rob zdravevski's blog

The Fed won’t allow natural price discovery

Manias, exuberance, despair and panic always appear through a cycle. It’s nothing new or “unprecedented”. All that happens is the the subject of love or disgust changes.

Even the increase of money supply isn’t an overly new practice, but what is……is best summarised in the extract below from Seth Klarman’s Q2 2020 newsletter;

“Central banks, led by the Fed, continue to be the predominant driver of financial markets. By holding down interest rates, they influence investors to bid up the prices of securities, irrespective of the economic backdrop. By maintaining these seemingly never-ending policies and wilfully ignoring developing bubbles, the Fed has engineered a strong market recovery even as the unemployment rate tests Great Depression levels……..Investors are being infantilised by the relentless Federal Reserve activity. It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene.

When the market has a tantrum, the benevolent Fed has a soothing yet enabling response.

As with the 30-year-olds still living in their parents’ basements, we can only wonder whether the markets will ever be expected to make it on their own.”

A difficult upcoming week for the ASX 200

Copper is the only extreme I can find

ASX 200 not breaking highs

To be on the record for followers of my posts, today, with the ASX 200 reaching a 62% retracement of the recent peak-to-trough move, I’ve been a seller of the following Australian shares.

BSL $12.88; CWN $10.77; DOW $5.30; EVT $9.85; ILU $9.21; ORG $6.45 and WBC at $19.80.

I also lightened up some positions on Friday June 5th and around May 27th, which is where the vertical dotted line on the attached chart marks the 50% retracement of this rally.

Today, my view is that the index’s advance over the past 8 trading days (since my May 27th “market top” call) constitutes an “overshoot” or lurch amongst low volume and driven (dangerously for many an investor) by momentum rather valuation coupled with fund managers playing “catch-up” due to relative underperformance concerns.

How are you going to explain the next mean reversion to your Mum based on that reasoning?

I’m wondering where are the prevailing tailwinds ?

But on a more actual note, my cross-asset technical readings suggest prices are at extremes and others signal a “topping” process.

Some stock prices are back to their March 6th-9th levels while the better “gift” is that some are back at their Feb 25th prices.

This looks like quite a nice “get out of jail free” card all within 3 months.

June 9, 2020
by Rob Zdravevski

Activate link to view larger image.

Assets revert to the Natural Owner

ASX 200 posts a financial year decline of 11%

In another edition of market illusions…..

It’s the time of year when Australians measure investment performance as our financial tax year (ending June 30th) has come and gone.

Some market watchers may think V-shaped rallies, overwhelming tech bullishness coupled with tsunami’s of fiscal stimulus should’ve equated to above average returns on equity markets.

Not necessarily the case…..

Between July 1, 2019 and June 30, 2020,
the S&P 500 recorded a 5.4% return,
while in AUD, it was 3.7%.

and deceptively, the ASX 200 posted a decline of 10.9%

Another topic for another day is why we draw the line on each quarter, calendar or fiscal year. Though I guess, we need to start somewhere in order to measure things.

July 6, 2020
by Rob Zdravevski
rob@karriasset.com.au

How Tesla paid for his Tesla

One of my clients (“John”) has always been interested in buying the new Tesla 3. In Australia, that car was being priced around A$73,000 or ~ US$47,000 depending on the FX rate used.

While the markets were plunging in March 2020, I told him about a story from over 20 years ago where a client (“Brian”) wanted to buy a Harley Davidson (HOG).

Instead of buying a Harley Davidson for $35,000, Brian decided to invest that same amount in HOG shares.

His strategy was that Harley Davidson shares could pay for his Harley.

Back in 1997, HOG shares were wallowing around the $10 mark. By Christmas 1998, the stock was trading at $20. At a price of $22, Brian had sold his shares.

Job done. A free Harley Davidson.

He recouped his original outlay. The profits were used to buy a new motorcycle and with a bit of money leftover to contribute towards his capital gain tax bill.

However, the story continues…..

15 months later (May 2000), HOG shares doubled again and are now trading at $40 per share and by 2004 they are trading a further 50% higher, at $60 per share.

Brian suffered from “Hindsight Bias”. He was annoyed about his decision to sell and thinks his $35,000 Harley is actually worth at least $180,000. He even pondered installing elaborate security in his garage to protect it.

Today (16 years later), HOG shares are trading at $23.

And so this brings me to “Tesla John”.

Instead buying a car, in early April 2020 he bought Tesla shares at $504 per share (not quite the $350 low seen 2 weeks earlier).

In early June (only 2 months later….), Tesla shares reached $1,000 and John “was out”.

A new Tesla 3 is due for delivery around September.

Today, the shares have roared a further 20% higher to $1,208 and are now the most valuable automobile manufacturer in the world.

What a wonderful and fun idea but I hope that John isn’t affected by the same cognitive bias.

July 3, 2020

by Rob Zdravevski

rob@karriasset.com.au