Tag Archives: Templeton

Fundamentals vs. Technicals, Templeton, Ackman, Analysis of Valeant

Fundamental vs. Technical Analysis

https://monetary-metals.com/technical-vs-fundamental-report-19-mar-2017/

Technical analysis, in all of its forms, uses the past price movements to predict the future price movements. In some cases (e.g. momentum analysis) it calculates an intermediate signal from the price signal (momentum is the first derivative of price). But no matter the style, one analyzes price history to guess the next price move.

This is necessarily probabilistic. There is no way to know that a particular price move will follow the chart pattern you see on the screen. There is no certainty. And when it does work, it is often because of self-fulfilling expectations. Since all traders have access to the same charts, and the same chart-reading theories, they can buy or sell en masse when the chart signals them to do so.

Fundamentals or Arbitrage:

Arbitrage works just like a spring. If the price in the futures market is greater than the price in the spot market, then there is a profit to carry gold—to buy metal in the spot market and sell a futures contract. If the price of spot is higher, then the profit is to be made by decarrying—to sell metal and buy a future.

There are two keys to understanding this. One, when leveraged speculators push up the price of gold futures contracts, then that increases the basis spread. A greater basis is a greater incentive to the arbitrageur to take the trade. Two, when the arbitrageur buys spot and sells a future, the very act of putting on this trade compresses the spread.

If someone were to come along and sell enough futures contracts to push down the price of gold by $50 or $150 or whatever amount is alleged, then this selling would be on futures only. It would push the price of futures below the price of spot, a condition called backwardation.

Backwardation just has not happened at the times when the stories of the big “smash downs” have claimed. Monetary Metals has published intraday basis charts during these events many times.

The above does not describe technical analysis. It describes physics—how the market functions at a mechanical level.

There are other ways to check this. If there was a large naked short position in a contract that was headed into expiry, how would the basis behave? The arbitrage theory predicts the opposite basis move. We will leave the answer out as an exercise for the interested reader, as thinking this through is really good work to understand the dynamics of the gold and silver markets (and you can Google our past articles, where we discuss it).

This check can be observed every month, as either gold or silver has a contract expiring (right now it’s gold, as the April contract is close to First Notice Day).

Templeton

Ackman and Valeant

Ackman and his disasterous investment in Valeant The are many psychological lessons in this article.  What can you learn?

Ironically, one of the best research on Valeant was done by Allergan: Allergan analysis of Valeant 2014.   Did Ackman’s analysts even read it?   At least you have an example of solid research.

Compare to Ira-Sohn-2015-Presentation on Valeant and Other Platform Companies   Studying the two different presentations provides a FREE course on valuation and presenting a research idea.  But not 1 person in 10,000 would be willing to sweat the details like studying the two documents linked above.

Oh well, opportunity for those who work.

Test for Investors; Do you have what it takes to be a value investor?

giraffs

Test yourself…………….

Each of four cards on a table has a letter on one side and a number on the other, but you can only see what is on the side facing up. What you see are two letters and two numbers:

A         4           D           7

Suppose the rule governing these cards is that if a card has a vowel on one side, it has an even number on the other side. Which two cards would you turn over to find out whether the rule is true? Take no more than twenty seconds.

Now go to the real world: Can you name at least two psychological/analytical errors that you see in this clip.

https://youtu.be/Cxjdj5_5yNM Take no more than 4.5 minutes–length of the clip. The investment bankers each have MBAs, CFAs, Accountng degrees etc. They are SMART!

Total time for test 5 minutes.

2016_templeton   Hand-out to go with the above talk in 2016.    A good discussion of the psychological strength needed to apply value investing principles.

Capitulation in Gold (Continued….)

Continuing from where we left off in the capitulation series, a case study, http://csinvesting.org/?p=11351

Gold-COT (1)

Silver-COT (1)

Precious-Metal-Short-Interest

The above charts show the massive swing in sentiment as speculators moved from long to short expecting gold to fall INEVITABLY to $1,000 or so the pundits say:

What's uglier than gold

Demand for gold bullion remains stronger than the supply offered through the futures market–the co-basis is rising:

letter-aug-9-gold

Meanwhile, could divergences be developing in miners vs. gold? Note prior bottoms in 1986 (bear market rally) and 2000, the beginning of a major rally.

bear divergence

HUI_2000_070815

HUI_gold_110815

Mining stocks shunned

Aug8.2015goldstocksvsspx1

This post is not a recommendation but compiling the case study of capitulation in gold and associated miners. Remember Why Gold Mining is a Tough Business_Pollitt (a MUST read!) and Why-is-gold-mining-such-a-crappy-business Summary and…

ray-dalio (2)

Templeton

http://thefelderreport.com/2015/07/21/its-time-to-get-greedy-in-the-gold-market/  John Chew: Don’t ever just concentrate in one gold stock since the company and operational risks can be high.  SDGJ by Sprott offers diversification and sensible companies. Sprott Junior ETF Mining. Why even consider investing in such a bad industry? Because of price and the counter-cyclical nature of these stocks. You buy when the industry is losing money and hated and sell when the pundits recommend it and the trend is forever extrapolated higher.  There is no law that miners won’t go lower; miners are extremely volatile moving up and down 10% in one day.

What Happens When You Buy Assets Down 80%? farber

We’ve done a lot of articles on value and drawdowns on the blog before (search the archives).  I was curious what happens when you bought the US equity sectors back when they were really hammered (French Fama to 1920s).

Average 3 year nominal returns when buying a sector down since 1920s:

60% = 57%

70% = 87%

80% = 172%

90% = 240%  The average of 80% to 90% down is a triple.

 

Average 3 year nominal returns when buying an industry down since 1920s:

60% = 71%

70% = 96%

80% = 136%

90% = 115%

 

Average 3 year nominal returns when buying a country down since 1970s:

60% = 107%

70% = 116%

80% = 118%

90% = 156%

Templeton’s 16 Rules; Go Where the Outlook is MOST Miserable; Young Investors

TempletonSir John Templeton Quotes

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.

  • The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
  • “An investor who has all the answers doesn’t even understand the questions.”
  • “Diversify. In stocks and bonds, as in much else, there is safety in numbers.”
  • “…success is a process of continually seeking answers to new questions.”
  • “People are always asking me where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?”
  • “Focus on value because most investors focus on outlooks and trends.”
  • “Sell when you find a much better bargain to replace what you are selling.”

Sixteen Rules: Sixteen Rules for Investment Success_Templeton

Where is the outlook the most miserable?jan2edgoldstbears

Gold and silver stocks (as well as gold/silver) certainly fit John M. Templeton’s criteria of a hated asset class. The current 2011 to 2014 bear is near the average in duration and price decline. The worst decline in gold stock history was the 1980 bear market with a 72% decline. So, one sign post is the past. (Gold index used: Barrons’ Gold Mining Index or BGMI)

But charts like the the gold index only tell you the past.BIG HUI

Gold-Silver-Technicals

As you would expect, sentiment follows price. Note the huge decline in Rydex precious metals assets compared to all other financial asset sectors of the market–5%. Even the 2008/09 crisis period had triple the percentage. Of course, public opinion is at near all-time lows.

jan2edrydexpms

Silver-Sentiment

As price quietly stops declining (for now?)

jan2edstocks

Another sign of bearish Western investor sentiment was the draining of gold from ETFs. Also, there were discounts of up to 8% to 10% in closed end funds such as CEF and GTU that hold gold and silver bullion–an asset with no credit liability! The gold mostly went to Asia.  Physical demand is high at these prices. I simply view gold as money that can’t be debased in a world of fiat currency wars.  That doesn’t mean the price of gold in US dollars can’t go lower in the near term–three to eighteen months. GLD history chart 010214

goldetf

Rising demand for physical gold but declining price, video:

 

http://news.goldseek.com/GoldSeek/1388758285.php

http://www.bloomberg.com/news/2013-12-31/gold-with-silver-heading-for-worst-decline-in-three-decades.html

http://jimrickards.blogspot.com/

SEARCH STRATEGY
All of the above, is one part of a search strategy–look for the biggest price declines with the highest negative (or lowest positive) sentiment. Study the past hundred or so years of the industry (Google: Mark J. Lundeen and gold shares). If you are going to buy precious metals equities or gold/silver 5% to 20% as part of a portfolio, I suggest a high-quality mutual fund like Tocqueville Gold fund (TGLDX) or an ETF like GDX, GDXJ. You are nicked 1% or more in annual fees with a mutual fund but you get the diversification. GDX and GDXJ include companies that may be financially over leveraged or of poorer quality, but you have a lower cost and wide diversification. If gold and silver rise significantly, then highly leveraged–operationally and financially–leveraged companies will vastly outperform higher quality large cap miners like Agnico-Eagle (AEM) for example. I prefer a basket of 15 or so hand-picked gold and silver miners with 1. management with skin in the game, 2. decent balance sheets, and 3. well-defined projects with low cash and capex costs (no explorers unless a prospect generator). My goal is to hold through the beginning of the NEXT bear market–perhaps two-to-five years away?

Finding a hated asset class and then finding financially strong companies is relatively easy with some diligence. The HARD PART is holding on through the wild gyrations of price and sentiment. Stomach and character over brains.

Teaching the Young About Investing

http://sprottglobal.com/thoughts/articles/who-is-teaching-the-young-about-investing/

John Del Vecchio and Tom Jacobs, the authors of What’s Behind the Numbers?,
are giving a presentation at the New York Society of Analysts. Attendees will learn:
How companies hide poor earnings quality
Repeatable methods for uncovering what companies don’t tell you about their numbers
Reliable formulas for determining when a stock will get hit
Whether you’re a number cruncher or just curious, you’ll greatly benefit from this seminar, given by two people who combine investment chops with crowd-pleasing stories. So what are you waiting for?

Date: January 13, 2014
Time: 6:30 – 8 pm
Place: NYSSA Conference Center
1540 Broadway, Suite 1010
(entrance on 45th Street)
New York, NY 10036
Price: Nonmember $55
($10 surcharge for walk-ins)

Advance registration is encouraged in order to avoid the additional charge for walk-ins. Also, space is limited by the size of the room.

You may not be able to keep your resolutions about losing weight or going to the gym, but with a successful portfolio, no one will really care. So start the new year right by attending the above seminar.

Thank you for your interest in What’s Behind the Numbers?. Please feel free to share this with your networks!