Coca-Cola Island

If the market were to head lower and gap down at some point this week, Coca-Cola could have a nearly year-long topping pattern that would become an island reversal. Google had a similarly large top that didn't play out at a gap down, but like Google, this is probably also a major top.

Who Is Buying and Selling?

All the action today says bearish to me. I called the top on Saturday and nothing has dissuaded me. Utilities, consumer staples and real estate SPDRs are each up 1.50 percent or more with 30 minutes left in trading. This is bear market activity as I showed in the weekend post. The best case for bulls is this represents some pre-Fed nervousness and the whole market will shoot higher on Wednesday after Powell fails to credibly confront inflation.

I wonder who is buying and selling at these prices though. There is a lot of ink spilled on the topic of inflation being bad for stocks, yet shorts are near an all-time low. I'm sure options trading has picked up, but most of that is short-term neval gazing around derivatives of derivatives such as gamma. Are traders stocking up on 20-percent OTM puts on stocks while VIX is cheap? (I'm pivoting in this direction for 2022.) I sense not. Who has been buying a stock like Apple? I'm confident the "defensive" buying is fund managers dealing with inflows. Again, going back to my bear post this weekend, my sense is the defensives lead until the money flows stop, and then everything goes down. '

If I had to buy—I don't and won't— I'd be in consumer staples and then utilities, because I think the former have better pricing power aka bullish narrative. I saw this dirty diamond in WEC Energy (WEC), an upper Midwest utility.

Here is Proctor & Gamble up about 10 percent in the past two weeks.

Coca-Cola (KO). Is this the inflow/Santa Rally?

Coca-Cola Goes Green

Coca-Cola is going green, by buying China Green Group:
Coke to buy China multi-grain drinks maker for $400 million

Coca-Cola Co (KO.N) has agreed to buy the beverage business of China Culiangwang Beverages Holdings Ltd for $400.5 million (266.7 million pounds) including debt, to get a foothold in the fast growing multi-grain drinks category.

The deal marks Coke's first takeover in China since the country's antitrust regulator blocked its bid to buy local fruit juice maker Huiyuan in 2010.

Following the disposal of the beverage business, China Culiangwang will continue to develop its consumer products business, the company said in a stock exchange statement. The sale is subject approval from Chinese antitrust approvals.

Coke is paying a premium to China Culiangwang's market value of $230 million. The company's shares, which have more than doubled this year, were suspended ahead of the announcement. They will resume trading on Monday.

I wonder if Coke is buying now because it's afraid of rising prices. The stock has indeed doubled in the past year, but it has also doubled less than 2 months. If it rises to Coke's price, it will have quadrupled.

If you have been to China, you may have tried these types of drinks before. The Chinese website of of this particular company is here: 中国粗粮王饮品. I enjoyed a similar beverage made by a university in Hubei province. In terms of the marketing appeal, these types of drinks hit the green/health market and would probably also appeal to Westerners, but the flavors may need to be adjusted to appeal to Western tastes.

Coca-Cola splits: what does Coke's chart signal?

One of the most interesting charts to me, in part because I own the stock, is Coca-Cola. Unlike the broader stock market, shares bottomed during the bear market of the early 2000s, and formed a major cup and handle chart since the peak in 1998. The chart is interesting in itself, in what it might mean and also because I'm bearish overall and this chart makes me question my assumptions.

First, the cup-and-handle typically leads to a major rally when the previous peak (the first edge of the cup) is broken. This cup forming phase is a long basing pattern and fits into Elliot Wave theory as a larger order corrective wave 2 or wave 4. Second, the chart shows a different pattern from the broader market.

In trying to think of why Coca-Cola could diverge from the market, or how it could stage a breakout (it must exceed 1998's high of 88.94, a gain of 19% from the current price) when it already has a relatively high P/E of about 20, calls for some explaining. First, I fully accept that KO may not breakout and we could see shares tumble along with the broader market. In the examples below, KO actually lags some strong performance by McDonald's and Nike. Even in this case, however, the fact that these companies did not make new lows in 2008 is interesting and implies strength that is lacking in the broader market.

I have two ideas I'm mulling on Coke and other multinationals: since China's entry into the WTO, emerging markets have made up an increasingly large share of the global economy and U.S. firms that sell globally could decouple from the U.S. market, if the U.S. were to continue its slow growth (taking a long-term view of a decade and more). The performance of some brand name firms suggests this is already happening.

Thinking in negative terms (what would cause KO to breakout when there's no positive reason), another possibility is that we are on the verge of hyperinflation. Gold (precious metals) performs best in hyperinflation, followed by hard assets, real estate and stocks. A company such as Coca-Cola is more than a drink seller, it owns an intangible asset in its brand and if hyperinflation leads to stock buying, the public will probably overload on blue chips.

I believe the economy on the other side of this crisis will increasingly be built upon intangible assets as manufacturing costs decline and software increasingly controls and customizes our experience with products. Imagine a world where the cost of manufacturing drops to zero: what is left is the image, the brand. Apple is perhaps the best example of this today and the performance of major brand names may be evidence that the market recognizes this ongoing shift to an information economy.

Here are some other companies that rely on their global brand name. In comparing them to KO, I'm looking for firms that did not hit a new low in 2008 or 2009; firms making the cut include global brand names such as IBM, McDonald's, Disney, Pepsi and Nike. Two brands that fail to make the cut are Microsoft and General Electric.

Maybe a major deflationary wave will take all of these stocks below their early 2000s lows. One reason many firms may have not hit a new low in 2008 is due to rapid growth during the decade. However, this brings me back to Coca-Cola, which didn't put up massive growth during the 2000s.

I have owned Coca-Cola since 1994 and have no plans to sell.

Long-term bases forming?

Tim Knight had a post on long-term charts and spotting what in hindsight are obvious patterns. I noticed some decent formations on a few household names.

Look at the long-term charts of Coca-Cola (KO), Intel (INTC) and Cisco (CSCO). Coca-Cola looks the best of the bunch, and Intel looks as though it could move lower.

Cisco has no dividend, but the yield for Coca-Cola is 3.3% versus 2.6% on Intel.

China anti-trust

Here's a good article by Nathan Bush covering China's anti-trust law, Limited Lessons from Chinaʼs Merger Rulings. Passive investors won't find it too interesting, but it is solid information for serious investors, and offers a good overview of the failed merger between Coke and Huiyuan.

Buy and Hold? It Depends.

This morning I read Five Reasons Why Buy-and-Hold is Dead and Buy and Hold Dead? Um...No
I think they are both right. "Why Buy-and-Hold is Dead" is a dead-on analysis of changing market structure, investor access and psychology. A quick check of Smita Sadana's checklist:

1. Easier access to brokers, cheaper commissions, and the rise of ETFs.
2. Easier access to information and susceptibility to peer pressure.
3. The world's accelerating rate of change has created the perception of increased risk in buy-and-hold strategy.
4. Once beaten, twice shy: buy-and-hold versus “buy-and-forget.”
5. Loss of faith in the markets.

Read the whole article. My take on 1 and 2 is that structural changes have weakened "buy and hold". When you had to go through the act of calling your broker or going in for a visit, this slowed the investment process. Now, you can make a decision in seconds. Socially speaking, what is more trendy, sitting down and reading a book or "Tweeting"?

3 and 5 get to the psychological change. "Buy and hold" is dead because investors burned by losses will fear getting burned again. They will sell their winners and losers more quickly in future.

4 is more of a general critique on "buy and forget", where investors buy a stock and hold it forever. GE's plunge from over $60 in 2000 to under $10 this year comes to mind.

The immediate thought when I read that "buy and hold" is dead is that "buy and hold" is now an increasingly good strategy. It was a bad strategy near the market peaks because how are you going to reap profit when you're buying at the top? And one of the reasons there is a top is because everyone is buying and holding. There is great demand for stocks, but not a lot of supply (although there was new supply via IPOs).

Todd Sullivan gives a great example of when to "buy and hold". It almost all depends on price:

I'm going to take a look at the longest holding I ever had...Altria (sold last December).

I bought it in late 1999 in the midst of the "Master Settlement" and Chapter 11fears for them. The buying thesis was simple:

1- Addicts will buy their products
2- They can't go Chapter 11 because those suing them (States) need the money they provide
3- Because of that, their long term health was assured.

The purchase price for Alria was $21.65 a share and when I sold it was $16.75. In addition to that I received $21 a share in the Kraft (KFT) spin-off (sold immediately), $48 a share in Phillip Morris International (PM) shares (still held and today worth $42).

Oh, and over the 9 years I held it I received $23.25 a share in dividends.

First off, notice he did not "buy and forget". He exited in December. The key factor is the price—he purchased at a time when people thought Altria would declare bankruptcy. He goes on to say:

Has the market done a round trip the past decade? Yes. Are there plenty of companies whom over that time have gone up/down and then back to start? Yes. BUT, if you buy it low enough and pay attention to its business environment/prospects to determine your selling time, you can avoid many of the losses.

And most importantly, as Ms. Sadana rightly points out, "buy and hold" has lost popularity. You want to be selling to "buy and hold" buyers at the peak, and buying from "buy and hold is dead" sellers at the bottom.

Disclosure: I also sold MO last year, and still hold PM and KFT. I first purchased MO in the mid-1990s. I still hold Coca-Cola (KO), first purchased in 1994. And yes, I was stupid not to sell at $80 in the late 1990s. Live and learn!