As describedin our article on speed resistance lines (SRL) dated September 22, 2011 (found here), Netflix (NFLX) fell below our projecteddownside target of $99.58. Although we thought that the stock would be worthconsidering below such a level, we had to concede that, “...the difficulty may be that thesentiment that pushed the stock price to $298.73 would likely be just theopposite to push the price down.” Assuming the purchase of thestock at $99.58, an investor would have gained 21.10% based on the currentprice of $120.59.
Naturally, wewondered what Edson Gould’s speed resistance lines would say about AppleComputer (AAPL). The very first thing that we look for, to determine speedresistance lines, is the most recent peak in the price. Because AAPL is continually making new highs,we only need to use the latest price of $455.68 as our starting point.
Based onGould’s work, Apple (AAPL) has a conservative downside target of $230.09 and theextreme downside target is $151.89. Whenwe ran the same calculations on Netflix (NFLX) in September 2011, we made aseemingly innocuous error. We overlookedthe fact that NFLX had a lower support line (red line) at the price level of $85. In this case, we have denoted AAPL’s supportline (also in red line), at $117.05, as a potential downside target for thestock.
As the priceof Apple increases, so too does the SRL lines based on the work ofEdson Gould. The rampant enthusiasm for AAPLsuggests that the stock isn’t likely to decline to the indicated levels anytime soon. However, when and if you seeAAPL start to make a swan dive, the levels indicated are reasonable downside targets.
The following is one of our personal favorite watch lists. We started tracking the insurance industry in January 2011 and we're very impressed with the results so far.
Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild. The book starts with Shelby Collum Davis investing approximately $50,000 to $100,000 that ultimately grew to $900 million after 47 years. The strategies employed by Davis seem more accessible to average investors as opposed to Warren Buffett's leveraged strategies and education from Benjamin Graham.
NamePriceP/EEPSYieldP/Bpayout ratio% from Low
National Western Life Insurance143.27.2819.660.30%0.41.83%10.15%
American National Insurance72.6411.296.444.20%0.5347.83%10.55%
Tower Group, Inc.21.9110.82.033.40%0.8536.95%10.77%
HCC Insurance Holdings, Inc.27.9411.562.422.20%0.9325.62%13.30%
XL Group plc20.328.190.722.20%0.6761.11%14.75%
Kansas City Life Insurance32.3613.62.383.30%0.5145.38%15.53%
Sun Life Financial20.1413.631.486.90%0.8293.24%15.75%
Everest Re Group85.1525.563.332.30%0.7657.66%16.09%
Endurance Specialty Holdings37.0870.760.523.20%0.58230.77%17.08%
Willis Group Holdings38.7324.421.592.70%2.5165.41%17.22%
Hanover Insurance Group36.6935.871.023.30%0.67117.65%18.35%
Watch List Summary
Alleghany Corp. (Y) appears to be an exceptional investment opportunity. First and foremost, Alleghany Corp. has emerged as the suitor of our current holding of Transatlantic Holdings (TRH). Even Warren Buffett was turned down by Transatlantic holdings after he lobbed a lowball offer for TRH. Despite this fact, Alleghany is acquiring Transatlantic Holdings at a price nearly 10% below book value. This alone suggests that Alleghany has an eye values. We've been adamant that Transatlantic Holdings was a great value (found here) and is trading 8% below the offer price of $59.79.
The Punchline: Being within 4% of the 52-week low and 12% below book value, Alleghany (Y) is definitely a long-term buying opportunity at $288. We'd make Alleghany a two part acquisition that comprises 15% of the portfolio when completed. Keep in mind that the stock has a downside target of $266 based on Dow Theory.
“There's a reason Gold is the hottest in the world.Investors are simply losing faith in ALL fiat currencies. Hence, they areturning to one thing that has always been real money - GOLD!”
We don’t know about the far distant future of gold,governments and profligate spending. However, we've always enjoyed a historical perspective on the topic of “realmoney.” We’ve pulled a few quotes fromRichard Russell’s Dow Theory Letterson the topic of “real money” in the same vein as described above.
“The US is on a treadmill to disaster via the creation ofdebt. In time (and the time is moving very rapidly now) the debt will destroyalmost ALL forms of investments. Gold will withstand the destruction, becausereal money is never destroyed.”
Dow TheoryLetters. Issue 736. August 7, 1978. Page5.
“Coming up in a month, a year, a few years (I can’t time it)is the BIG PROBLEM, the problem that I’ve warned about for a long time. How doyou get people to hold paper “money” when they have increasing doubts about itsworth? The answer: you must make it CONVERTIBLE into real money-gold.”
Dow TheoryLetters. Issue 766. September 26, 1979. Page1.
“My job now seems to be to try to save my subscribers fromthe deceitfulness and greediness of our own Government. So I talk about thetechnical position of gold, of where WC are, of whether gold is still a buy andwhether it will take 900 or 1000 paper dollars to buy an ounce of real moneysay six months or maybe even three months from now."
Dow Theory Letters. Issue 774. January 16, 1980. Page 7.
“‘How can the Government ever be bankrupt if it is able to createmoney?’ The answer is that the Government could only be bankrupt if no onewould accept that money. And of course, that possibility is the reason why manysurvivalists will ‘never be without some kind of a position in real money -gold.’”
Dow Theory Letters. Issue 805.March 25, 1981. Page 3.
“Why could gold be bullish? Two opposing reasons: first,with a potential crisis in the world monetary system, people turn to real moneyas an insurance policy. Gold is real money. Second. With unbearable deficits facingthe US over coming years, politicians will be tempted to ‘print’ (monetize)some of those deficits (and suppose Edward Kennedy gets in in ‘84).”
Dow TheoryLetters. Issue 841. August 11, 1982. Page 6.
Now, we’re not suggesting that the ultimate consequence ofprofligate spending isn’t coming. Additionally,we’ve made a call for a secular bull market (as opposed to a cyclical bullmarket) in gold on September28, 2010 and silver on September5, 2009 . However, much of thearguments during and after the peak in the price of gold are the same as today.
Additionally, nothing has changed that was said about profligatespending at the peak in the price of gold in 1980 or the period from 1981 to1999, a time when the price of gold was in a declining trend. Therefore, we have little to help us distinguish the difference between huge government spending when gold is rising and when gold is falling. We're sticking to the view that Dewey and Dakins' assertion that gold vacillates in a 50 to 54-year cycle is right on target (our 2009 review of their work here).
We’re opting for the view that goldexperiences good times and bad rather than the view that our nation is comingto an end. After all, the redemption ofour gold, as with all forms of insurance, is not something that we look forwardto.
Source: Watterson, Bill. The Calvin and Hobbes Lazy Sunday Book. Universal Press Syndicate/Andrews and McMeel. 1989. page 49.
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