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Secret Stock Market Structure That Is Truly Mind Blowing (Part 2).

Long Term Dow Structure

 

This post continues to look into the mathematical work that I have been doing. Once again, indicating prefect structure in the financial markets. 

The numbers derived above stem from my own unique way of looking at the stock market. They are 3 dimensional calculations that combine price and time into one number. The calculation itself is basic high school math, but I will let you figure it out if you want to pick it up from here.  

I cannot overstate how amazing this chart is. Just a few points. 

  • The move between 1994 bottom and 2000 top was 11,800 UNITS. The Dow topped at exactly 11,800 in January of 2000. Amazing!!! 
  • The up move between 1994 bottom and 2000 top was 11,800 UNITS. The down move between 2000 top and 2002 bottom was 6,483 UNITS. When you combine both values together you end up with a value of 18,283 UNITS. The move took 9 years. 
  • The up move between 2002 bottom and 2007 top was 10,156 UNITS. The down move between 2007 top and 2009 bottom was 8,137 UNITS. When you combine both values together you end up with a value of 18,293 UNITS.  The move took 7 years. 

So, the combined move took 16 years and there was only 10 UNITS of variance between the moves. And you still want to argue with me that the market is random? It Is Not. Once you know and understand this structure you can time the market with great precision. 

For example, if you understand the structure you know that the move from 2007 top will be exactly 8,127 UNITS. With such knowledge you can know the exact time and point location of the bottom in 2009. I mean to the day and long before it happens. Just as I predicted in 2008. So, while everyone is freaking out and trying to figure out where the bottom is you can be laying on the beach while making crazy amounts of money shorting the market. 

The sample structure above is just a small sample of how the market truly works. This type of measurement is available on the daily charts as well as the long term charts. 

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Largest Money Manager Reveals An Outrageous Secret

Bloomberg Writes: BlackRock’s Fink Says There Are ‘Bubble-Like Markets Again’

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BlackRock Inc. (BLK) Chief Executive Officer Laurence D. Fink, whose company is the world’s largest money manager with $4.1 trillion in assets, said Federal Reserve policy is contributing to “bubble-like markets.”

“It’s imperative that the Fed begins to taper,” Fink said today at a panel discussion in Chicago, referring to the central bank’s $85 billion in monthly bond purchases. “We’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically.”

“We have issues of an overzealous market again,” Fink said at the event, which was sponsored by the Paulson Institute and the University of Chicago Institute of Politics. 

He is of course absolutely right. The markets have been distorted by the FED to an amazing degree. The situation is truly unprecedented as we have never seen anything even close to that.

I would go even further and argue that we have backed ourselves into a corner from which no easy exit is possible. As I have mentioned before the velocity of $85 monthly QE is slowing down drastically as all of that money no longer has as much of a impact as it did in the past. Simply put, as the velocity slows down, the overall economy/markets follow and interest rates go higher. On the flip side, should the FED cut back by any amount (even a small one) the impact to the downside will be as described above, only much more severe. There is no easy answer, we will all have to suffer.

Not that I would know, but it is like going through a cocaine withdrawal. Your normal dose no longer has the kick, yet if you decrease the dose….withdrawal symptoms begin to show up.

Either way, only two outcomes are possible. Going through a withdrawal or ODing. Not a pretty picture for the US Economic future either way you look at it.   

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Real Estate Meltdown Just Starting

Bloomberg Writes: Pending Sales of Existing Homes Slump by Most in Three Years

 housing crash investwithalex

Fewer Americans than forecast signed contracts to buy previously owned homes in September, the fourth straight month of declines, as rising mortgage rates slowed momentum in the housing market.

The index of pending home sales slumped 5.6 percent, exceeding all estimates in a Bloomberg survey of economists and the biggest drop in more than three years, after a 1.6 percent decrease in August, the National Association of Realtors reported today in Washington. The index fell to the lowest level this year.

Mortgage rates last month reached two-year highs and some homeowners are reluctant to put properties up for sale as they wait for prices to climb, leading to tight inventories. Those forces are pushing some would-be buyers to the sidelines and slowing the pace of recovery in real estate, giving Federal Reserve policy makers reason to delay reducing stimulus when they meet this week.

Read The Rest Of The Article Here

On October 3rd, 2013 I put my foot down and made a gutsy call. I have called for a housing top at the time. You can read the article here. I Am Calling For A Real Estate Top Here

Even though most people have dismissed this forecast I continue to stand by it. As new data points for the real estate market continue to come in, it looks as if I have made the correct and exact call. Yes, certain markets will roll over and start going down a little bit later, but the overall market is starting to look top heavy here. I would expect to continue seeing weakness over the next few quarters until we begin to see clear indications that the real estate market is heading down. At that time a lot of people will freak out and we should see a real inventory spike followed by even lower real estate prices. Of course this cycle will feed on itself for a long time.

Remember, this will be the 3rd leg down for the real estate sector. The first one was the initial decline between 2007 and 2010. Typically, 3rd legs down are longer and steeper. As such one shouldn’t be surprised to see large drops in housing prices over the next few years. As my previous valuation work here showed, overpriced markets like So. Cal should and could go down as much as 50%. 

For now we wait and see as the housing market continues its rolling over process.  

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The Secret To Not Losing Money On Wall Street

CNBC Writes: Dow could rise 10 percent or more in 2014: Siegel

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Wharton School professor Jeremy Siegel told CNBC on Monday that the Dow Jones Industrial Average (Dow Jones Global Indexes: .DJI) could rise 10 percent or more in 2014.

That may not be on par with this year’s roaring return but is still historically robust, he said, considering that 2013 has been an “extraordinary year” for stock gains.

“I think they are going to kick the [budget] can down the road a whole year,” Siegel said. “So that’ll be off our plate and that will be a very, very positive factor [for] first-quarter 2014.”

Read The Rest Of The Article

This post is to quickly remind you of two very important facts.

1. Most financial media is worthless. Half the time they don’t even know what they are talking about.  They continuously recycle worthless stories that have no impact on financial markets or individual stocks. As I have said many times before, news do not drive stock prices. I want you to be aware of that.

2. Never listen to teachers when it comes to real world applications. Most of them have the theory down, but that’s it. They do not have what it takes to be on Wall Street. If Mr. Siegel knew anything about the markets he would be managing money and making millions of dollars each year. Instead he teaches. Those who can…do and those who can’t….teach.

Anyway, what kind of garbage is this…..only 10%?  Why not 50% or 100%. Might as well just say that. As a matter of fact, any number will do.  The point I am trying to make and the secret I am sharing is this…..

If you listen financial media and/or take advice from those who do not directly participate in the financial markets, your money and you shall soon be separated.  

Okay, I am done bitching for today. 

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How To Determine The Intrinsic Value Of Any Company (Part 5)

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As you can see the calculation itself is fairly simple and straight forward. What is not easy when it comes to doing Intrinsic Value calculation is doing the fundamental research and figuring out which inputs to use.  A slight deviation in any of the variables above can have a huge impact on your overall Intrinsic Value calculation and your subsequent valuation estimate.   

For example, are you 100% confident in your management team analysis? Are you sure they will be able to turn the company around? Is your estimate of $0.50 EPS in 2015 and a growth rate of 11% thereafter really valid or is it full of holes?  Are you sure the company turns around and what about the competition?

These are the real variables and the real questions that determine the Intrinsic Value. Yet, none of them can be known with 100% certainty. They can be very well researched and you can make very accurate estimates, but they are not exact. In many cases these are guesses at best.  That is the point I want to drive home. You will NEVER have an exact Intrinsic Value, it will always be an estimate.

That is why Margin Of Safety plays such an important role. Let’s say you have worked very hard on determining RadioShacks Intrinsic Value at $10.72. With today’s stock price of $3.75, it gives you a 70% Margin of Safety. That is exactly what you are looking for. This type of a large margin of safety will protect you on the downside should your analysis fail to deliver.

If the management team has failed, if the growth rate or the P/E ratio don’t materialize the chances of this stock going much lower is small. Why? Because it is already selling at 70% discount from what a reasonable fundamental research and valuation work indicate. Should you make a mistake your losses will be limited. Yet, should the company surprise to the upside your return will be significantly higher. A low risk and high return setup.

Can the stock still go to zero? Absolutely. The company can still fail and file for bankruptcy, but if you have done your work right and continue to follow the company on the daily basis you should be well aware of that long before it happens. That is what value investing is all about. Finding these undervalued gems, doing a lot of fundamental research, valuing companies and trying to identify investment opportunities that sell well below their intrinsic value. That in return provides you with a low risk and a high return type of a setup.

Chapter Summary:   If you take anything away from this section of the book, take away the fact that no Intrinsic Value calculation can be exact. Even complex models used by investment banks and Quants yield best guess estimates.  There are just too many unknown variables that depend on future events that comprise the calculation.  

That is why you will be very well served by doing your own fundamental research and concentrating on stocks that provide your with the biggest margin of safety and plenty of upside.  

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How To Determine The Intrinsic Value Of Any Company (Part 4)

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With that said, let’s take a look at our previous  example, RadioShack,  for clarification.

  • Stock Market Price: $3.35 (Oct 18, 2013)
  • Current EPS (Earnings Per Share): $-2.71 (EST $0.50 in 2015)
  • Estimated Future Growth Rate:  11%
  • Weighted Average Cost Of Capital (WACC): 7%
  • Average P/E (Price/Earning) Ratio To Use:  14.8

RadioShack presents us with an interesting real life valuation example that you will run into more than you can imagine. Particularly if you are looking for cheap value oriented stocks.  First, you will notice that last year EPS were negative. 

Well, we cannot perpetuate negative earnings into the future in order to determine Intrinsic Value. Earning have to be positive.  In addition, negative earnings means that you do not have a workable P/E ratio to use in our formula. That is where fundamental analysis comes in so handy.

It is obvious that RadioShack is going through a rough time and its stock price reflects it.  If this continues,  in the not so distant future RadioShack is likely to be filling for bankruptcy.  Yet, if the company is able to turn itself around and grow again, the stock price will appreciate significantly….providing investors with large gains and very little risk.

Let’s assume that your in depth fundamental analysis has yielded the following points (this is done for valuation explanation purposes and NOT  based on the real life analysis of RSH).

  • The new and highly experienced management team has taken over operations.
  • The new management team has put forth a plan that you believe they will be able to execute.
  • Based on your fundamental research you estimate that the company will turn around and earn  EPS $0.50 in 2015.
  • Thereafter the company will grow at 11% per annum(based on your research).
  • After looking at RSH average P/E Ratio and industry averages you feel comfortable with using a P/E ratio of 14.8 for your valuation work.
  • Most importantly, based on your work you believe the company will turn around and prosper.

Let’s take a look at the valuation.  

STEP#1:  Figuring out EPS in 10 years.

  • Formula:  (Annual EPS x Estimated Growth rate^10)
  • RadioShack:  $0.50 x  1.11%^10 = $1.42

Explanation:  If RadioShack grows its EPS at 11% over the next 10 years (after EPS of $0.50 is acheived),  in 2025 its earnings per share will be equal to $1.42

 

STEP #2:  Figuring out stock value at year 10

  • Formula (EPS at year 10 x Average P/E Ratio)
  • RadioShack:  $1.42 x 14.8 = $21.02

Explanation: This means that if EPS and Average P/E ratio holds, the price of RadioShack stock should be $21.02 in the year 2025.

STEP #3:  Discounting future value to determine today’s Intrinsic Value

  • Formula (Future Stock Value/ WACC^10)
  • RadioShack $21.02/(1.07^10)=$21.02/1.9671=$10.72

Explanation: That means the stocks Intrinsic Value today should be is $10.72. With the stock price being $3.35 today, it appears that RadioShack is selling at about 70% discount to its Intrinsic Value. 

To be continued…..

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A Little Known Way To Blow $1 Billion

Obamacare Website Trainwreck

Shocking data released Thursday by a highly regarded Bloomberg government analyst put the Obamacare website rollout cost at over $1 billion. This represents a $600 million increase over the price tag usually associated with the Affordable Care Act, according to the Government Accountability Office. 

Unfortunately, the bad news does not end here. Due to the multitude of kinks and glitches so far encountered and the anticipated overload of problems yet to be exposed, the website costs will continue to escalate.

Bloomberg’s Peter Gosselin offered, “Given the seriousness of the IT problems and the fact that most of the contracts are on a cost-plus basis, the companies almost certainly are in line for another burst of spending aimed at quickly making repairs.”

Just yet another sign that the US Government has completely broken down.  How can anyone spend $500 Million (with cost estimated to balloon to $1 Billion) on a website that doesn’t even work is beyond me. 

As someone who has build a number of fairly complex websites I cannot understand how the website they have built can cost anywhere close to that much money. They could have outsourced it to India or Russia or they could have found a few college kids who would have built them a killer application for as little as $10 Million. I guarantee you that.  The cost that they are paying is astronomical and just shows how broken down the system is.

It is just another symptom of complete mismanagement and fraud that is the US Government. They borrow money they do not have and repay it with money printed out of thin air, they wage wars against cave dwellers with AK-47 by shooting at them with Million dollar missiles,  they spent $1 Billion on a website that should only cost $10 Million and they goose the economy with cheap credit at the expense of a future collapse. How is any of this going to end well?

 It will not. 

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Here Is A Quick Way To Destroy Confidence

Bloomberg Writes: Is JPMorgan Getting a Bad Deal?

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In resolve a handful of state and federal investigations, JPMorgan Chase (JPM) has tentatively agreed to pay $13 billion—more, as my colleague Nick Summers points out, “than the combined salaries of every athlete in every major U.S. professional sport, with enough left over to buy every American a stadium hot dog.” Thirteen billion is also equal to 61 percent of the bank’s profit for 2012, so it’s a significant sum. But does that make it a “shakedown,” as some have suggested?

But there’s no getting away from the fact that the Obama Administration has taken a great deal of criticism over the lack of accountability pertaining to the financial crisis and for not punishing those who had a role in bringing the economy near collapse.

Read The Rest Of The Article Here

I am no fan of big banks nor the bailout of said banks in 2008. In fact, I was a big proponent then, as I am now, that those banks should have failed. Yes, it would have caused a lot of economic pain, but we would have been on the way to a real economic recovery now.  Instead, they have created even a bigger moral hazard.

With that said, I am troubled by this settlement. The US Government is now going after the those who were  willing to step in and backstop the economic collapse by taking over failed financial institutions on request from the US Government. It’s like begging your neighbor for money to buy food (because you are starving) only to slap him with a lawsuit a few years later for lending you that money.  Not only is it unfair, it is downright idiotic as it brings even more risk into the financial system.

Listen, I understand that there was a lot of back room dealings and billions of dollars changing hands that we do not know about. Yet, one thing is clear. If this is to happen again, good luck finding anyone willing to step in. Yes, I am talking to you US Government.  

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Stock Market Update, October 25th, 2013

daily chart Oct 25, 2013

Summary: Continue to maintain a LONG/HOLD position

In the last couple of updates I have mentioned that the market will bounce to the 15,300-15,500 on the DOW in order to close all the gaps and to satisfy all of my requirements. Well, we are here, what’s next?

This is where the picture gets a little bit fuzzy.  According to my mathematical work there is no doubt that we are at the inflection point with two possible outcomes.

  1. September 2013 top was indeed the top and the bear market down leg will resume shortly.
  2. The final top (a little bit higher or lower than September 2013 top) will be set in March of 2014. Thereafter the market will roll over and begin its bear phase.

As I have mentioned many times before, my mathematical work is clearly showing that the bull is ending and the 2-3 year Bear market is just beginning.  I would call the exact date, but there is just too much interference right now.  Unless a severe down leg starts over the next 2 weeks, we will have to wait until March of 2014 for the Bear to start. Until that happens a lot of ups and downs without so much as going anywhere.  The rest of my analysis remains the same.

Over the next few weeks we will find out if the if the bear market has already started or will start in March of 2014. Should the market break below 14,600 over the next two weeks, the probability is high that we have already started the bear market leg into the final 2016 bottom.  The market is certainly going back into the 14,800 as it left a huge gap there, but a firm break below 14,600 will give us a confirmation that the bear is back.

At the same time we cannot yet ignore the technical picture with the market being near an all time high. As such, I continue to advise you to maintain a LONG/HOLD position while waiting for the confirmation that the bear market has indeed started.  

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How To Determine The Intrinsic Value Of Any Company (Part 3)

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Further Notes & Valuation Explanation

Based on the calculation above there are 2 important dynamic areas that require our further attention and explanation.  They are an integral part of the calculation and just a small adjustment can have a significant impact on the overall Intrinsic Value outcome. These variables are…

1. Estimated Future Growth Rate:  Determines the future growth rate of the company over the next 10 years. It is an impossibly difficult number to get right. We can look at the historic growth of the company and use that number OR we can use the existing (last few quarters) growth rate OR we can use our future projected growth rate based on our understanding of the fundamental factors, the economy, company products and so forth.

Whatever your decision might be, understand that you are somewhat guessing here. The future is fuzzy. In 10 years the company might be collapsing with negative growth rates or it might be growing at an

+40% rate due to new product introduction. I often find it helpful to concentrate on the historic/average growth rate and then reduce it by a few percentage points to reduce Intrinsic Value output.  This give me a little bit more margin of safety and a little bit more room if I have made a mistake. 

2. Average P/E Rate:  Very similar situation to the Estimated Future Growth Rate discussed above. While we can look at the average P/E  ratio of the company over the last 10 years and perpetuate it over the next 10 years, in reality we have no idea what that ratio will be in 10 years.  In Microsoft’s example above we have estimated that the P/E ratio will be at P/E= 15 in 10 years.

Yet, no analyst can say that with 100% certainty.  Once again, the company might stumble over the next 10 years and find itself with a P/E Ratio of 5 OR it might surge its growth and find itself with a P/E Ratio of 35. Of course, that greatly impacts the Intrinsic value calculation and any perceived Margin of Safety that you have.  As discussed in the previous point you are better off using historic/average P/E Ratio and then reducing it by a few points to give yourself some extra margin of safety.

It is often helpful to play around with different inputs for these variables based on your research. It will give you a range of Intrinsic Values (Best Case, Average, Worst Case) type of scenarios that can give you a better understanding of what the company is really worth.

For example, in Microsoft’s case you can have a range of ($45.15 I  $54.82 I $59.28) based on playing around with a few numbers.  These prices can act as markers for future developments.  If the company is performing better than your original research has indicated, a higher range IV is appropriate. If worse,  the lower one.  In either case, you are at least aware that the Intrinsic Value is not an exact number, but a constantly changing one.

Once again, the formula above is a highly simplified version of a standard Intrinsic Value calculation.  It can be made a lot more complicated for the purposes of being more precise. Plus, there are multiple ways to calculate the Intrinsic Value.  Whatever the situation is I want you to understand that an Intrinsic Value number cannot be determined with exact precision.  It is your best guess based on the past and the research that you have done.  

Finally, some of the most important variables in the Intrinsic Value calculation rely on the future performance. While the future can be estimated, any such estimate is rarely accurate. As such, you must have a clear understanding that you are making predictions based on unknown future developments that might or might not be anywhere close to what you have originally estimated. 

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