The Four Percent Rule

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The 4% rules dictates that, given historical market returns, we can't afford to withdraw more than that amount from our retirement portfolio after age 65 when we, presumably, stop contributing to it.  From what I understand, this is before fees, and other related costs.  On that basis, does it make sense that we should be paying more than half of our potential retirement income to the mutual fund industry in the form of management expenses?  Whose money is it, anyway?  I plan on withdrawing more than 4% from my retirement portfolio.  Given the high fees relative to performance, I won't be parking my funds for retirement in any mutual fund!

Have you looked at your mutual funds, lately?


 

COW (part 3)

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The Consensus
I started my analysis of COW (iShares Agriculture Exchange Traded Fund) by determining the companies which make up the majority of it, and then I did a Price/Earnings calculation for each, based on consensus earnings as at the end of 2012.  The next step is to calculate the expected price difference between now and the end of the year.  We can calculate the difference between today's prices and the year-end target prices. Using the same weightings we derived for each company in the fund, we can then compute each company's contribution, and thus, a year-end price.

The Price
That said, the target price I calculated for COW by the end of the year is $28.78, a 32% increase from today.  Now, if I only relied on fundamentals, COW would be a buy, although I have to say earnings estimates are being cut during the current reporting season.  Dupont, for one, had to do so.

The Charts
If we also look at the charts for COW, however, we can see that it has approached a point of resistance where it is not totally clear whether the price will continue much higher than that.  Still, the upward trend remains, largely, intact.  While it is no guarantee of future performance, that same upward trend has continued into the new year in each of the last four years.  Personally, I have my doubts given the uncertainty over tax rates in the U.S. after the end of this year.  I can't advise people what equities they should buy, but for myself, I would only be willing to hold COW if it breaks above that line of resistance.

What do others think?  Are you convinced?

October 2012 Returns

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Seasonally, November brings the beginning of the best six months for the TSX market.  The materials sector normally shows strength at the middle of the month with the technology sector continuing in strength.  Technology as measured by the iShares XIT Exchange Traded Fund is currently trending higher, but the materials sector - not so much, yet.  Overall, the TSX was relatively flat for the month of October, finishing slightly higher.

Mutual Fund redemptions have been growing, and I expect that trend is likely continuing, given investor uncertainty over the situation in Europe and the elections/fiscal cliff in the U.S. coupled with continuing high unemployment.  All in all, no news is still better than bad news, but not by much.  It is still impossible to tell, yet, whether, or not, we will get much of a rally going into the end of the year. 

22 month return for TSX @ October 31, 2012 =     -6.98 percent
Return for Basic Timing Model Using XIU =          13.5   percent
Return for Advanced Timing Model =                    -4.36 percent
Money for charity =                                            $0.00

Any predictions for the end of the year? 

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?

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?

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

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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?