be made from a short position on each market. In fact both bear markets produced a decline of over 50% during the two years AFTER the initial major shocks.

So after much thought I’m going to abandon my QID position and forfeit the additional profits that are available IF in fact the market top materializes in the current range (and I don’t see many reasons why it will), and wait for confirmation of change in market direction before I place a substantial bet on the deflation of global markets. As Suntzu reminded us “the market can stay irrational longer than you can stay solvent”.

Marc Faber

sharpsicle — Sat, 19 May 2007 18:29:49 -0400

For those interested here is a link to the doctor's monthly market commentary.

http://www.ameinfo.com/news/Dr__Marc_Faber/

Purchase: UNTD

sharpsicle — Tue, 14 Feb 2006 02:21:49 -0500

Reasons I purchased United Online. (US:UNTD)

1. 6.7% Dividend yield.

I believe that the US economy is nearing the end of a 2.5 year run and interest rates are about to peak, if they have not already. This stock should perform well when the Fed starts loosening, and until then I can at least collect a decent return on my cash.

2. Earnings growth.

Net income has grown in each of the past six years from a loss of $6 per share in 2000 to earnings of $.83 for 2005 (not including special income). Current year estimates from the company indicate they expect to make between $1.15 and $1.25 per share.

3. PE ratio

Current PE ratio 14.4 is below the S&P500 ratio of 20.2 and a good bargain when factoring the company’s net income growth rate and dividend rates. Forward PE is 9.9.

4. Price/Cash Flow

4.9 … Nuff said

5. High Margins

Return on assets of 21.9% and net profit margin of 22.3%.

US$ hedging stategy: VI (the Google strategy)

sharpsicle — Thu, 09 Feb 2006 23:56:40 -0500

As I was reading an interview with Jim Rogers I was reminded of another hedging strategy commonly employed by hedge funds. The long/short strategy, which requires that an investor place equal long and short positions in different investments. The result of this is (theoretically) that in a rising market, your long position will, if well selected, outperform your short position on the upside. And during a falling market, the short position, if well selected, will realize it's full potential and fall further than the long position.

So in the end, I would need to place a short US equity position of equal size for every long position I own. (I call it the Google strategy because I can see no other stock that is so obviously overbought and despirately asking for a short)

Survival of the flexible â€“ Hedge the US dollar or DIE!

sharpsicle — Wed, 08 Feb 2006 01:53:16 -0500

To date my investment strategy has been to find high quality US value stocks. Not because I believe that US equities are necessarily of higher quality that those of other countries, but because I am a part-time investor, and to find stocks that meet my strict value criteria I need to be able to sift through thousands of stocks quickly in order to find the two or three that I will purchase. Enter the MSN Stock Screener. It is by far the most useful screener that I have found in searching for the specific criteria that I look for in a stock, but unfortunately if focuses strictly on American equities.

I am a big believer that one should stick to their strengths, but I also believe that only the flexible survive. Up until a few years ago my MSN screener-value strategy worked well enough not to warrant a second thought, but recently the severe weakening of the US dollar has taken a noticeable bite out of my would-be profits. If I believe that the US dollar will continue to weaken over the long term (and I do) then being a Canadian investor I stand to extend my sub-potential performance if I continue to invest in US stocks and do not adjust myself to the situation in some way.

I have been looking for ways to hedge my dollar exposure, or to avoid US stocks all together, and here are the ideas I’ve come up with thus far.

Invest in foreign markets (Canada included) – As I mentioned before, I do not have the time or the tools to sift through all the available stocks.
A systematic hedge via currency futures or options – Given the size of my portfolio, this is not a realistic option.
Invest a portion of my portfolio in gold – This could be an option given the historical relationship between gold and the dollar, but I would have to use the expertise of someone who specializes in precious metals investing to accomplish this strategy.
Expand my skill set and develop a new investment style – A long-term project would not help me with my current situation. (But not a bad idea!)
Invest in US equities that generate profits in currencies that will remain strong against the US dollar.

Based on these five ideas, I believe that strategies #3 and #5 are the two best suited to my portfolio size and investment style. I will be using Canadian mutual funds (most likely AGF and Sprott precious metals funds) to increase my gold exposure, and I will add one more layer to my current screen of US stocks to find the companies that are generating profits from outside the United States.

If you have additional ideas on how an individual investor can hedge a US dollar position, or know of a comprehensive screener for Canadian or other foreign stocks, please add a comment or post a blog of your own.

A failed experiment is a succesful one: Check your screens!

sharpsicle — Fri, 25 Nov 2005 15:40:20 -0500

Since I'm having such difficulty uncovering high quality value stocks, I thought I would share an experience where I rejected a stock that initially looked quite promising.

Blair Corporation (US:BL) recently appeared near the top of the net current asset value screen on Grahaminvestor.com, showing a NCAV of $60/share and a trading price of $40. As I dug into the financials I found their income statements and balance sheets to be extraordinarily strong over the last ten years. It was only when I did my own calculation for NCAV that I discovered the problem: Management had recently repurchased more than 50% of the outstanding shares with much of the accumulated assets, all the while taking on an additional $35 per share in short term debt. For some reason grahaminvestor's screens had caught the recent share repurchase but had not caught the decrease in shareholder equity.

I've learned this lesson over and over again: Automated screens are good for an initial list of candidates, but the final decision to purchase must be made based on MY OWN manual calculations.

The problem with value shorting

sharpsicle — Sat, 05 Nov 2005 15:36:54 -0500

If we look at Salesforce.com (US:CRM) we see a stock trading at a PE ratio of 190, a forward PE of 158, a PS ratio of 12 and a PB ratio of 17. These four statistics alone would prevent both a growth and a value investor from even considering this stock for more than a few confused seconds. In fact, if I were to look for a stock that was in danger of a major collapse, CRM would be a prime candidate.

The problem with following through on this short arises when I look at the stock’s history over the last year. Last year at this time it was trading at a PE of 500, a forward PE of 143, a PS of 7 and a PB of -15… and it still rose 25%! And the price is still climbing!

Placing a short based on fundamentals alone places you at risk of riding ‘the momentum train’ straight off the rails… because unlike a value purchase where there is a semi- tangible floor (book or net current asset value), a value short has no obvious ceiling (see: Tech bubble 2000). In order to make a value short work, you also need the chart signaling that the momentum has already turned downwards.

This is also why I have not placed my Google short yet…