3 topics, 1 blog
Some discussion on a few topics that have my interest. As usualy, I question convential wisdom (I am a skeptic by nature, what can I say)
Topic 1: Volume
People use volume as an indicator. I sorta get it. When a lot of volume is used in a certain direction, it probably means fund managers are behind the move. These fund managers are longer term people, who will probably buy more of that stock as they receive more funds from investors. So, I could see why that could make some sense as to why it confirms a move. But there is still a part I really don;t get. lets say a stock makes a move up over resistance, or just a big move up, on high volume. The reason this is seen as good, what I usually hear said is "that shows there are a lot of buyers". WRONG. For every buyer, there is a seller. This is the most simple concept. You cannot buy something without somebody selling something. So, if there is very high volume to the upside, not only does that mean that a lot of people were willing to pay up for the shares, but it also means that a lot of people were willing to get rid of their shares at that price because they don't think it will go up any more. So, how is volume an indicator, if it really shows both sides of the transaction? This boggles my mind.
Topic 2: Spinoffs "unlocking value"
To avoid getting into the specifics of a certain stock, I will make up an example. Company XYZ has two sub business: coal, and textiles, and they each make up half of the companies earnings, $5 a share each. The coal segment is kinda slowing, and the prospects are bleak, and people hate it, and want to assign a p/e of 8. The textile busienss is booming with good prospects and people love it, and want to value it with a p/e of 20. 8x5 = 40. 20 x 5 = 100. 100 + 40 = 140, making the share price $140/share, with a p/e or 14. The company announces it is going to spin off the two divisions into seperatre companies. WHY DOES THE SHARE PRICE START JUMPING UP BEFORE THE SPLIT? People see this as 'unlocking value' because since the whole company trades at p/e of 14, now the textile business has a chance to trade at its fair value of p/e 20. I completely understand why the textile business would shoot up AFTER the spin off. But, the coal business should correspondingly DROP to a p/e of 8. People start buying it before hand, because they want that textile business. Why dont they just wait until the spin off and buy the company they like. You are still buying the same crappy large business if you buy before the split. Whatever value you gain in the good business you will lose in the bad one, hence why the share price was bad before the split announcement.
Topic 3: contango.
I understand how contango works mechanically in the sense that the contracts roll over into a higher price which depresses the price of the ETF (or whatever is used to track it). NG is $4 this month, $5 next month, you lose a dollar on the roll over. I understand backwardation too. But, does this mean the best time to buy an etf that deals with futures is when you think the underlying commodity will do poorly? "I am bearish on oil, so I am going to go long oil because it will continually roll over into lower priced contracts". That is not how it works, I know, because I see the price go up for an ETF when the price of the underlying commodity goes up. Tell me if I got it right: the share price for the ETF only jumps when there are short term spikes; The price of oil jumps really high for the current month becsuse there is a huge shortage, but people expect it to go back down over time, but they think it will keep going up until the roll over date?
Thanks in advance for the feedback!