Ford - A chartist perspective

We generally do not analyse individual stock for clients or agents. However, we were posed with an interesting idea from one of our agents regarding Ford (F). The stock currently trades with a P/E ratio of less than 10. The agent was wondering if this looked like a entry level for a buy on Ford. Below is our analysis on what might make Ford an interesting buy from a charting perspective.

Ford Stock Price Mark Up

Ford is consolidating now after a very strong run up to a previous resistance level around 14.30 on heavy volume. It's holding support at what has become an important diagonal trend line. A buying point would be around $12.66 (up to $12.88) with a stop around 12.30.  If Ford broke its diagonal support trend line, this would be very bearish. An initial target price for exit would be around the $14.30 area. However, Ford is currently trading right below its 50 day Moving Average (not shown on graph). It must break above for a continued run to 14.30. This makes Ford a hard stock to read as it is not  a clear bullish trending stock.

Investing is a very visual endeavour. Investors' actions are more important than their words and thoughts. Visual representations of their actions can be seen in the price and volume action on the charts. We are very accustomed to using charting tools to identify proper entries and exists for ETF trades - many of which we have discussed on this blog or on our facebook page. These same tools can be used on individual stocks.

Author: Chris Davies 

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Invest in Iraq's Development

           For the last decade, Iraq has been afflicted by economic instability, war, and political uncertainty.  Today, a new era is dawning in Iraq as the country begins to rebuild and remake itself.  Much like Russia in the early 1990s, modern Iraq is in its infancy.  Russia seemed off limits to savvy investors for its similarly unpredictable investment environment.  Despite an occasionally bumpy transition, the RTS index has risen ten-fold since the mid 1990s. 

            There is good reason to believe Iraq can imitate Russia’s success.  It is expected to be one of the fasted growing economies for the next several years in terms of GDP.  The Iraqi Stock Exchange (ISX) remains one of the most undercapitalized in the region.  Several expected IPOS on the ISX promise to increase total market capitalization as early as this year.  Investors willing to bear some risk are now faced with a very similar opportunity to invest in the early stages of a resource rich country’s modernization. 

            A good part of Iraq’s growth story will come about through its underdeveloped oil reserves.  Decades of conflict have left Iraq with as little as ten percent of its oil reserves explored.  It is estimated that Iraq’s total reserves match those of Russia and Saudi Arabia though the total stock of market capitalization only 1% of these two counties.  This underdevelopment offers a window of opportunity for investors to get in early and ride the wave of market capitalization once Iraq’s known oil reserves are effectively exploited.  The process of putting these vast reserves to work has already begun as revenues from oil production have recently begun to rise. 

            Investing in Iraq is a long-term investment.  Interested investors should have a 3-5 year horizon on their investment and recognize the nature of their investment.  Investments will seek to benefit from Iraq’s general economic development, the growth of the ISX, and the development of its large oil reserves.  Investment funds are aided by local independent managers responsible for allocating capital in Iraq and to foreign companies associated with Iraq.  This allows a fund to be well diversified in order to hedge against risk and more thoroughly invest in Iraq’s economic development.     

            Just like the opportunity that Russia in the 1990s presented investors, Iraq has its share of risk.  Funds seek to minimize risk by thorough diversification across sectors in the Iraqi economy but risk is an ever-present challenge to investors in such a market.  It is a well-known general observation that risk and potential reward can be strongly correlated but investing on such sentiment is hardly sound practice.  The Iraqi economy can be precarious, as Russia’s was during its development, but it has nowhere to go but up.  High-risk investment in Iraq is not an instance of gambling but of recognizing the real potential the country has to develop quickly in the new post-war environment.  Headlines about isolated violent incidents and political infighting can and do affect the weekly fluctuations of the ISX.  Such stories cannot, however, eclipse the biggest story in post-war Iraq: development.  

            Off limits to American investors, Iraq can add an important element of high risk/return and long-term outlook to a Russian portfolio.  Funds and investment products are available to provide investors access to Iraq’s growth.  Interested investors should consult with their financial advisor about the risks and potential returns offered by Iraq.  

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Investing in Gold

Quality and Certainty

During the first months of the financial crisis, the price of gold began its infamous rise to nearly $2,000 an ounce.  Investors looking for a safe haven as the global economy collapsed found a natural safe haven in gold.  As an asset class, gold has a long history as a dependable hedge against market volatility.  Backed by its own intrinsic value, gold does not depend on a central bank or a stock exchange.  It is relatively supply inelasticity gives investors in gold a greater degree of certainty than investors in other precious metals.   

Gold, however, is much more than a safe haven asset.  Recent research shows that having 5% to 10% of total investment in gold is an effective contribution to a well-diversified portfolio.  It is a prudent investment during times of both inflation and deflation.  Given the precariousness of the current world economy, gold provides investors with stability even if with a slight negative return.  There is much to suggest, however, that the price of gold will continue to climb in 2012. 

Inflation Hedge

In a recent statement, Federal Reserve Chairman, Ben Bernanke, announced that the Fed would continue its zero interest rate policy through 2014.  The announcement comes after last fall’s “Operation Twist,” an FOMC action that has flattened the US treasury yield curve and lowered long-term government bond yields.  The Fed’s balance sheet enlarging “quantitative easing” program has the potential to resume in 2012 according to one prominent Fed official. 

        

Although some analysts are quick to dismiss concerns inflation by citing sluggish growth in the supply of the world’s reserve currency, it should be noted that inflationary episodes in economic history occur after a delay of several months or years from the time that new money has been made available by central banks. 

       

“New dollars” created during quantitative easing have been largely confined to the US securities market, as recently overleveraged banks are hesitant to lend to businesses and consumers despite low rates.  Thus while real CPI inflation has yet to materialize, the potential for inflation has been laid by the Fed’s balance sheet expansion.  Commodities excluded from the CPI (e.g. food, energy, metals) have already been rising since the monetary expansion began.    

Long-term Security

In addition to serving as a hedge against inflation, gold tends to gain value during inflationary periods.  This potential for future inflation to place upward pressure on the price of gold has one reputable analyst forecasting that gold will break through the $2,000 per ounce ceiling in 2012.  Four years into the economic slowdown, the flight to quality, which originally supported the price of gold, has given way to a steady growth in value driven by monetary policy. 

          Generally, when the price of gold rises in response to monetary phenomena, it maintains its value.  In this sense, the price of gold can be viewed as a ratchet, increasing consistently without major drops.  While the potential for major gains in gold is relatively low, excluding the unlikely case of a mass flight to quality, the potential for major losses is very low.  Given the uncertainty surrounding the sustainability of current market growth, gold promises to reduce the risk exposure of an investment portfolio. 

How to invest

There are many ways to diversify a portfolio by investing in gold.  Investors can purchase physical gold coins, bullion, certificates, stock in gold mines, or gold backed ETFs to name only a few common methods.  Additionally, gold funds and structured products are available to meet investors’ specific needs.  Potential investors with questions about how to make gold a part of their portfolio should talk with a financial advisor about the best way to begin investing in gold.        

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Asset Allocation in a Volatile Market

A recent Asset Allocation Survey conducted be the American Association of Individual Ivestors recently signaled an increased aversion to equities, with stock/stock fund allocations falling to 53% last month. Many investors, both individual and institutional, are frustrated by the market’s headline-driven volatility, and some are just plain scared by it.

In order to protect retirement savings from further down drafts in this type of market, investors often seek to simply move to all cash and wait for an “all clear” signal. The effect of this can be seen recently when outflows from US domestic equity funds totaled $6.67 billion last week - the largest amount of weekly withdrawals since August 10, 2011, according to research from the Investment Company Institute. However, by acting in a herd mentality, investors run the risk of waiting too long to reenter the market. Momma market is a hard teacher and she never gives you the “all clear” signal until after you have already missed out on big gains. Although we are inclined to advise many clients to sit out any immediate new investments into this market, we remain mindful of this fact. So, the secret is to keep investing in stocks (if your financial goals call for it), while not taking unnecessary risks. Here two specific things to focus on:

Allocation – In a difficult environment, your financial tolerance for risk can be higher than your emotional tolerance. Thus, it is your financial tolerance that should govern your allocations, especially if you have a long investing time horizon. Simply put, the longer the time period before you need the money, the bigger the threat inflation becomes and greater the need to include stocks in your portfolio. If you are really nervous, cut back on your allocation to stocks a little and rebalance your portfolio when your allocations drift off target by five percentage points or more.


Valuation – Remain alert to current value statistics. Cognizant investors know that 84 S&P 500 member companies trade with a price-earnings ratio below 12 AND a price-to-book ratio below 2 at the end of last week. With so many cheaply valued stocks, its hard not to be compelled to find bargains in certain sectors of the market. Granted, some stocks are cheap for a reason, but there are enough with both low valuations and good fundamentals to qualify as bargains.


Finally, realize that the market’s volatility and slow economic growth could continue for a while. It may not be pleasant, but sometimes the best strategy is to grin and bear the short term, while investing for the long term.

Author: Chris Davies

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