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

Next week could be carnage !

Or at least, difficult for the ASX 200 (XJO) Index.

Short term indicators are turning lower, longer term technicals are losing steam and the AUDJPY is in the early stage of suggesting “risk-off” as the media has coined it.

Incidentally, for the month of July, the XJO rose 0.5%.

As I’ve written over the past few weeks under the heading of “being aware of illusions”, the ASX 200 has continued to hover around the same price it was 2 months ago.

And as readers have noticed, I’m not short of having a view.

10 days ago, I published this opinion (in the link below) along with several price targets on the ASX 200.

The first “gap” mentioned in that post was reached in todays trading.

My main message is to be prepared with your “shopping list” and your Buy prices.

31 July 2020
by Rob Zdravevski

Fees – Fair or Fleeced ?

So you have either $500,000 or $5 million to invest and your selected investment fund charges a fee of 1% p.a. of the amount you hand over.

That means the fee is either $5,000 or $50,000 per annum.

Does that funds management firm do 10 TIMES more work ?

Why not charge a flat, fixed fee?

Is charging a fair amount in exchange for a commensurate amount of work conducted such a radical idea?

p.s. these questions also apply to financial planners and advisors, the M&A fees charged by investment banks and the selling commissions charged by real estate agents.

Timber !

The 3 best commodities trades since the March 2020 lows have been Long Oil, Silver and Lumber.

Yes…..Lumber. (see chart below)

All have doubled over the past 4 months.

Where to next….
Oil’s bullish trend is still intact,

Silver is overbought, at extremes and warrants caution if you are long (susceptible to a pullback to $18),

and Lumber is a Sell. With its 3 standard deviation above its ‘weekly’ mean and an outside reversal week, it’s time to cash in the (wood) chips.

by Rob Zdravevski
July 27, 2020

Looking for a 15% decline in ASX 200

Today, the ASX 200 closed at 6002.

I am watching if the index will trade lower to “fill” the following “gap-ups”,

5918, 5803, 5604, 5394, 5055 & 4701.

Those are declines of 1.4%, 3.3%, 6.6%, 10.1%, 15.8% & 21.7% respectively.

I’m betting on it trading closer to the 5,055 level.

20 July, 2020
by Rob Zdravevski

Copper is the only extreme I can find

The only “extreme” I am finding amongst the macro cross-asset world is in the rising price of Copper.

Accordingly to my analysis, the price of Copper ($2.86) remains at extended and extreme levels and start to decline.

The traders amongst us may choose to take a “short” position, while others may ponder who will be the beneficiaries of lower Copper prices.

Although not at an extremes, a new trend is developing suggesting lower yields for the U.S. 10 Year Government Bond.

And so, I want to bring to your attention the wonderful correlation the Copper to Gold Ratio has compared to the U.S. 10 Year Treasury Yield.

In the past 2 weeks, the metals ratio is diverging and moving in the opposite direction. I believe this ratio will mimic the bond markets pattern soon and with a new trend suggesting lower yields in the 10 Year, this means either Gold falls at either a proportionate rate or greater than my predicted decline in the Copper price.

10 July 2020
by Rob Zdravevski

ASX 200 not breaking highs

One month ago (on June 9th, 2020) I wrote the post below.
The ASX 200 has not traded higher than that June 9th high of 6,198. Today it’s 4% lower, however many market watchers seem to think we have been barrelling into new highs each day.

Although I’d like to note that the stocks I was selling as listed in the original post have all declined between 10% and 20%.

I am not advocating a trading mentality but rather, when you have conviction in your opinion, there are times when you need to protect your capital.

July 10, 20202
by Rob Zdravevski

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

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Assets revert to the Natural Owner

There is such a thing as a natural and unnatural owner.

Throughout the business cycle it seems inevitable that assets change hands between a “natural” to the “unnatural” owner and revert again to the “natural” owner.

What do I mean by this?

When doctors and lawyers buy vineyards, sure and soon enough they end up selling them back to the seasoned wine operator.

Sometimes people are romanced by starting, owning or buying a business which they have no business being involved in.

This can also include people who shouldn’t be in the stockmarket or own multiple residential dwellings in order to become high-flying landlords or starting a restaurant.

I’d love to hear some of your examples.

A recent conversation which started up while drinking beer with friends was relating to the housing grant stimulus being offered and a coming “boom” in new home starts.

One of the pre-requisites to receiving or qualifying for the grant, was that a slab (concrete foundations) needed to be laid by the end of December 2020.

So, my buddies start talking about getting into the concreting business.

I interrupted and asked “what the hell do you blokes know about concreting?”

Their reply was along the lines of, “what’s to know?” and “its easy”.

I needed to chime in and remind them that the guys which you see in the business today, actually belong there.

They are the “natural” owners of those businesses.

They’ve been talking concreting with their “old man” over the dinner table for years.

They know the costings, pricing and margins better than any of us.

I’m not raining on anyone’s entrepreneurial parade but it seems obvious that certain businesses should be run and owned by those with a pedigree in that industry.

Pedigree trumps competence, finances and passion.

If your friend ever decides to invest in Alpaca Farming or a Forestry Schemes, start a Nail Salon or an online bikini company…….and they have no business being there, perhaps you should say something.

7 July 2020

by Rob Zdravevski

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

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



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