Archive for April, 2011

natural gas – where to from here?

April 29, 2011 Leave a comment

Yesterday, natural gas broke the downtrend line (top blue) of the symmetrical triangle. These triangles signal continuation of prior trend for about 75% of the time and are reversal signals otherwise.

Here is a 2-year daily price chart:

Will natural gas break out of its multi-year downtrend and surge forward or will it go to new lows? Here is a 5-yr weekly chart:

And just to throw a kink, here is a seasonal chart which suggests that the time to short natural gas is right around the corner.

Disclosure: short natural gas


Toronto housing market – update

April 25, 2011 Leave a comment

I haven’t had much time to write since buying a house and selling my condo… if I can convince myself, I’m never going to move again, that means not buying another principal residence.

It has been over a month since the new mortgage rules took effect… is there any early effect on real-estate markets? Let’s look at the GTA housing numbers for March 2011…

  • Year-over-year Prices up 5%
  • Year-over-year Sales down 11%
  • Month-over-Month Prices up 0.4% vs 5-year average of 0%
  • Sales up 15% over 5-year average Sales

I don’t think there is anything to worry about yet but I think we need to keep an eye on Sales numbers… -11% sounds like a lot but 2008-2010 were outliers for Sales numbers

…and mid-April numbers are:

Greater Toronto REALTORS® reported 4,444 sales during the first two weeks of April 2011 – a three per cent decrease compared to the first two weeks of April 2010. The number of new listings was down by 21 per cent compared to the same period last year.

Again, nothing to worry about here either. 3%… however, average prices have shot up!

  • Year-over-year Prices up 10.4% vs a range of -3 to +13 % over the last 5 years!! (with that kind of variation, averages become meaningless)
  • Month-over-Month Prices up 6% vs 5-year average of 4% !

I have been saying for the last year that this kind of price increases is unsustainable and I reiterate it here.

Will Level 7 be the death knell for Uranium stocks?

April 12, 2011 2 comments

Japan upgraded increased the severity level of the Fukushima nuclear accident to the highest possible at level 7… global equities and uranium stocks were hard hit today.

Uranium miners were recovering from the sharp fall and it looked like the worst was over but except with Level 7 the worst might be yet to come? Almost 4 weeks ago I posted charts of uranium miners Cameco & Uranium One… let’s see where we stand today. There are many exploration and development stage companies but these two are the prime Canadian uranium producers.

Today’s price action in Cameco (CCO.TO) is interesting and perhaps suggests that the worse is over…

  • The stock traded an intraday low of 26.38 and sharply recovered to close at 27.16 which is above major support lines (blue & red/green).
  • As I pointed out in my previous post, if we break here, downside targets are 26, 24 & 22.
  • On the upside, there is plenty resistance in the 30-34 area and my guess is that this stock will be range bound given the fundamental situation.

Uranium One (UUU.TO) is hanging on to support at rising trend line (short blue line).

  • Next support is near the 3.25-3.38 range and is rather strong with 3 converging trend lines, long blue line, pink line and bottom support/resistance line.
  • After that support is at just above 3.00…
  • On the upside, there is strong resistance at 4.00 which is where the recent relief rally reversed…

Copper charts – 12-April-2011

April 12, 2011 Leave a comment

There has been a lot of chatter about commodities blowing off lately (see this, this & this)… especially Copper (& Silver) which has risen dramatically since the 2009 lows. Copper is considered by many as a leading economic indicator…. without further adieu here is the technical picture for Copper

On the daily chart, copper recently broke out of the descending triangle and the short-term downtrend line… pink line. The medium term price channel (blue lines) is still intact and Copper could go higher and take out the Feb highs (fundamentals story don’t support this view)

The dotted line symmetrical triangle supports the continuation of prior (up)trend.

On the other hand, the weekly charts show a rising wedge pattern which is almost always a bearish sign… if confirmed using other indicators. In the case of Copper, MACD supports the rising trend and is not confirming the reversal… yet

CFA Reading on Derivatives – Forward Markets & Contracts

April 12, 2011 1 comment

CFA Level 2 – Derivatives; Study Session 16, Reading 60 in 2011 curriculum/Reading 58 in 2010 – Forward Markets & Contracts

According to the Schweser, most people find the Derivatives topic to be the most difficult in Level 2 … I find it fun and relatively easy (perhaps because I want to work in the dazzling world of derivatives)… Because you need to understand forwards to understands futures and swaps, this will be a long post.

The key to derivatives is to understand how the price of the underlying asset and interest rates influence the value of the derivative…read on and it will be clear.

What is a Forward contract?

The following is verbatim from the CFA curriculum and I think it is succinct and to the point.

The holder of a long forward contract (the “long”) is obligated to take delivery of the underlying asset and pay the forward price at expiration. The holder of a short forward contract (the “short”) is obligated to deliver the underlying asset and accept payment of the forward price at expiration.

At expiration, a forward contract can be terminated by having the short make delivery of asset to the long or having the long and short exchange the equivalent cash value. If the asset is worth more (less) than the forward price, the short (long) pays the long (short) the cash difference between the market price or rate and the price or rate agreed on in the contract.

A party can terminate a forward contract prior to expiration by entering into an opposite transaction with the same or a different counterparty. It is possible to leave both the original and new transactions in place, thereby leaving both transactions subject to credit risk [counterparty risk], or to have the two transactions cancel each other. In the latter case, the party owing the greater amount pays the market value to the other party, resulting in the elimination of the remaining credit risk. This elimination can be achieved, however, only if the counterparty to the second transaction is the same counterparty as in the first.

What is the price and value of a forward contract?

The forward price is the price that a long will pay the short at expiration and expect the short to deliver the asset. There is no cash exchange at the beginning of the contract and hence the value of the contract at initiation is zero.

The value of a forward contract after initiation and during the term of the contract as the price of the underlying asset (S) changes. The value (profit/loss) of a forward contract between initiation and expiration is the current price of the asset less the present value of the forward price (at expiration).

Here is a payoff chart of a long position in a forward contract

The value or payoff of a short position is the opposite of the long i.e. if long is valued at +10, short is valued at -10… this is true for all derivatives because derivatives are a zero-sum game i.e. one’s gain is another’s loss.

Why we need to value forward contracts:

Valuation of a forward contract is important because 1) it makes good business sense to know the values of future commitments, 2) accounting rules require that forward contracts be accounted for in income statements and balance sheets, 3) the value gives a good measure of the credit exposure, and 4) the value can be used to determine the amount of money one party would have to pay another party to terminate a position.

Formulas to calculate Forward Price and to value forward contract

  • General formula (for security without cash flows i.e. dividends, interest, etc):

Calculating the forward price of a security with cash flow includes one additional which is either the present or future value of the cash flow discounted at the risk free rate.

  • FP of an equity security (can be stocks, stock portfolios or stock indices) with discrete dividends:

Vt (value of a long position at time t)


  • FP of a fixed income security (Instead of dividends, we adjust coupons, in reality there are adjustments for special features i.e. call, put, convertible, etc):

Vt (value of a long position at time t)

(note that forward contracts on bonds must expire before the bond’s maturity, no point buying a bond on maturity)


  • FP of an equity index or a continuous compounding security (instead of a discrete cash flow, we assume continuous cash flow)

Vt (value of a long position at time t)


  • FP of a currency forward contract = forward exchange rate quoted as domestic currency/foreign currency (remember that currency units are always quoted in terms of another currency i.e. CADUSD = USD/CAD where USD = Domestic Currency & CAD = Foreign Currency)

(Hint: numerator interest rate corresponds to currency of numerator, for example if spot price was quoted as USD/CAD, the RDC = USD interest rate & RFC = CAD interest rate). In words of CFA Institute:

The [forward]price, which is actually an exchange rate, of a forward contract on a currency is the spot rate discounted at the foreign interest rate over the life of the contract and then compounded at the domestic interest rate to the expiration date of the contract.

Vt (value of a long position at time t)

… next post will cover FRAs and Futures Markets & Contract

Coal is here to stay for a long, long time

April 1, 2011 Leave a comment

I have liked coal for the last couple years despite of the global warming/green energy/fierce environmental protection backdrop… for the foreseeable future I see demand for coal to keep rising regardless of what happens with the renewable energy sources.

Why I feel that way?

Two stats from World Coal

Coal provides 27% of global primary energy needs and generates 41% of the world’s electricity

Approximately 13% (around 717Mt) of total hard coal production is currently used by the steel industry and almost 70% of total global steel production is dependent on coal.

If you prefer to view graphics like I do, here are some key figures from IEA’s World Energy Outlook 2010

So… if you are still not convinced, too bad J

Moving forward, I plan to analyze some coal stocks and present my analysis here.

Grande Cache Coal (GCE.TO)

I’ll start with the easy technical stuff for Grande Cache coal – a metallurgical coal miner (i.e. coal used for steel making)

  1. The stock has broken out of the recent downtrend channel (blue) and closed above the 50, 100 & 200 day moving averages on reasonably high volume
  2. Green lines are support, Red lines are resistance and there is immediate resistance around 10.5, then at 11 and 12

In the next post, I will delve in to the fundamentals of GCE

Update: Right after posting this article I stumbled upon this piece from FP via  Alphaville. Trust me I’m not looking for an opinion that confirms my thesis (confirmation bias) quite the contrary. Here are the salient points from the FP piece:

According to official data, Chinese investment in coal was about the same as its investment in oil, gas, and scientific research combined. The investment in coal at home was larger than the PRC’s outward investment in all non-bond assets — all energy, all metals, and so on — in 2010.

From 1980-1996, coal consumption growth was about 5 percent annually. From 2003-2009, under leaders Hu Jintao and Wen Jiabao, it was over 13 percent annually.

Coal previously accounted for less than 70 percent of Chinese electricity use; now it is over 80 percent.