Buy Agriculture Now?

Yes, COW
I am not a financial professional, and cannot recommend equities for you to buy.  Having said that, I want to share my analysis with you.  I do this as a means of teaching others a (relatively) simple approach to arriving at price targets.  Why agriculture?  This is a seasonally strong period of the year for agriculture stocks.  Second, my calculations  indicate there is as much as a 24 percent upside to the Exchange Traded Fund (ETF) with the ticker symbol COW on the TSX as at Saturday, Sept. 22.  I will provide additional details of my calculations over the next few posts, but first, a little more about COW.

Diversification
iShares lists the top holdings in COW by weighting.  By adding the weightings, we can see the top 13 companies make up 81 percent of the fund.  These companies are headquartered in Canada, the U.S., Chile, Brazil, Japan, and Switzerland.  As in this case, ETF's give me the most diversification at the cheapest price.  I could go out and buy each of the 13 companies (or only the one's I like), but the cost of the commissions to do so quickly adds up.

Price
Prices of ETF's such as this one follow an index.  As such, there is no fund manager deciding which company to buy, and when.  iShares manages the fund so it reflects the holdings in the index it is tracking.  The price follows that of the index because institutional providers package up the stocks of companies in the index to sell to iShares when it is cheaper to do so, and buy them back again when they become cheaper than the stocks. As a result, the constant buying and selling of ETF units causes the price of the ETF to mirror the index of stocks.  Price is a function of earnings.  At any given point, we can show the price of a share of stock as being the amount of company earnings divided by the number of shares multiplied by some number.  In other words, Price = Earnings/Share Times X.  Calculate the future price based on future earnings for most of the companies in an ETF, and we can compute the target price of the ETF.

Technical Analysis
Technical Analysis only goes so far when it comes to individual stocks.  That is doubly true of stocks which have a limited trading volume.  A volatile market such as the one we find ourselves in currently compounds the problem even more.  A price of a widely held ETF of widely held stocks is much more predictable than a single company.  The fundamental analysis I am in the process of sharing with you shows me what to buy.  I then use technical analysis to determine when to buy what I have calculated as having a cheap valuation relative to the current price.

Questions?  Comments?


   

Don Vialoux On The TSX

Click Here To Play The Video

Don's research identifies the time period of Sept. 16 to Oct. 9 as a period of seasonal weakness.  He believes the technical indicators are now pointing to a correction.  This correction is, on average, 4.0 percent for the TSX index.  He expects markets to go higher after the U.S. election.  With the debate surrounding the fiscal cliff in the U.S., I expect volatility to be higher than usual, especially if trading volumes remain low.  I think they will get the job done to avoid the future tax increases from automatically kicking in, but it will come at a cost, further weakening people's faith in the system, and the markets.

Anyone have an opinion they wish to share?

Happy Birthday "Occupy"

Robert Johnson asserts that the system of money and politics in Washington is broken, and then they launch into a discussion about education being the real problem.  I am not saying there aren't problems in the education system in the U.S., but I think there is a state of denial which prevents them from seeing that the real issue is the hijacking of the political process by well-financed lobbyists.  While high unemployment may swell the ranks of the Occupy Movement, I sense it is the polarization of the rich looking out for the rich and the poor left to fend for themselves which is at the heart of the protest.  Being out of a job is one thing; losing faith in the ability of the system to bring a return to prosperity (except for the rich) is an entirely different (and more volatile) situation.

August 2012 Returns

Click To Enlarge

Seasonality at this time of year still favours Energy, Gold, Agriculture and Natural Gas. Natural Gas is the only sector not participating, possibly due to the run up in June and July. North American equity markets continue to trend higher.  My time horizon remains short as we enter into the worst seasonal period of the year based on historical trends.

I had made a choice not to play gold, even though seasonality favours it at this time of year.  First, I would rather invest in gold companies rather than bullion, and a big enough decline in the market causes everything to drop at the same time.  At such times, even gold offers little protection.  Second, I wasn't crazy about the idea of holding a more highly volatile ETF given the high market volatility.  I am now thinking that was the wrong decision, but take comfort in not, potentially, putting funds at risk.  I am all about risk vs. reward, although in this case I underestimated the reward potential  Still, a dollar saved is a dollar I can use later.
  
20 month return for TSX @ August 31, 2012 = -10.94 percent
Return for Basic Timing Model Using XIU =        9.59 percent
Return for Advanced Timing Model =                -4.36 percent
Money for charity =                                        $0.00

Comments? Suggestions?