It’s not a solid of piece of analysis, but playing with the US 2 year government bond yield and the percentage it has traded above its 200 week moving average, while mean reversion beckons.
Walmart just reported its latest quarterly earnings.
On Monday (July 26, 2022), the company said it needed more price cuts to pare inventories. The stock is trading 10% lower in the after-market.
“In May 2022, Walmart said it was sitting on over $60 billion of inventory at the end of the first quarter and promised “aggressive” price cuts on items such as apparel.”, said a Reuters report.
Inventories at general merchandise stores at the end of April were the highest since at least 2000, U.S. Census Bureau data showed.
My blog post on July 1, 2022 mentioned the risk of bloated inventories leading to discounting.
….while 6 weeks earlier, Reuters reported “Target Corp on Tuesday cut its quarterly profit margin forecast issued just weeks earlier, and said it would have to offer deeper discounts to clear inventory as decades-high inflation takes a toll on demand.”
Keep in mind that inventory turnover ratios are lagging indicators.
However, some perspective behind that large number of $60 billion of stock sitting in Walmart’s stores and warehouses actually equals 11% of Walmart’s revenue. Industry goals tend to aim for that ratio to sit between 5 and 10.
Walmart’s is usually around 7.5% and the 11% is the same level the company saw in 2013.
From a stock investors perspective, these types of announcements are also considered ‘good cleansing’ statements.
American companies and their management are good at doing this and taking decisive action.
European and Japanese executives tend to be more reluctant doing so.
Nevertheless, discounting is deflationary as are the lower (20%-40%) prices of many commodities already being seen over the past 2-3 months.
In turn, this will aid the moderation of interest rates, as I have alluded in this note written 4 days ago.
Only the 4th time in the past 15 years has AUD priced Silver simultaneously traded below its 200 week moving average and into Oversold territory on the Relative Strength Indicator (RSI).
First tranche is being accumulated at current A$26.93 region.
The following assets (on a weekly timeframe) registered an Overbought or Oversold reading and/or have traded more than 2.5 standard deviations above or below its rolling mean.
Extremes “above” the Mean (at least 2.5 standard deviations)
AUD/GBP
Overbought (RSI > 70)
Brazil 10 year government bond yields
The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
None
Extremes “below” the Mean (at least 2.5 standard deviations)
U.S. 10 year minus U.S. 5 year government bond yield
Gold in AUD
Corn
Oversold (RSI < 30)
Hot Rolled Coiled Steel
Copper
Tin
Silver (in USD)
Silver (in AUD)
INR/USD
JPY/USD
KRW/USD
IDR/USD
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
None
Notes & Ideas:
This past week’s biggest news was the rally in equities, the decline in the USD and the continued decline in agricultural and energy commodities.
Wheat has fallen 40% over the past 2 months and is now at its lowest close since January 10, 2022 which is well below the price when Russia invaded Ukraine.
While Corn is at its lowest price since November 8, 2021.
Other mean reversion being seen in Gasoil is on its way. It fell 4% for the week even following a 4% rebound on Friday alone. This diesel fuel was mentioned in this recent post.
Bonds caught a bid and saw yields fall, as they move back to some ‘normalisation’.
The IEF and TLT bond ETF’s rose 1.4% and 2.1%. Quite a good weekly result of a government bond fund.
The U.S. yield curve remains inverted for the 4th week in a row and Oversold for 2 consecutive weeks while the U.S. 5 year minus 3 month yield spread hit my Oversold Trifecta.
In equities, I’m reflecting on my previous comments pondering ‘what if the lows (in equities) have already been seen”?
Past posts have highlighted the extreme lows seen in various U.S. indices such as the Russell 2000, the Smallcap 600, S&P 500 and the Nasdaq. Since their June 16, 2022 intra-day lows, these indices have risen between 10% and 12%.
On June 7, 2022, I suggested that Natural Gas was trading at the mother of all peaks’.
It fell 34% from $9.45 to $6.22 within 14 days. The post below prompted the closing of that position and taking the ‘fat part of the trade’. That was on June 26, 2022.
This past week, Natural Gas rose 18% and it is now 33% higher in the past month.
There is indeed merit in taking the ‘fat part of the trade’.
Today, it’s no mans land and I don’t see a trade.
We saw a weakening in a persistently strong USD.
The Aussie rallied 2% agains the USD.
The hoo-ha about the Euro touching parity didn’t actually mean much. EUR/USD is at 1.02 today.
The Copper/Gold Ratio bounced out of Oversold territory, nor is the GBP/USD or the SEK which rallied 2.5% against the USD.
The Yen remains weak and the Indian Rupeee and Chilean Peso are trading at all-time lows.
Crude posted its lowest weekly close since the Ukraine invasion, which is 5 months to the day.
Recents posts about bourses in Taiwan, South Korea and Germany being Oversold saw the corrective action with 3% rallies.
And last week, I wrote about Gold and Silver nearing their Oversold regions and Silver in AUD at $26.50 would be an interesting entry point. It’s low for the week was $26.54.
The larger advancers over the past week comprised of;
Aluminium 4.3%, Bloomberg Commodity Index 2.7%, Hogs 4%, Copper 3.6%, JKM LNG 7.5%, Coffee 3.5%, Cattle 1.8%, Natural Gas 18.3%, Palladium 10.4%, Platinum 4.4%, Cotton 3.1%, Brent Crude 2.8%, Rice 2.1%, AEX 4.9%, KBW Banking Index 2.1%, CAC 3%, DAX 3%, Dow Jones Industrials 2%, DJ Transports 4.5%, HSCEI 2.1%, Bovespa 2.5%, KOSPI 2.7%, S&P Midcap 400 4%, Nasdaq 100 3.5%, Nikkei 4.2%, Sensex 4.3%, Oslo 3.8%, Copenhagen 4.2%, Helsinki 2.7%, Stockholm 4%, Russell 2000 3.6%, Philadelphia Semiconductor Index 5.5%, S&P 500 2.6%, Singapore STI 2.7%, TAIEX 2.7%, Nasdaq Transports 5.1%, ASX 200 2.8%, Toronto’s TSX 3.2%, S&P Smallcap 600 4.2%, Nasdaq Composite 3.3%.
The group of decliners included;
Rotterdam Coal (2.3%), WTI Crude Oil (3%), Gasoil (4%), Heating Oil (6.6%), LNG (6.6%), Tin (2.1%), Sugar (7.1%), Urea (2.1%), Silver in AUD (2.4%), Corn 6.6%, Oats (2.9%), Soybeans (3%), Wheat (2.3%) and the Nasdaq Biotechnology Index fell 1.6%.
In January 2022, the Australian 2 year government bond was yielding 0.40%.
The Reserve Bank of Australia’s (RBA) cash rate was 0.10%. 7 months later, the yield in the Aussie 2’s rose 9-fold, up to a recent high of 3.50%.
Today, they are 2.97%.
‘Shorting’ bonds and long commodities was your inflation trade. That’s all over now.
Now, the RBA’s cash rate is 1.35% which is a 13-fold increase from that January 2022 rate.
The designed and manufactured mid cycle slowdown is working for them.
I don’t think the RBA increases rates to anything close to 2%. Commodity prices have been falling and I’m expecting an inventory ‘discounting’ war which will aide the abating or moderation of inflation.
The prices of assets in various markets are telling me that inflation has peaked.
This means, I think interest rates also decline.
I’ll look for the Australian 2 year government bond yield to move lower towards the 1.50% – 1.60% range over time. It won’t occur in straight line, however probability of a mean reversion increases notably following parabolic price rises.
Arguably, you don’t want to fix your borrowing costs.
A move lower in interest rates is inherently positive for equity prices (more so for technology stocks) along with bond prices.
Although it bodes poorly for oil prices, many commodities and generally, the Australian Dollar.
By the way, Lower oil prices are good for overall corporate earnings as are cheaper commodity ‘inputs’.
And keep in mind that Copper has already declined 35% and usually leads the direction of credit market yields.
In the chart below, U.S. listed Olaplex has risen 26% in the past 7 trading days.
Short covering, momentum buying, benchmarking pressure….blah blah blah….are all some reasons for the spike in many stock prices over the past few days.
Heck, Citigroup has climbed 18% in 4 days,
Following a challenging couple quarters or lagging performance and lower fees, do you think is plausible fund managers lock in those gains, especially considering the comparative return of cash or the index?
Look for these types of stocks to give up perhaps half of the recent gains, in the coming days.
My view that interest rates would rise was derived from a combination of a some type of reversion to a ‘norm’ along with a belief that inflation would become evident due to an eventual increase in prices driven by ‘output gaps’.
This led to my ‘correlated’ comment suggesting being long various commodities would position investors well for such a move.
The commodities listed in that post rose between 25% and 80% in a short period of time.
The inflation trade has already occurred and the continued media hubbub is only reporting what has already played out.
Recently bond yields have overshot and probability lends itself to them falling. More on that in an upcoming note, where I’ll reference the recent peak in rates correlating to a peak in inflation and commodities prices. Albeit that turn has started, in those same commodities (and many others) listed.
To be clear, I think that inflation abates, not collapses.
The other cryptic quip in that July 2021 post mentioned a ‘ballsy’ trade shorting technology stocks which were then trading at nutty price to revenue multiples.
The stock samples I mentioned in that original post (July 9, 2021) were Peloton, Snap and Pinterest.
When they were respectively trading at $120, $66 and $77 per share.
Today, they have plunged to trade at prices of $8.50, $14 and $20, respectively.
All 3 charts are attached below have circles around their July 9, 2021 prices.
When U.S. 10 year bond yields started breaking above 1.8%, many more technology stocks commenced a concerted cascade.
A host of tech stocks are now poised to mean revert higher (not lower). They have been bludgeoned to the point that they traded to, through and mightily below their long term means.
What if organisations seek greater cost cuts to offset wage and price inflation by employing and exploring more technological replacements and alternatives?
What if political pressures fold to ‘re-embrace’ globalisation in order to reduce the cost of living?
What if more commodity prices mean revert?
What if supply chains repair and shorten?
well…….interest rates will decline again and inflation will ease.
Although many can’t see that case amidst today’s environment, technology stocks will benefit in such a scenario.
p.s. banks will make a fortune, as I predict that while they are swift to increase interest rates commensurately to central bank hikes…..they won’t be so accommodating to reduce the cost of borrowing should either central banks become dovish or if credit market yields ease.
p.p.s. the decline in commodities will be selected as some are already finding their lows (see my recent Macro Extremes weekly note)
The attached chart shows circles that coincide with moments when the price of Sandfire Resources (SFR.AX) has traded 2.5 standard deviations below its weekly rolling mean, touched its 200 week moving average and registered a weekly Oversold reading.
This price action mimics the decline and low in the price of Copper.
Remember that ‘electrification’ theme mentioned a year ago?
It’s now 40% cheaper.
An added benefit is that Copper sales made in U.S. Dollars are sweeter with an even lower Australian Dollar.
July 18, 2022
by Rob Zdravevski
rob@karriasset.com.au
this is not personal advice. see my disclaimer. seek your own advice, pay for some or do your own work before finalising an investment decision.
3 months on, the prices of HP and Twitter are both at least 24% lower than the morning when Buffet and Musk appeared in the headlines are a buyer or suitor of the aforementioned stocks.
It’s a reminder to speculators to do your own work or forfeit the right to complain when a stock loses a quarter of its value. Perhaps those ‘celebrity investors’ are buying stock on better terms that you or for other reasons.
Even at today’s ‘lower prices’, one should still do their research.
rob zdravevski's blog 