Technical Analysis doesn't work AT ALL

[Rooster]

Originally Posted by npg

So what's it going to be then?

Good ol' coal is coming back.

And what you need for a coal industry?

Railways.

And which railway already transports most of it?

BNI.

If there is a chance of this event becoming reality in our immediate lifetime, then you will need the railway for more than transporting heavy goods. It will be the only efficient method of transport left.

I am not on the side of the doomsayers, but this scenario is too big not to think about. In the least, I suggest considering this scenario as a reason for Warrens latest interest in oil and railways.

The Rainwater Prophecy - December 26, 2005
Peak Oil: Life After the Oil Crash


In fact, both Buffet and Munger have worked out that Peak Oil is a reality unfolding right now.

Fasten your seat belts, I'm going long on VLO and COP.

This theory explains some of the current sentiment of the market. I have everything in UNT right now, but I noticed that COP has an even lower P/E and P/B than UNT. COP's 50% MOS, according to Graham's formula is about $85 and it is currently selling for $77.29. It's ttm EPS growth is 0% compared to it's 3-year EPS growth of 42%. Do you know why the drop occurred?

VLO looks excellent from every angle. I like its niche : "Valero Energy Corporation (Valero) owns and operates 18 refineries located in the United States, Canada, and Aruba that produce refined products, such as reformulated gasoline blendstock for oxygenate blending (RBOB), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates (liquid hydrocarbon compounds containing oxygen)." It seems to be forward thinking.

Graham didn't much like the idea of investing in railroads. I wonder what he would tell his best student about that?

[Rooster]

Wow! This is scary stuff. It won't much matter what Graham thinks of railroads or anything else that runs on petroleum. Survival seems to be more of an issue than just having enough to retire comfortably.

Dr. Colin Campbell presents an understandable model of this complex (and often difficult to explain) relationship as follows:

It is becoming evident that the financial and investment community begins to accept the reality of Peak Oil, which ends the first half of the age of oil. They accept that banks created capital during this epoch by lending more than they had on deposit, being confident that tomorrow’s expansion, fueled by cheap oil-based energy, was adequate collateral for today’s debt. The decline of oil, the principal driver of economic growth, undermines the validity of that collateral which in turn erodes the valuation of most entities quoted on Stock Exchanges. The investment community however faces a dilemma. It desires to protect its own fortunes and those of its privileged clients while at the same time is reluctant to take action that might itself trigger the meltdown. It is a closely knit community so that it is hard for one to move without the others becoming aware of his actions.

The scene is set for the Second Great Depression, but the conservatism and outdated mindset of institutional investors, together with the momentum of the massive flows of institutional money they are required to place, may help to diminish the sense of panic that a vision of reality might impose. On the other hand, the very momentum of the flow may cause a greater deluge when the foundations of the dam finally crumble. It is a situation without precedent. (Source)

For what it's worth, Bush's Crawford ranch is completely off-the-grid and equipped with the latest in energy saving and renewable power systems. It has been described as an "environmentalist's dream home." The fact a man as steeped in the petroleum industry as Bush would own such a home should tell you something. (Peak Oil: Life After the Oil Crash)

[Rooster]

"How is the oil industry reacting to this?"

If you want to know the truth about the future of oil, simply look at the actions of the oil industry. As a recent article in M.I.T.'s Technology Review points out:

If the actions - rather than the words - of the oil business's major players provide the best gauge of how they see the future, then ponder the following. Crude oil prices have doubled since 2001, but oil companies have increased their budgets for exploring new oil fields by only a small fraction. Likewise, U.S. refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built.


Some people believe that no new refineries have been built due to the efforts of environmentalists. This belief is silly when one considers how much money and political influence the oil industry has compared to the environmental movement. You really think Ronald Reagan and George H. Bush were going to let a bunch of pesky environmentalists get in the way of oil refineries being built if the oil companies had wanted to build them?



The real reason no new refineries have been built for almost 30 years is simple: any oil company that wants to stay profitable isn't going to invest in new refineries when they know there is going to be less and less oil to refine.

[kiki888]

Rooster,

How did you come with a MOS of 85 for COP. The equity growth rate the past the past five years has been about 21%, but the P/E the past four years has been about 7. Using a current EPS of 9.66 the sticker comes out to about 112. The MOS would be about 56.

Five years ago the average P/E was 37.80. If you include this number the average P/E jumps to 13. With this P/E the MOS is 104.

If you average the last 10 years of P/Es the average is around 16. The MOS would calculate to 128.

[rwins42943]

Originally Posted by kiki888

Rooster,

How did you come with a MOS of 85 for COP. The equity growth rate the past the past five years has been about 21%, but the P/E the past four years has been about 7. Using a current EPS of 9.66 the sticker comes out to about 112. The MOS would be about 56.

Five years ago the average P/E was 37.80. If you include this number the average P/E jumps to 13. With this P/E the MOS is 104.

If you average the last 10 years of P/Es the average is around 16. The MOS would calculate to 128.

Just ran the numbers on investools and came up with an MOS of 17.71 for COP.

[kubla000]

Originally Posted by ktf

Over the last 3 months I have been following 4 companies with the following results due to technical trading, in brackets I put the approximate buy and hold results:

APPL up 9%, (40%)
UNT up 3% (25%)
LRW up 6% (33%)
NTRI up 6% (20%)

Granted I made a lot of mistakes in trading and didn't always follow Rule #1 principles, but that is part of the point. Like others I do not have the temperament for trading.

Wow, I think you might have been better off buying into each at a good MOS and just noting the gains, and taking profits at some point.

If we're all looking to book 15% per year, and realize 40% on anything, would the further increases matter more to us than the past increases? If so, leave the 40% gain in the stock, let it play with the houses money and pull back your original investment. 40% up, it's near Sticker and I wouldn't want to wait for all 3 technicals to tell me to leave, by then 40% could easily become 10% again...

[kiki888]

rwins42943

You're right. I used the historical growth rate rather than the estimated 5 year growth rate. As the latter is is much lower, I should have used that.

[capp53]

Originally Posted by lee810

That's a good question. Although Whole Foods (WFMI) figured prominently in the Rule#1 book, I've noticed that its equity growth went flat from 2005 to 2006. That will take the MOS price from whatever it was down to near 0, particularly if you're using a conservative estimate, like the spreadsheet does. Looking at the stock price, it's been on a decline over the past year (down nearly 30%) while the S&P is up 20%.

I don't know if this is an example of technical analysis not working, or if it's a case of having a bad stock to work with. Even the 50-day moving average is so smooth in its decline that it looks just like a straight line downward except for a 2 month period around last November. With technical analysis, you still need to have a stock price that moves up and down to get in and out of with some profits, whereas the WFMI stock has been more of a slow steady slide and so it may not be a good stock to use as an example of how technical trading works or doesn't work.

I believe that the technical analysis part of Rule#1 investing is just to let you know when to get out of a stock after the MOS calculator has told you gone near or above sticker price. If you want to do purely technical trading, then that sort of violates the fundamentals of Rule#1, i.e., buying value stocks to begin with.

-Lee

I think this proves exactly what Phil said. I looked at WFMI
when it was in the high 50's. The MOS was in the high 30's. This was such a darling that is was fairly valued for its growth rate then. It really had only one way to go regardless of the technicals.

[Rooster]

Originally Posted by kiki888

Rooster,

How did you come with a MOS of 85 for COP?

P = ProjEPS * (8.5 + (2*G)) * (4.4/AAA yield)
Details about this equation at:

Fool.com: Ben Graham's Equation [Rule Maker] October 31, 2001

I probably didn't plug in exactly the right numbers for projected EPS or for AAA but it is in the ball park. This company has P/B and P/E within Graham's specs.

[npg]

Originally Posted by Rooster

Wow! This is scary stuff. It won't much matter what Graham thinks of railroads or anything else that runs on petroleum. Survival seems to be more of an issue than just having enough to retire comfortably.

Warren Buffet stated recently that he is more concerned about wealth preservation than creation. This may have something to do with his age, but it may be a hint that things can become ugly once the credit bubble pops.

Just imagine what is going to happen when the Chinese sell their holdings in US bonds. With the current deficit (whose total obligations are estimated to be at 40 Trillion $), this will make the big crash of '30 look like a boy scout sing-along. Throw a bit of peak-oil into the cocktail, knowing that demand is dramatically increasing because of the growing industrialization of Asia.... If that doesn't make you sit up, nothing will :P

I am working hard at building my new "Schadenfolio" 8)