Tuesday, October 23, 2012

COW (part 2)

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P = E Times X
My continued analysis of COW (iShares Agriculture ETF) is long overdue.  Previously, I provided a list of the companies which comprise 80 percent of the makeup of COW.  I then mentioned the relationship between price and earnings, and how calculating the potential price of the companies in the ETF results in a price we can use for valuing the ETF, itself.  I had written that Price = Earnings per share Times X.

P/E Ratio
How do we determine a value for X?  Given the formula above, we can then restate it as X = Price divided by Earnings per share.  X is what is known as the Price to Earnings Ratio, or P/E Ratio (Price divided by Earnings).  I looked up each of the companies on the list, and determined what, historically, would, seem like a conservative P/E Ratio over the past number of years.  You can see my findings in the chart above.

Growth Rate
What we need to understand about the P/E Ratio is that it is directly correlated to the growth rate of the company.  The faster the company is growing, the more people are willing to pay to take advantage of that growth.  To a point.  I then compared my estimated P/E Ratio to the growth rate for each company.  The P/E Ratio should be anywhere from 1 to 2 times the company's growth rate.  What you see above are the adjusted numbers.  CF is the exception.  The historical growth rate for CF is greater than the P/E Ratio I am using, but I am more comfortable using the lower number in that case.

Target Price
The Earnings per share estimates I am using are the average consensus earnings for all the analysts who follow each company, which are closest to the end of the current year.  Multiplying the P/E Ratio by those Earnings numbers, we get a target price for each of the companies.

So, what price did I come up with for COW, for the end of the year?  I'll show you those calculations next time.  Still with me?  Questions?

Thursday, October 11, 2012

September 2012 Returns

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September was not all that bad, this year, considering its history for being the worst month of the year.  It is a good illustration of how seasonality is based on probability, not certainty.  Having said that, I am still concerned about this market, particularly since we seem to be deviating from what I would consider to be normal seasonal patterns.  In itself, that wouldn't bother me so much, if it were not for the fact the major technical pattern called a head and shoulders, which I wrote about earlier this year, is still intact.  

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The momentum indicators I follow would indicate the market is heading lower.  If that turns out to be the case, the fact we did not make it above the previous high from last February is more bad news.  I would not be surprised to see the TSX drop below the 200-day moving average which is only some 150 points, or so, lower than the close of today's market.  We could get there in a single bad day!  

The returns shown above use the XIU ETF as a buy and sell signal.  The idea is to buy when XIU is above it's 200-day moving average, and sell when it is below.  Bad things can happen in the markets when they are below the 200-day moving average.  The real danger is, however, if we get down below the 11,000 mark.  A pattern such as this would indicate going back to the lows in the last Great Recession.  It will be interesting to watch - the markets normally finish the year stronger, but that was not the case is 2008, either.  If we do see these things begin to happen I will be looking for opportunities to short the market (using inverse ETF's) rather than looking for buying opportunities.

21 month return for TSX @ September 30, 2012 = -7.86 percent
Return for Basic Timing Model Using XIU =          11.97 percent
Return for Advanced Timing Model =                    -4.36 percent
Money for charity =                                            $0.00 

Are you expecting a year-end rally?