Berkshire Hathaway: Fairly valued, But…

On May 6, 2012, we posted an article titled “Should Berkshire Hathaway Be Trading at 1995 Prices?” where we constructed an Altimeter for Berkshire Hathaway (BRK-A).  At the time we said the following:

Based on the Altimeter, Berkshire is currently undervalued by at least 66% and below the 2007 peak by almost 95%. Those considering the acquisition of Berkshire Hathaway have the following upside targets to consider in the coming 2-3 years, all things being equal:

  • $175,280
  • $197,190
  • $219,100

Since that time, the price of Berkshire increased the +95% by November 2016.  The updated Altimeter is listed below:

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Commodity Index Review: February 2018

Below is one of the most important charts of the Bloomberg Commodity Index (BCOM) you’ll ever see.  The range of the chart is from late 2015 to the present.

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Looking at this chart, can you tell what the overall trend of the index is?  Do you suspect what might happen if the index declines below the June 2016, February 2017, or January 2018 levels?

California Real Estate: February 2018

Two indicators of the California real estate market that we’re tracking are the median price of existing detached homes and the violations of California regulations for real estate licensees, agents, brokers and non-licensed individual/firms involved in real estate transactions*.  Below we have the monthly and 12-month moving average data for these two series from 1990 to the present.

DJIA Update: February 2018

Below is the performance of the individual Dow Jones Industrial Average constituents from December 29, 2017 to February 21, 2018.

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The latest update on the performance of the respective categories demonstrates, in part, the quality of analysis that we provided on the Dogs of the Dow investment theory.

Interest Rate Monitor: February 2018

In all of our postings on interest rates, we have made the claim that the Federal Reserve follows the markets when it comes to setting policy.

Recently there has been a low rumbling that rates might need to be increased faster than expected.  In a USA Today posting on February 19, 2018, it was suggested that faster hikes might be needed.

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In a Reuters posting dated February 20, 2018, the Bank of Korea Governor Lee Ju-yeol said that  “If (the Fed moves) faster than expected, it will immediately impact international financial markets and also domestic markets as well, so we’re prepared to respond to such a scenario.

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If you’re wondering why there is any discussion of rapid rate increases then the story is all in the data that we’ve been tracking below.

Precious Metal Considerations

For anyone that is interested in investing in precious metals, there are two articles that are required reading.  The first article is titled The Definitive Dow Theory of Gold dated March 18, 2017.  The second article is titled The Hidden Story of Gold dated February 15, 2018.

The March 18, 2017 article is instrumental in outlining where exactly we are in the cycle of gold.  The February 15, 2018 tells us that regardless of what most analysts think, the current market is no different than when gold was not freely traded on the open market in the U.S.  These articles are instructive because they put context around the idea that this isn’t the first rodeo and all change in the price of gold is relative.

Applying the context and relative themes should result in some very obvious questions that all precious metal investors need to ask.  However, there are two very basic questions precious metal investors should be asking themselves right now.  First, are we headed for an extended trading range before the price of gold skyrockets?  Second, what is a reasonable upside targets?  This posting will demonstrate the rationale for these questions and present possible answers to both.

Coppock Curve: Helmerich & Payne

On Monday February 12, 2018, we kicked off the Coppock Curve series with one of the largest oil field service company, Halliburton. Today, we continued on that oil sector review with a drilling company, Helmerich & Payne (HP).

One aspect that we like about Helmerich & Payne is its long history. Because of that, we are able to extract the data going back as far as 1982. The chart below displays HP's Coppock Curve from 1982 until now. Such a long history allows us to study the effectiveness of this strategy. Continue reading

Canadian Dividend Watch List: February 2018

Below is the total return performance of the Canadian Dividend Watch List from February 27, 2017 to February 16, 2018.

symbol name 1-YR TR
ACD.TO Accord Financial Corp. -5.41%
PJC-A.TO The Jean Coutu Group 24.91%
KEY.TO Keyera Corp. -9.89%
BEI-UN.TO Boardwalk REIT 1.29%
REI-UN.TO Riocan REIT -3.88%
D-UN.TO Dream Office REIT 21.46%
AX-UN.TO Artis REIT 15.54%
CUF-UN.TO Cominar REIT 4.74%

At the time, we thought that The Jean Coutu Group (PJC-A.TO) was likely to do better than an investment in REITs.  While PJC-A.TO did generate the highest total return, the REIT stocks did much better than we anticipated. 

Below we have ranked the performance by selecting the top three stocks from the respective fundamental categories.

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The Toronto Stock Exchange was relatively unchanged over the last year while the entire watch list averaged +6.10%.

U.S. Dividend Watch List: February 16, 2018

Previous Year Performance Review

In our on-going review of the NLO Dividend Watch List, we have taken the top five stocks on our list from February 17, 2017 and have checked the performance one year later. The top five companies on that list can be seen in the table below.

Symbol Name 2015 Price 2016 Price % change
MAC Macerich 66.41 60.66 -8.7%
KO Coca-Cola Co 41.23 44.98 9.1%
BMS Bemis Co Inc 48.62 45.97 -5.5%
SO Southern Company 47.80 43.93 -8.1%
SCG SCANA Corporation 65.65 37.71 -42.6%
      Average -11.1%
         
DJI Dow Jones Industrial 20,624.05 25,219.38 22.3%
SPX S&P 500 2,351.16 2,732.22 16.2%

Looking back at our commentary about Macerich (MAC), it's fair to say that our analysis was accurate. We felt that Macerich would underperform in the rising interest rate environment and the stock did just that. The following commentary came from the post last year.

"The valuation of Macerich is depended heavily on the interest rate cycle thus Valueline estimated that Macerich is trading below fair value but with declining secular trend as interest rate is expected to rise. Knowing that there are two strong secular headwinds, declining fundamental for mall and interest rate, we urge extreme caution to our readers."

The average change for the top five companies was -11.10% and the brightest spot from the top five was Coca-Cola (KO). A company we were optimistic about at the low and executed on that thesis. The following excerpt was extracted from the list a year ago.

"Next on our list is a company that is familiar to all, Coca-Cola (KO). The stock reached a low of $40 last December and trading in range between $42 and $40 for nearly 6 months. Perhaps the stock is forming a bottom or consolidating before another leg down. We acquired more shares as recent[ly] as last November thus it's fair to say that we are hopeful for the bottoming thesis."

U.S. Dividend Watch List: February 16, 2018

It was a good week for the bulls as the market rose +4.30%. Despite that rise, the correction put many companies in our watch list. Below are 55 companies that appear on this week's watch list. Continue reading

Bitcoin Upside Targets

Like Ethereum, Bitcoin is rebounding nicely from the February 5, 2018 low.  Below are the upside targets for Bitcoin:

Gold Stocks: Hedge Free

We have been quoted here on many occasions saying that when the general equity market takes a dive of –10% or more, so too does gold stocks by a greater margin.  Our point, gold stocks are not a hedge from general market drops.

In our September 24, 2014 article titled “Gold Stocks: Risks and Remedies” we highlighted the numerous instances from 1939 to 2011 of when the Dow declined by more than -10% and showed how either the Barron’s Gold Mining Index or the Philadelphia Gold & Silver Stock Index declined by a greater percentage.

In the recent decline of the DJIA from January 26, 2018 to February 8, 2018, the index declined –10.36%.  So how much did the Philadelphia Gold & Silver Stock Index (XAU) decline?  The XAU declined –11.57%.

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In the chart above, we have excluded the decline of –14.75% from January 24, 2018 to February 9, 2018 in the XAU index.  Add this to the growing list of instances of when the DJIA declines more than –10% and gold stocks also decline by a greater percentage.

Ethereum Upside Targets

As Ethereum recovers from the low set at $695.08 on February 5, 2018, the expected upside targets are as follows:

The Hidden Story of Gold

Gold is currently languishing in a trading range between $1,366 to $1,049. This trading range is thought by many to be a pause before the eventual increase above the previous high at $1,895.  After all, the price of gold had managed to decline from $1,895 to the low of $1,049.40, a drop of –44.62%.  Part of the thinking of a new high in gold is predicated on the idea that we are entering a phase of rising inflation after years of decreasing inflation from the 1980 peak.

Introduction

If the thinking is that gold is on the cusp of new highs, there is one question that we need to answer.  The question is, “What happens with the price of gold in the early stages of an inflation cycle?”  What is amazing about this question is that in the early stages of the last inflation cycle from 1939 to 1942, gold was fixed at $35 until 1971.

Never in the history of the United States have investors seen the reaction of the price of gold to the early stages of rising interest rates.  In this posting, we’ll attempt to show a reasonable benchmark for gauging what would happen if there weren’t restriction on the  price of gold.

How are we going to explore the price of gold in a period when there was not a free floating price for the metal?  By examining what the price of silver has done in the period when interest rates rise in response to increasing inflation.

Silver is the perfect means to convey the message of what would have happened to the price of gold if it were allowed to navigate the whims of Mr. Market.  While silver is more volatile than gold and prone to extremes it still tells the story of gold when gold did not have a voice.

Interest Rate and Inflation Cycle

We start with the price of silver from the peak in 1925 because, according to Dewey and Dakin's in their 1947 book Cycles: The Science of Prediction, the last peak in wholesale prices, which generally corresponds to interest rates.  If you have a beat on interest rates, you can get a better sense of where we are and where we might be going as it relates to precious metals.

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Remember, you don’t have to be a fan of cycle theory to appreciate the quality of analysis that reflects what has already happened from a book written in 1947.  Calling the peak in 1979 and the trough at 2006, while not exact, is the best way to learn from the past.  Looking at the 3-month Treasury, we can see the fulfillment of an entire cycle in rates from 1940 to 2009.

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Just think, there is no official data that extends from prior to 1934 to the present.  Without this important continuous information, it is difficult to find data that we can compare like-for-like stages in the cycle.  However, we do have data from the price of silver in the previous cycle top to the low that corresponds to the low in interest rates and silver.  This will be our introduction to the secret history of gold.

Continue reading

Coppock Curve: Halliburton

We're beginning a new series of the Coppock Curve by applying this technical indicator against individual stocks. First on our list is Halliburton (HAL). Continue reading

Dow Altimeter Review

The Dow Altimeter, as constructed by Edson Gould, is based on dividend payments made by the constituents of the Dow Jones Industrial Average (DJIA) as reported in the Barron’s section titled “Indexes PEs and Yields.”  The Dow Altimeter information provides a graphical representation of fundamental data.

On January 23, 2018, we said the following:

“While the market appears destine for higher ground, it is worth noting that the 24,223 level is the new support level for the DJIA.  If the DJIA fails the support level at 24,223 then the next stop is the 18,373 level.”

Below we have updated the Dow Altimeter and included the coincidence of buy indications based on the dividend history of the Dow.  We believe this history of dividend payments provides strong evidence of when a bear market has come to an end along with a fair estimate of when a recession should come to an end.

A recession and a bear market is coming.  We don’t know when, however, we can prepare ourselves with the necessary insight to better call the bottom (better than our July 2009 call for the stock market, our August 2009 call for the end to the recession and our December 2010 call for the bottom in real estate.