Lou,

Using my limited knowledge of technical analysis, it looks like HudBay Minerals Inc. (HBM-T) broke out of a descending triangle formation. More specifically, it has fallen below the 200 day moving average and breached support at $12. It looks like the next level of major support is at $8 to $9. Is this a good stock to short and what will it take for it to reach support at $8 to $9?

Many thanks,
Norman

Hi Norman,

You have made good use of your pattern recognition skills to identify a potential opportunity to short the shares of HudBay Minerals Inc. ( HBM TSX) but it caught support at $10.00 and now the question is which way is the wind blowing?

The three year chart provides a number of signals that HBM was on the verge of reversing the advance from the December 2008 lows. The RSI signaled that the stock was overbought in September / October of 2009 when it hit a high of $17. At the same time the MACD was turning below the signal line providing another indication that the uptrend was coming to an end.

The stock is currently trading below the 50 and 200 day moving average but did catch a bounce off of $10.00. You identified the descending triangle correctly on the chart so give yourself a pat on the back for the lessons you have learned and please continue to seek out more knowledge in the field of technical analysis. Check out the Canadian Society of Technical Analyst for ways that they can be of assistance in your skills development.http://csta.org/

The RSI on the six month chart indicated that HBM was oversold as we came into May of this year but if you look at the last candlestick the long upper shadow suggests that sellers were in control of the trading on May 11, 2010 and that the bounce off $10 is meeting resistance.

I agree with you that HBM has potential as a short but make sure to take some target practice before you strap on the six gun and head out to the gun fight.

Happy Capitalism!

Hi,

Can you explain why YRI.WT.C-T is trading at 6.5 cents. The 52 week High/Low range is $2.18 /$0.04. As well, can you provide some insight as to how warrants work. What are the sources available to a retail investor to determine within what time frame the warrants have to be exercised. Can warrants become worthless?

Regards,

Ash

Hi Ash,

I covered Yamana Gold( YRI TSX) back on January 25, 2010. You can go back to the archives and look at the report on the stock itself . Your question on how warrants work is a good one and as I have learned in the classroom at Sheridan College if one person makes an inquiry there are many who want to know but don’t want to ask.

Warrants provide an investor with the option to buy a stock at a specific price over a defined period of time. In the case of the YRI warrants investors could purchase the right to buy .543 of a Yamana share for $6.00 until February 17, 2010.

The chart for the warrants clearly illustrates the decline in the value of the option as the terminal date approached.

The six month chart for YRI tells the tale of the declining value of the warrants. As we came into 2010 the value of the shares of YRI fell below a level that crushed the economics of the option to buy .543 shares of YRI at $6.00. You could have bought the shares out of the market at a lower price than the costs associated with the exercise of the warrant.

One advantage of a warrant is that they offer investors leverage. You can own the right to purchase a share at a fraction of the cost of actually buying it. If the price of a stock moves higher the holders of warrants will enjoy a greater return on a percentage basis.

The disadvantage of a warrant is that it can expire with no value just like the YRI warrants.

MAKE IT A HUGE OLYMPICS AND HAPPY CAPITALISM!

Lou,

If the markets were unrealistically high last fall before they crashed and everything was over inflated, then why are they going up so fast again?

Should we not be happy with any small gain or loss everyday and should we not be worried about large jumps in the TSX over “better” then expected job losses (weird) or better than expected company losses (again weird).

I have to say the markets and how they operate really baffle me and I am starting to lose faith in them and am looking for other ways to invest my money. What’s your take – do you feel the system is somehow broken at all?

Charlie

Hi Charlie,

Great question!

The key to success in asset management is the ability to make decisions. My good friend Steve Kalil taught me that there is no good news, there is no bad news, there’s just news. What are you going to do about it?

The chart for the S&P TSX Composite illustrates the fact that there were a series of opportunities to make decisions to preserve capital or grow capital. The markets will not make decisions for you Charlie, you have to make them for yourself.

What the market will do is generate signals that indicate, but don’t guarantee, market direction. The trend is your friend till it ends! You have to have a good handle on market direction to make decisions on when to get on and off the ride.

I also want you to realize that the markets are a gauge of sentiment. When the markets are going up it is a signal that sentiment is positive, when they are falling the sentiment is negative. Here’s what I want you to keep in mind. It is never as good as it seems and its never as bad as it seems.

Here’s what I have learned since I bought my first stocks at age 11. There are times to be in stocks, there are times to be in cash, there are times to be in gold, there are times to be in real estate, there are times to be in technology. In general there are times to be in the asset class that is moving in the direction you are investing in.

When you talk about faith Charlie I want you to have faith in yourself! You can enhance your faith in yourself by taking advantage of opportunities to grow your investment knowledge.

On September 26, 2009 The Montreal Exchange will be hosting a full day conference  in Toronto on Options Strategies. Experts in the field will be educating interested investors . For $30 you get access to new ideas and expertise and they will include breakfast and lunch. If any of our readers is interested send me an email and I will wire you up to the details.

You might be thinking that you aren’t interested in options, but my point is that the capital markets provide an endless stream of opportunities to improve your investment knowledge. Take advantage of these offers!

Happy Capitalism!

Hey Lou,
I have a nice amount of cash sitting in GIC’s and it’s been there for a couple of years earning, as you know little interest. I love the security of cash but do you think I am losing out by not investing this money in something else. Is there anything else that I would think is safe?

JM

Hi JM,

I get a lot of investors asking the same type of question and I think that what is most important to all investors is to know your own self. I have a power point presentation that I developed for the Financial Forum in 2008 called “The 7 Steps to Successful Investing”  that I would be happy to send you or any reader that is interested. Just send me an email.

The core of the presentation is that it can be so destructive to your capital to go against your basic investor profile. If you have built up a nice bag of dough in guaranteed income certificates it says that you are have a degree of risk aversion. You have chosen reduced income for reduced risk. There is absolutely nothing wrong with that. You have made a decision based on your central investor profile.

When you chose lower returns for reduced risk there will always be potential better returns somewhere else in the investing universe but for the most part you will have to assume greater risk to achieve higher returns. Before you make any decisions on where to investment your nest egg ask yourself are you prepared to take on greater risk for potential greater reward.

And lets not look down on the returns offered by GIC’s. They did better than many portfolios in the last while because they achieved one of the most important goals of investing. Preservation of Capital! You didn’t make a ton but you didn’t lose a ton either.

One thing you should know about GIC’s is how they are made. Banks buy portfolios of bonds – mostly Government of Canada issues that generate a certain rate of interest. They then slice those portfolio of bonds up into GIC’s and keep a piece of the income for themselves. You could achieve better results on your investments without increasing your risk by owning the bonds yourself.

Be true to yourself and if you are really ready to change your investor profile make sure to undertake a course of study so that you are fully prepared for the experience.

Happy Capitalism!

Hi Lou,

Do you have any comment on Enervest Diversified Income Fund? I bought it in 2001 and it has performed well for me in terms of distributions, but it has cut its distribution, its share price has fallen, and management has changed. I’m wondering if it’s worth holding onto it to see if it comes back up, or if I should take my remaining money and run.

Thanks,

Florentia

Hi Florentia,

Enervest Diversified Income Trust ( EIT.UN TSX)  is an actively managed portfolio of mostly trusts and bonds with about 26% of the fund invested in common stock. In April of  this year units in EIT were rolled back  3 for 1. At its current level distribution of $0.15/ month the units are yielding just over 16%.

The chart shows that there was a nice recovery from  the aggressive selling that hit the entire market last fall. But like all things in the investment universe you have to watch the trend and it appears that the ride to the upside is fading.

The six month chart illustrates the current trend in the units of EIT. Clearly we have hit resistance and if you draw the trend line on the advance from the March lows we can see that the trend line has been breached. Which is a caution flag and why I suspect you have written.

Second thing to notice is the MACD which turned below the signal line in the middle of June indicating a shift in momentum to the downside.

Finally at the close of trading on Tuesday July 7  the units are now testing support on its 50 day moving average. If we are looking for a reason to hold  then we need it to catch a bounce from these levels.

From the tone of your email Florentia it sounds like you want to preserve your capital and when I sense that in an investor I always recommend that you go to cash.  Look at your capital as a fine race horse. Its been racing for you since 2001. At some point you want to give the horse and rider a rest.

When you have cash you are free to make another decision but right now your gut is saying take profits and nothing in the charts is telling me otherwise.

Happy Capitalism!

The chart on this stock looks pretty good.Where should I have my stop loss on this stock.

Hi Dan,

We should be looking at the use of stops as a decision that will depend on the volatility of the stock. A stock that has a wider range of trading will need a little more room so that you are not getting whipsawed through the stop only to recover a few days or even hours later.

When you look at the weekly chart  its apparent that SGR can move at a $0.20 clip when the urge to sell gets going. From these levels I would say that a stop at $2.25  would not be unreasonable. If SGR  were to breach $2.25 it would have broken through support at $2.30 and would then test $2.20. Below that the next level of support comes int at $1.80

The daily chart shows that the stock has bounced off support at $2.30  so if you had set the stop there its very likely that you would have been stopped out earlier than when you may have wanted to. It also looks like in the last month that the stock has been trading in a range between support at $2.30 and resistance at $2.50.

If you are just buying the stock then you would be looking to stop your losses if you have been riding the uptrend since April you would be looking to lock in some profits.

Happy Capitalism!

Hi Lou,

I always tune in to hear you on 640! Keep up the good work. 

I’d like your thoughts on US:SLAT.  With the transitions to cell powered vehicles in the near future, does this look like a good buy now? There have been some positive movements in their development, but I’d like your trained eye to have a peek.

Thanks for the help
Cheers
Scott

Hi Scott,

Clearly we need some breakthrough science to help us get to the next form of transportation fuel.  But I have some concerns whether Super Lattice Power ( SLAT NASDAQ BB) will be one of the companies that takes us to the promised land.

The first red flag for me is that its listed on the OTC BB which is a lightly regulated environment and for my money a high risk market place.

The second thing that puts me in a cautious mood is that their web site is light on steak big on sizzle. 

The third thing that has me checking for my wallet is that there are no financial reports so you can’t even look under the hood.

The fourth thing that has me on guard is that all the news on the company is coming from what I would call tertiary sources.

Frankly there isn’t enough to go on to really make an educated decision and the chart indicates choppy trading at best.

Lets keep hunting and look for something with a bit more meat on it.

Happy capitalism!

I just read your comments to Doug. What do you think about the Bank of Montreal in light of the announcement that Moody is down grading them? Will their dividend continue?

Hi Glenn,

You have focused your attention on the risks associated with buying a stock for the dividend. The sanctity of the dividend is the foundation that supports investor confidence in a company.

The dividend paid to owners of common shares is at the discretion of the the board of directors based on their determination of the best interests of the company. The directors at a company like the Bank of Montreal, which has a long history of paying a dividend and increasing the dividend, would rather have a root canal without Novocaine than cut or suspend the dividend.

From my point of view cutting or suspending the dividend would be low on the menu of choices, however its not a guarantee that the board would not take that action if circumstances demanded that they do so. The best defense for the unforeseen? Stops.

If you own a stock and want to protect the potential downside of getting sideswiped by a turn of events that could or might  happen, put in a stop loss order with your advisor. By putting in a stop loss at a reasonable price it puts the decision to preserve capital on auto pilot.

Regarding the change in outlook for BMO by Moody’s from stable to negative and a possible cut in the rating because of exposure to the US recession and off balance sheet investment vehicles, investors didn’t seem to react negatively yesterday. In fact they bid up the stock marginally.

The chart is exhibiting some continuation patterns such as an unbroken uptrend line, the MACD turning up, and a golden cross. All indicating that there could be more to come. These again are not a guarantee ,so put a stop under your position to preserve your capital come what may.

Happy Capitalism!

Lou,

It looks like a dead cat bounce and I wondered what you thought about the “go away in May’ strategy. My savings have recovered somewhat but I was considering picking some proven money maker stocks like J&J & Kraft  …etc.and let go some mutuals containing US equities and possibly trading money market funds for actual bank shares …TD,RB and BM . Any thoughts ?  I’m 54 and counting and don’t want another Oct 8th wake up call…love the show on AM640…appreciate the input.

Sincerely

Doug

Hi Doug,

I think you have identified a solid strategy. Buy great companies when they are cheap!  Johnson & Johnson and Kraft foods are both off of their highs and paying an attractive dividend. JNJ pays 3.6% while KFT offers a 4.5% dividend yield. But lets not forget that they are both US equities which you were thinking of trimming from your portfolio.

Given that both companies have international operations that will shield them somewhat from the travails of the US economy, you still have to reconcile the fact that the major part of their business comes from the US.  The idea of moving your capital out of the US isn’t a bad one given that it appears that Canada is better positioned to weather the current storm.

Moving out of cash and into Canadian bank stocks is another example of looking for solid companies at low prices. All of the banks have been lifted by the rally that started on March 9 and yet still offer attractive dividends. The Bank of Montreal dividend offers a 6.7% yield which given the tax treatment of dividends only makes it sweeter.

When it comes to being 54 and not wanting another wake up call I would say that you might have to reconsider your investment profile. It sounds like you have become more risk averse and need to start moving more of your assets into lower risk categories that reflect your concerns.

As far as applying the “sell in May and go away” strategy I think that you are wise to be aware of seasonality that effects certain sectors but you are best  served reviewing the charts of the stocks that you own on a regular basis. A regular review will give you  a better handle on how your investments are performing.

Happy Capitalism!

I have recently retired and received  a sizable severance package. My broker has suggested – as a tax avoidance – to look at investing in flow through shares. As a need to know I receive a monthly pension that is very good so the severance money is not necessarily required to bolster my pension. What do you know or suggest re flow through shares??

Wayne

Hi Wayne,

Congratulations on the package! Its always a bonus to get a pile of cash on the way out.

After the RRSP, flow through shares are the last bastion of tax avoidance in Canada. They are part of the tax code and as long as the company issuing them is in compliance with the statutes  you will not have to fight a rear guard action with CCRA. The provisions of the tax code allow you to use allowable exploration and development expenses incurred by the issuing company as a deduction on your tax return. The allowable deductions flow through to the investor.

The way that a flow through share works is that the investor who buys them gets to write off the entire amount of the investment. If you buy $20,000 in flow through shares the entire amount is tax deductible which would result in a reduction of your taxes. Assuming that you would be in the highest marginal tax bracket because of the severance the reduced taxes would be in the neighborhood of $10,000.

The effect is that you now have $20,000 in flow through shares and a tax bill that has been reduced by 10,000. The taxes you would have paid have assisted you in buying the investment.

Another thing to keep in mind is that your adjusted cost basis for the shares is treated as being zero so when you sell them you will pay tax on the entire selling price. The advantage would come as you will be at a lower tax bracket in retirement.

Flow through shares are not without risk as they are generally issued by small exploration companies in oil and gas and in mining. The smaller the company the higher the risk. There are  syndicates that offer portfolios of flow through shares that spread the risk by acquiring shares in many exploration companies.

I would suggest that you get in touch with an accountant to make sure you take advantage of your ability to shelter as much of the package into your RRSP as possible then look to other avenues for tax relief. In closing you should make sure that you consider the flow through shares as an investment first not simply as a way to avoid tax. Would you buy the shares without the tax angle?

Happy Capitalism!