Oil price action update

On June 20th (5 days ago), I wrote that Brent should (from $41.90) push slightly above $43 and warned it will be a head fake, as it should reverse direction and move lower.

Two days later, Brent Crude traded up to $43.90 and in the past 36 hours has dropped back to $40. That’s a quite a notable 10% price reversal.

What’s next?

My June 20th post contains the macro views while I’m getting positioned to buy selected oil securities at lower prices.

https://lnkd.in/eYNWKFY

I didn’t trade this Oil short or reversal because my overarching theme is that I am bullish on Oil over the long term.

My analysis suggested being careful and not add to positions at what I saw as an interim, short-term high which Brent can’t seem to break for the time being. I felt I could buy at cheaper prices if Brent fails to close above $43 on a “weekly” basis.

June 25, 2020
by Rob Zdravevski

Iron Ore – As Good As It Gets

June 23, 2020

by Rob Zdravevski
Iron Ore – As Good As It Gets ?

Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.

Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.

The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.

This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.

I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.

However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.

<see chart below>

Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.

Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.

It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.

But I also have the following questions;

  • Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
  • Is it true that Brazil produces a higher grade of Iron Ore than Australia?
  • Will Brazil’s cheaper labour and production give them an advantage?

If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.

Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.

Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.

Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.

And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.

The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.

For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,

Rob
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Drop me an email: rob@karriasset.com.au

Disclaimer

 

Some extra reading.

https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0

https://en.wikipedia.org/wiki/Brumadinho_dam_disaster

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

Aussie Gold Stocks – Wait for cheaper prices

There will be a time to own Gold, but it’s NOT now.

Away from the fintech and infotech stocks, one of the hottest sectors on the Australian Stock Exchange (ASX) has been shares in gold companies.

But I see enough divergences along with my analysis which suggest “look out below” as I expect lower stock prices.

Already stocks such as Saracen Minerals (SAR:ASX) have “stealthily” declined 18% over the past month and understandably so. On May 26, 2020, the stock (then $5.60) was trading at 149% above its weekly 200 day moving average.

For those interested in owning ASX listed gold companies, perhaps consider these entry prices for these selected stocks.

SAR, currently $4.56, Buy at $3.23
EVN, currently $5.27, Buy at $4.55 and preferably $3.94
NST, currently $13.11, Buy at $11.55 and optimally $10.84
RSG, currently $1.03, Buy at $0.85, while $0.69 is a bit far-fetched but it won’t hurt placing an order.

As always, do you own work, seek advice, see my disclaimer and I haven’t taken the readers personal circumstance into account when writing this.

Rotation into lagging Euro country indices

For cross-border equity index allocators;
whether its relative or absolute, the IBEX, CAC, MIBTEL & FTSE-100 have trailed their European cousins – the SMI, AEX, DAX and OMX.

The latter group have all visited, kissed and some have flirted above their 200 day moving averages.

While this isn’t the sole pre-requisite, it leads me to believe that we may see some rotation of monies from the “surging” countries into the “laggards”.

note: I am bullish on UK equities

Incidentally, all of the European indices have underperformed the S&P 500 and Nasdaq.

With a strong USD and relatively weaker Euro, there is the plausible trade of buying the lagging EuroStoxx 600 Technology index with your re-weighted Nasdaq scalping’s.

Shopify (SHOP) Sell Rating

15 June 2020

by Rob Zdravevski

Stock Code: NYSE: SHOP

Current Price: US$743

Target Price: US$ 530

Notwithstanding competitors such as Amazon and Microsoft coveting Shopify’s market presence, my view is that the market has priced in such extraordinary growth which suggests that this is “as good as it gets” for Shopify’s stock price in the near to medium term.

The advance in Shopify’s stock price has been accentuated in the past 4 months due to an acute rise in e-commerce transactions and the detrimental effect that COVID-19 has had on “bricks and mortar” retail.

For some context, Shopify’s Q1 2020 financials (released May 6th, 2020) reported growth rates (when compared to the same quarter a year ago) of a 25% increase in their Monthly Recurring Revenue, a 47% increase in Total Revenue, 42% rise in Gross Payment Volume and a 44% increase in Gross Profit.

All the while, its 1st quarter Operating Loss was $73 million and booked a Net Loss of $31 million.

At the very least I would expect some mean reversion in the stock price to reflect a combination of tempered or perhaps “normalised” growth rates and some “catch-up” on its valuation because its difficult to warrant “new” dollars being invested at its current $88.6 billion market capitalisation.

My 2020 estimate is for Shopify to produce Revenue of $2.11 billion, an EBITDA of $55 million, EBIT of $2 million and a Net Loss of $188 million.

As you can see margins aren’t impressive and a P/E ratio doesn’t exist.

Shopify does has $2.3 billion cash on its books which makes its Enterprise Value $86.3 billion……giving it an EV/EBITDA Ratio of 1,569.

Although I am a fan of the Andreessen Horowitz dictum that “Software Is Eating The World”, how can one make a “buy” case for this stock at these valuations ?

Furthermore, on April 1st, 2020, the company announced that it won’t provide any FY 2020 financial guidance or expectations to analysts and investors citing uncertainly due to rising unemployment and the COVID-19 pandemic.

Confusingly, I believe it has been the onset of COVID-19 which helped its stock price double over the past 3 months.

With a current stock price of US$ 742.58, my initial target price is $530, while I’ll assess the probability of it trading to $455 as we near the next quarterly earnings result.

Shopify Q1 2020 Financial Results

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Disclaimer

Rob Zdravevski

Rob Zdravevski

My Current Read on Oil Prices

June 12, 2020

by Rob Zdravevski

On May 25th, I called the price of Brent to pause at $43. See the link below.

https://robzdravevski.com/2020/05/25/overall-bullish-on-oil/

That high was reached on June 8th,

Since then (within 5 days) Brent has declined 14% to what I viewed as its first stop being $37, which also the previous resistance mention in the May 25th blog post.

Now, my work suggests a 50% probability that Brent holds this level.

This decline doesn’t seem the beginning of a larger decline but merely a shakeout of later-comers to the Crude “snap-back” rally. It’s a decline within a longer-term bullish trend and technicals give me the same impression.

So, today, I am nibbling (buying) shares in some favoured oil names in Australia and around the world.

Should Brent not hold $37, then $32 is the next level it should visit, test and hold.

A decline to the $32 level would result in the indiscriminate selling of Oil and Gas equities and should prove to be a 2nd (and safer) chance to take a long position in this theme, assuming you don’t choose Brent futures or another security.

Incidentally, I am overall bullish on Oil, irrespective of increasing COVID-19 cases in developing countries and emerging economies and the prospect of a 2nd wave of the virus in developed world. Supply remains constrained (one example is the halving of the drill rig count over the past 4 months ( https://rigcount.bakerhughes.com/static-files/371ff33e-7b57-4d90-bb4b-69b3dff45201 ) and subjectively, it seems there is little to zero premium being attributed for geopolitical & cartel related risk.

p.s. Brent is a better reflection of global pricing, thus I’m not watching the WTI price intently.

Short Bitcoin Call

A quick note to followers – Making a call, Short Bitcoin at current price of $9,320.

Targets are $8,300, then $8,170 and $7,200

Will add to the short at $9,430.
Stop loss will be set at $9,600.

A break in AUDJPY below 0.7160, then 0.7130 aids the short thesis, which includes plenty of cross-asset correlations.

#bitcoin #btc #crypto #cryptocurrency

June 12, 2020
by Rob Zdravevski

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Drop me an email: rob@karriasset.com.au
and seek advice or see my Disclaimer link on my blog site

Why has oil doubled?

Would you like to know why the oil price has doubled in the past 6 weeks?

The number of oil drilling rigs in operation has halved….

https://rigcount.bakerhughes.com/static-files/371ff33e-7b57-4d90-bb4b-69b3dff45201

New Macro Calls – Short AUD, Copper, Silver, Oil & Gold

June 8, 2020

by Rob Zdravevski

My new macro trade calls are;

Short AUD vs USD – its currently 0.6973. I first called this short at 0.66 on May 28th, 2020.

Short Oil (Brent is currently 42.90) – Brent today hit $43 target I mentioned in a note dated May 25th, 2020.

and I’m still Short Gold in USD, its currently $1,691

(see my original note, from May 4th, 2020, https://www.linkedin.com/posts/robzdravevski_gold-activity-6658641245285433344-OrN9

A break below $1,645 suggests USD Gold’s downtrend transfers the from a Short-Term to Medium Term timeframe.

But in light of expected AUD weakness, Gold in AUD is likely to be near its floor.

Currently its A$2,420, some probability of an overshoot to A$2,365, a further 2.2% lower from here.

Put another way, the decline in XAUAUD price should slow due to a falling AUD.

For example, a USD Gold price of US$1,551 (my initial downside target) and AUD FX of 0.6660 (its rolling daily mean and 20 day moving average), would put the XAUAUD at $2,329. Hardly a tragic collapse.

Furthermore, Platinum (in USD) is heading lower. Currently its $842

While Silver peaked on June 1-2 at the $18.90 mark, currently its $17.72.

A break below $17.30 aids the greater short commodity trade thesis.

Copper ($2.55) should turn lower. The manner (price action, accumulation, volume) of its recent break above the $2.46-$2.48 resistance hasn’t convinced me of a new higher, stronger leg.

Now to figure out how my views will affect certain stocks and also what other opportunities present themselves.

For example, I may be selling Woodside & BHP.

To be clear, these “calls” start life as short term views, which I typically categorise in a 3-6 week timeframe. Then, I start thinking whether they morph into a medium term call which usually means a period lasting 6-14 weeks.

An added note to these calls is that over the longer term, I remain bullish on Oil.

Read more at this link, https://robzdravevski.com/2020/05/25/overall-bullish-on-oil/

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Drop me an email: rob@karriasset.com.au

Disclaimer

Illusions abound

The rally in equity indices (which troughed on March 23, 2020) has created a fascinating observation of investor behaviour and cognitive biases.

For context, the ASX 200 produced 74% of its rally return before May the 1st.

The index rose 26.5% from March 23rd – April 30th (5 weeks) and has since climbed 9.5% from May 1st – June 4th, for the next 5 weeks.

As you can see, it did most of the work in the first 5 weeks following its low.

The second half has felt like an illusion that it moved up each day.

In fact, the ASX 200 was “flat” from May 1st until May 22nd. It rose 9% in the past 9 trading days.

While the S&P 500 rose 32% in the 5 weeks from March 23 – April 30 and its advance for the next 5 weeks was also 9%. A sharp rise of 12% occurred over the past 14 trading days.

June 5, 2020
by Rob Zdravevski

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