Archive for the 'Charts' Category

Index Projections

Posted on February 22, 2010, 7:23 am. Closed

I occasionally find it fun to look for “patterns” in the price movements of stocks and indexes as a way to see what might happen in the future. I put patterns in quotations because I actually tend to think that my efforts are mainly just my brain’s meager attempt to find order in what really is probably meaningless chaos. However, I have read that Jim Simons main hedge fund works on the basis of taking advantage of patterns, so I’m not really sure about the utility of spending my time on this subject…

Anyways, in the chart below you will see two boxes, the first one being the pattern, and the second box containing a rough tracing of where the index will go if this pattern reoccurs (click for larger image).

I think I will continue to regard technical analysis as something I should not entirely disregard. It will be a very minor consideration in investment decisions.

Brown & Brown

Posted on February 18, 2010, 12:53 pm. Closed

Brown & Brown (BRO), the world’s sixth or seventh largest insurance agent/broker, recently missed estimates by a fairly significant margin. The stock is down about 6% for the week and has fallen from its 2009 high of $20 to $16.50. Here are some reasons why I think BRO is a good potential investment:

It’s at a historically low P/E of 14 (earnings yield of about 7.1%) after ranging from the 20s to lower 30s for the past decade
Cash flow yield is in the double digits at 11.6%
Has grown shareholder’s equity at 28.6% annualized
ROE is quite good — has been in the upper 20s to low 30s
Operating margins are also good — in the mid-to-upper 30s
Some other good value investors own the stock like Tom Gayner and Richard Cunniff

Here’s a chart of BRO’s stock price and normalized P/E ratio for the past 15 years:

As you can tell from the chart, it generally was a good time to purchase the stock after a peak in the P/E ratio, after the ratio had compressed by about 50%. It seems we are in a similar situation where the last clear peak was in 2005 and 2006 when the ratio was at 30. With a P/E now at 14, this looks like another good entry point for BRO.

Two Specialty Insurers That Can Be Had on the Cheap

Posted on January 23, 2010, 12:08 pm. Closed

These two specialty insurers ain’t no Berkshires, Markels, or Alleghanys, but they seem to have done alright with their underwriting in the past, but Mr. Market has punished their stock prices in the past several months.

The first is The Navigators Group (NAVG). It’s P/B is 0.9 at the moment and the forward earnings yield is about 11%. And technically speaking, I think its a great entry point being at the bottom of its bands and near a range of support. (click for larger image)

The second is Argo Group International (AGII). It’s P/B is 0.52 and the forward earnings yield is about 15.8%. This stock is also at a great entry point technically speaking. (click for larger image)

Patterns, Patterns on the Chart

Posted on December 17, 2009, 11:05 pm. Closed

I have always been fascinated by charts, patterns, and the technical analysts who faithfully believe the chart tells all. For several weeks I have seen various people who believe a drop in the Dow Jones Utility Average is coming. I decided to take a close look myself and here is the picture I painted where there is a small chance a pattern may repeat itself. I wonder if this will come to pass? (Click image for larger size)

The Cash for Clunkers Bump

Posted on October 28, 2009, 10:06 am. 1 Comment

Much like the effect of a “Colbert Bump,” light vehicle sales experienced the effect of the cash for clunkers bump over this year’s summer. (click for larger image)

Notice how quickly vehicle sales returned to historic low levels.

Is the top in? Is the bear market rally top in?

Posted on October 17, 2009, 10:24 am. 1 Comment

It seems to me that a lot of investors and traders have been asking this question for the past four or five months. (click for larger picture)

Is the the rally over? Is it a V-shaped recovery? Are we in the middle of a W-shaped recovery? If most people think we’re in a huge bear market rally, is that a contrarian indicator that we’re not in a bear market rally?

Who the heck knows? All I knows is—I’m purposefully affecting a New York accent here—that there ain’t as many deals as there used to be.

An Illustrated History of U.S. Banks Net Interest Margins

Posted on October 2, 2009, 7:47 pm. 2 Comments

Below is a chart I created showing the net interest margin of U.S. banks (click for larger image):

As you can see, the blue line is the net interest margin for all U.S. banks. Glancing at the data, you can see the net interest margins peak sometime in 1993 and from that point on, net interest margins have been in decline. Gee, I wonder if that has anything to do with total consumer credit beginning its 15-year long march upwards? (See my previous posts on consumer credit: What Portion of Past Economic Growth Was Debt-Fueled? and Predictably, Consumer Spending Declines).

Bank net interest margin peaking in 1993 I feel is more evidence that late 1992 and early 1993 was a real economic turning point for this country. People started to borrow and spend without abandon based on rising productivity, increased incomes, increasing asset prices, increasing home and land values, etc. I can only surmise this meant there was a lot more money out there in the economy, competition between banks for that money was fierce, and therefore net interest margins for the banks began to decline.

Another thing I find interesting is that the “small” banks with average assets under $1B seem to always have had a much better net interest margin than the “large” banks with average assets greater than $15B. The graph below shows the difference between the small and large bank net interest margins (click for larger image):

Since 1984, the average net interest margin spread between small and large banks has been 112 basis points. Another interesting thing is that the spread seems to fall a good deal during and after a recession, but once the economy gets going again, the spread then widens again. Perhaps this is because the large banks have usually been the ones to benefit most from government attention and from their closer relationships with the Fed and Treasury? Being too big to fail probably has its competitive advantages in moments of economic instability or crisis…

Georgia Monthly Mortgage Licensing Statistics

Posted on September 2, 2009, 9:52 am. Closed

Last night I spent some time collecting data from the Georgia Department of Banking and Finance regarding the monthly licensing activity of the Non-Depository Financial Institutions Division, i.e., the licensing activity of the mortgage industry inside Georgia. Before I began, I hypothesized the data would show a decrease in approval of licenses and increase in revocation of licenses some time around early 2008, roughly the time when people were starting to realize there might be a housing bubble and that it might be bursting.

Here’s a graph of the data I collected (click for larger size):

First, I thought it was interesting that July seems to be the month where the majority of the license revocations, expirations, etc., occur for the year. This might be a result of the seasonality of the housing/mortgage market or might just be the month where the government decides to release a large backlog of processed licensing decisions. I’m not sure.

Secondly, it looks I was not too far off with my hypothesis. Up until about December 2007, the amount of mortgage licenses approved outnumbered the amount of licenses revoked. Since that point in time, more licenses have been withdrawn or revoked per month than approved. This will be the trend until the mortgage market finds equilibrium.

Update: As an aside, though the publication reported the quantity of licensing decisions, the publication did not provide any context for the data. Data without context is next to meaningless. A simple historical chart such as the one I created could have easily been provided by the government and would have added so much more meaning to the data already provided. Is this just an example of how government often lacks initiative and foresight?

A Most Bullish Chart

Posted on August 20, 2009, 11:32 pm. Closed

Bill Nasgovitz shows a chart of the ten year rolling returns of the stock market in this video. He is definitely correct in that it is a very bullish-looking chart and that the next ten years will most likely be better than the last ten years.

However, I am sure that there are different charts out there that show we have not yet hit the point where we have the true beginning of a new bull market. For example, Vitaliy Katsenelson has a chart showing the 10 year trailing P/E ratio of the S&P 500 on slide 18 of this presentation (click image below for larger size):

Katsenelson says the market is now trading at an average valuation, not a below-average valuation, which he argues is the point at which a new bull market begins.

My own personal opinion is that this market is fairly valued or maybe even slightly overvalued.

Patterns in Stock Charts

Posted on April 26, 2009, 5:33 pm. Closed

Often times, when comparing past and current stock charts, one will see identical or similar patterns. This might be due for any number of reasons. I believe its probably a combination of a significant amount of investor psychology and a small amount of coincidence. Investors will react to crises or tectonic shifts in markets in the same way regardless of the time period.

So for example, I took a look at Rowan Cos. (RDC), a major provider of international and domestic contract drilling services, and a large holding of Robert L. Rodriguez’s FPA Capital.

First, lets get a big picture of the stock’s history.

Just from looking at the chart and without knowing anything about the company, you can tell that this is probably a company in a very cyclical industry by looking at the large number of steep advances and declines. So let’s compare a past decline with the current one we are now experiencing.

The chart above is from late ’97 to early ’99, a period of 482 days from top to bottom. The next chart will be our current situation.

The current situation is that RDC topped in the middle of ’08. It’s been 299 days since the top. So how can this comparison help us? Let’s think of the current situation. Last year, the world had the most spectacular run-up in energy prices and one of the most spectacular declines probably in modern history. Now the entire world is in recession and countries are doing their best to fight deflation. Can we really say that an energy services company like RDC has put in a bottom after only 299 days during brutal economic conditions when in the past it took 482 days to put in a bottom in what were probably comparatively rosier times?

I think the answer is no and that we won’t see a bottountil at least October of this year.

But on the other hand, can we also simply rely on what a stock chart looked like in the past in an attempt to predict the future? Can we forget about the fundamentals of the company? The answer to both questions is No. The goal of this post was mainly to convey my fascination with how similar price patterns can often repeat themselves over the course of history.

Disclaimer

This blog is produced by Douglas Ott. By viewing or participating in discussion on this blog, you understand that the opinions expressed within are the opinions of only the author and individual participants.

Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument. Before investing, consider your investment objectives, risks, charges, and expenses. Any purchase or sale activity in any securities instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. The author may or may not have positions in any security mentioned on this blog.