Sand Spring Advisors LLC
Another Analog for 2003
December 18, 2002
by, Barclay T. Leib
Back in May 2001, we posted this article entitled "Irwin Jacobs: Be Quiet" showing a possible "pattern match" between the way Reliance Insurance had gone belly-up and the way Conseco was then acting. Today of course, Conseco formally declared bankrupty and the expectant arrow we drew so long ago appears to have been particularly prescient.
Moving forward into 2003, let us put forward another possible "pattern match" type of perspective.
Back in 1990-1991 I was living and working for Goldman Sachs in London and had one fundamental view: the British pound was way too high trading near 1.95 to the U.S. dollar. A triple top started to form on the daily and weekly chart, and I started shorting the pound. But before satisfaction on that trade could be had, a "false breakout" up to 2.017 first occured. At the time it was a bit painful for me, but I stuck with my position and actually added to it just a tad at these higher levels. Then, but late February 1991, the British pound started to collapse, and went down more or less in a straight line for multiple months.
Today, I look at the chart below of Golden West Financial (GDW), America's second largest thrift institution, and have a very similar feeling that a "false breakout" top is in the making after its recent triple top formation.
Here at Sand Spring Advisors LLC, we are on our toes to sell this stock somewhere between $72 and $77 (the Fibonacci bands are not precise enough to definitively peg this high)and then await the slide lower when many of the residential mortgages currently on GDW's books start to cause headaches in the coming years.
This stock is only trading at a 12 P/E vs trailing earnings and has produced 25% annual earnings growth in past years, so one must obviously be careful attacking it. It's still one of Wall Street's favorites. But GDW is also trading at over 2x book value and with a debt-to-equity ratio above 4. In general, we're not smitten with past fundamental growth and performance as a good indicator of future returns here.
Instead we'll go with our chart "analog" perspective, and only exit shorts established between $72 and $77 on a stop placed above $81.
A Note to Subscribers: Work has begun on this month's subscriber-only letter, and it will likely be forthcoming by next Monday.
Non-subscribers are invited to access our November 9th article, "Iceberg Risk: A Rumbling Earth & Mortgage Market Malaise," together with our October 4th subscriber-only missive ("The Ancient History of Math, Current Pi Cyclical Rhythms, and The Macro Picture in Europe and Asia in Relation to the U.S"), and other part articles, by signing up for a quarterly Sandspring.com subscription below.
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