Pivotal Events

By: Bob Hoye | Fri, Aug 25, 2006
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Signs Of The Times:

"I've never seen a soft landing." CEO, Countrywide Financial, which is the biggest home mortgage lender in the U.S. WSJ, Aug. 8

"Recent growth in house prices is not due to speculation in the housing market, such as occurs in bubbles. We argue that our findings point toward the high prices being driven by fundamentals."
"Housing Bubble Fears Unfounded"
Chicago Federal Reserve - NP, Aug. 23

"The pain that homeowners and homebuilders are now feeling follows a raging national house party in which prices had more than doubled in parts of the country between 2000 and 2005."
"'Hard Landing' on the Coasts Jolts those Who Must Sell"
WSJ, Aug. 23

Stock Market: As the saying goes "mutton dressed up as lamb".

Of course, the imagery is of a former belle of the ball dressing as an ingénue and we take August's action as a sprightly rally within a developing bear market.

Actually the "vigour" was mainly shown as an outstanding shift from selling to buying pressures, as calculated by Lowry's. On profitability, the Nasdaq almost made 8% and the senior indexes are approaching overbought territory. Yesterday's slump suggests that the old dame is presenting only the image of youth.

Our advice has been to sell the rallies.

Sector Comment: Banks and financials have participated in the summer stock rally, with the BKX rising from 105 in mid-July to 113.3 on August 7.

This, along with representative bank stocks (JPM and BAC) reaching an RSI of 70+, successfully completed the "Widows and Orphans" sell pattern.

As with the last such pattern in 1998, this occurred 13 weeks after the "alert" signal from our proprietary Bank Trading Guide.

More recently, the Guide has rallied from 179 on July 31 to 197 on August 16. This seems "overbought" at nowhere near the high of 229 with the "alert" set in April.

The next slide in the Guide will anticipate a plunge in global bank stocks.

Following the similar topping pattern in 1998, the BKX plunged 42% as, for example, Citigroup crashed 60%.

The advice has been that investors and traders should be aggressive sellers of the sector.

In this regard, it is interesting that our model has given a "sell" signal similar to 1998 and valuations are the highest since that fateful year.

For example, in Toronto banks and financials carry the largest weighting at 30.5%. Within this, the largest bank (RY) is commanding a 3.33 price to book ratio, which compares to 2.98 in 1998. The price to cash flow registers a lofty 13, which compares to 11 in 1998.

The comparisons are daunting.

We have been mentioning that takeovers on the base metal mining sector mainly happen at cyclical highs for metal prices.

While the senior stocks are nowhere near their highs of May, the takeover action has driven the index (STPMN) to a double high in August. This is against some technical negative divergence.

Of course, this index of Toronto stocks is being propelled by the takeover mania and a big telltale is that Teck Cominco could not raise the funds to "win" in the nickelodeon game.

They should be so fortunate. In the 1960s and 1970s, Teck was built by putting properties into production when metal prices were weak when, on the accounting side - the "numbers" are poor.

Over the same time, Cominco, for example, was buying Bethlehem Copper out of the market. In checking insider reports then, this researcher noted that the tendency was to buy at highs for the stock and metal prices or, in accounting terms, when the numbers were good.

Naturally, Teck's discipline was sound and eventually took over Cominco when it had become weak through orthodox but unsuccessful policy.

Regrettably, it seems that Teck Cominco lost its original discipline and joined the orthodox crowd in attempting the nickel acquisition when the numbers were good.

By not providing a financing, the market has blessed an errant Teck.

The August 3 advice was to continue lightening up in the sector. Investors and traders can begin to sell more aggressively.



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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