Too early to re-enter Silver

Since my call that the ‘fat part of the rally’ in Silver (as priced in AUD) had been seen….

Silver in AUD has seen the ‘fat part of the trade’

it has declined 9% in a series of 6 consecutive losing weeks.

My current read is that it may pause or find some slight support.

Such streaks come to a (temporary) end.

It remains in no-man’s land.

For now, my re-entry interest will be closer to the A$26.80 – A$27.90 region, as we approach late March 2023.

February 27, 2023

by Rob Zdravevski

rob@karriasset.com.au

7% p.a. gross ain’t that bad

Bought for $7.25 million in 2008 and hopeful of a $17 million selling price in 2023.

https://www.afr.com/property/residential/rea-boss-owen-wilson-hopes-for-17m-for-toorak-pile-20230227-p5cnvy

It’s all in the way the story is written and in turn, how it’s not.

This result would equate to a 7.1% compounded annual return……

while not yet deducting for stamp duties, maintenance or operating costs and (if there were) any borrowing interest costs or renovation and improvements since 2008…..

and this, in the most exclusive suburb, in one of world’s best performing real estate markets.

This is not a sleight on the property owner (for surely they bought well in 2008), rather it’s a critique on how the media frames the prices which marquee properties are sold for.

I’m encouraging readers to just ponder the mathematics before being wowed by a journalists figures.

Although, I can’t resist a snippy comment.

If one bought shares in the company which employs the gentleman owner of this property, (with an approx. 2008 average stock price of $5), then the annualised compound return (REA stock is now trading at $122) sits at 31.8%.

While both are concentrated ‘bets’, I’ll await the customary response that ‘you can’t wrong with property’ and ‘at least, I can touch it’.

For a topical reference, this other marquee property in the same suburb was bought for $108,000 in 1968 and now seeking a selling price of $45 million.

https://www.afr.com/property/residential/late-billionaire-david-hains-toorak-mansion-tipped-to-fetch-45m-20230221-p5cm5w

The compounded annual rate of return is a more impressive 17.7% p.a. and awfully prescient from one of Australia’s best investors (and most classiest organisations).

Although, that was then.

What if we optimistically assumed a constant 7% compounded annual return for both sample properties over the next 15 years (not 17% p.a.and nor for 55 years), could they respectively be worth $44 million and $115 million in the year 2038?

Surely, in many asset prices, the ‘fat part of the trade’ has been had, in those past days of lower interest rates and some degree of FOMO.

February 27, 2023

by Rob Zdravevski

rob@karriasset.com.au

Aussie gold equities down 24% from blow-off top

I warned in December 2022 that I didn’t like the smell of the rally in gold stocks.

Rally in gold stocks doesn’t smell right

My investing strategy post mortem involving Australian gold equities was that I was very disappointed in my premature exit of Northern Star Resources but very pleased with the delayed, staged exit in Evolution Mining.

Whilst I tend to have a habit of leaving the party too early, my analysis and discipline in how I read the ‘tape’ kept me and clients in good stead by not chasing, adding or commiting new money as the rally extended itself.

Today, the price action in these stocks coincide with my view that Silver and Gold prices will (have) ease.

Whilst, precious metals will have their day in the sun, simply, I think there is a little more consolidation and digestion ahead in their respective stock prices before that day comes.

In the case of Northern Star Resources (NST.AX), many people did the wrong thing, at the wrong time paying A$11 per share, let alone A$13.

Some are now sporting losses of 24%.

This analogy could also be applied to the recent trading in Newcrest (NCM.AX) with takeover arbitrageurs and the like, paying a price as high of A$25.80, when Newmont lobbed in a bid.

Newcrest shareholders may be soon accepting an equivalent bid around the A$19.50 mark.

I may be interested in Northern Star Resources when the stock trades below A$8.10, if not A$7.30.

As I have warned in many an asset price, there are gaps beneath.

February 27, 2023

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending February 24, 2023)

A weekly Macro, Cross Asset review of prices trading at extremes which may generate future investment ideas and opportunities.

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)

U.S. 2 year government bond yield

Australian Coking Coal 

Overbought (RSI > 70)

German 2 year government bond yields

The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)

U.S. 2 year government bond yield

Hot Rolled Coil Steel (HRC)

Cattle

Extremes “below” the Mean (at least 2.5 standard deviations)

None

Oversold (RSI < 30)

Urea (U.S. Gulf) 

Urea (Middle East)

The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)

None

Notes & Ideas:

Following a couple quiet weeks, Equities were lower. More comical were the ‘fear’ reports from the financial media that equities had the worst weeks for some months.

The overbought European indices which featured in last weeks edition, aren’t overbought.

The HSCEI has fallen 14% in the past 4 weeks. Such a decline in western markets would spook many. 

Amongst bonds, yields generally rose. The U.S. 2 year bond yield saw its highest closing weekly price since mid-July 2007, whilst its intra-day is yet to break that seen on October 31, 2022

The Australian yield curve is the lowest since mid-August 2019. At a current spread of 0.17%, we’ll watch if it inverts. The last time we saw that was in August 2008.

Something else to watch is the possible change in trend (downward) in the U.S. 10 year minus Australian 10 year yield spread. It has a healthy correlation with the S&P 500.

And the U.S. 5 year yield minus U.S. 3 month bill yield spread is no longer Oversold, while the U.S.30 year minus 10 year bond curve re-entered ‘inverted’ territory.

Last week, I mentioned that I’m watching the BAML 5-7 year corporate bond yield, the U.S. 5 year breakeven and the ‘real return’ of the 5 year minus 5 year breakeven yield.

That’s all still on my radar.

Incidentally, the 5 and 10 year breakeven inflation rate is at the start of an embryonic upward trend (on a weekly basis). I’ll watch this to decipher the ‘stickier’ inflation thesis.

In commodities, Rotterdam Coal, RBOB Gasoline, Natural Gas, U.S. Mideast Hot Rolled Coil Steel and the Baltic Dry Index had tremendous weeks. The latter snapping a 8 week losing streak.

Keep tabs on those streaks, for on a weekly basis, 6 of them is rare, 8 is even rarer.

Palladium continues its decline and getting closer to a buy signal as it hits a 7 week losing streak, falling 26% over that time.

Urea has similar traits.

Silver has fallen for the 6th consecutive week. Readers would have seen my “Sell Signal” note, back then.

Most ‘softs’ saw weakness (Wheat fell 7%) with my ‘short’ Corn call gaining a little traction.

Cattle is Overbought for the 20th consecutive week.

Cotton’s bearish outside week was decoy as it rose 4% on the week.

And finally, the Japan Korea LNG Marker (JKM) touched its lowest price since August 30th, 2021 and is also nearing a buying moment. (see the seperate post from last week)

In currencies, the AUD was lower against many, again. 

The USD was stronger. This also means that currency crosses such as the KRW and JPY are at their weakest since late November / early December 2022.

And previous outside bearish week seen in CAD/USD carried on with the Loonie easing 1%.

The larger advancers over the past week comprised of;

Rotterdam Coal 15.1%, Baltic Dry Index 64.1%, China Coal 4%, Gasoil 2.2%, Heating Oil 3.1%, Hot Rolled Coil Steel 27.8%, Natural Gas 12%, Orange Juice 3.4%, Gasoline 7.2%, Dutch TTF Gas 3.5%, Urea U.S. Gulf 3.4% and Cotton rose 4.2%. 

The group of decliners included;

Australian Coking Coal (2.8%), Aluminium (1.9%), Copper (3.8%), Copper/Gold Ratio (2.1%), JKM LNG (5.8%), Palladium (7.7%), Silver (4.5%), Urea Middle East (4.3%), Silver in AUD (2.4%), Gold (1.7%), Corn (4.1%), Oats (5%), Rice (4.5%), Wheat (7%), AEX (2.4%), KBW Banks (2.5%), CAC (2.2%), DAX(1.8%), DJ Industrials (3%), DJ Transports (3.4%), MIB (2.8%), HSCEI (4.1%), HSI (3.4%), BOVESPA (3.1%), Nasdaq Composite (3.3%), S&PMidCap400 (2.4%), Nasdaq Biotechs (4.8%), Nasdaq (3.1%), Stockholm (1.9%), Russell 2000 (3%), Sensex (2.5%), S&P SmallCap600 (2.7%), SOX Index (2.4%), S&P 500 (2.7%), FTSE 100 (1.6%) and Mexico fell 2.1%.

For reference, Toronto’s TSX fell 1.4%, the ASX 200 declined 0.5% and the ASX Small Caps eased lower by 0.7%.

February 26, 2023

by Rob Zdravevski

rob@karriasset.com.au 

FTSE-100 is full

In 5 weeks time, the corporate tax rate in the U.K. will rise from 19% to 25%.

Don’t be too surprised.

Corporate taxes were as good as they were going to get.

They were 52% from 1973 onwards….then the chart below shows the rest.

Add a doubling of the cost of capital (net interest expense)…..

and my note about changes (risk) to EBIT is pertinent.

A case for a 30% decline in the S&P 500

And so, I’ll throw an additional study being a Monthly price chart.

It shows the FTSE 100 now trading up towards a rare 2.5 standard deviation (above its rolling monthly mean) and its 14% above its 50 month moving average. The latter means something too.

It’s difficult to make an emphatic case for an extension to the current bull run.

Moreover, should it run higher, at least acknowledge that the probability suggests that it’s an advance to ‘rent’ rather than ‘own’.

For institutional investors, I’d be interested to know if the ‘goliath’ asset consultants are identifying the same extreme in their allocation advice.

February 23, 2023

by Rob Zdravevski

rob@karriasset.com.au

Be careful going long when a conflict or crisis breaks

I remember a year ago when ‘everyone’ became experts in Ukrainian wheat exports, the effect of Russian oil sanctions and how Europe will freeze without Russian gas, let alone should a pipeline rupture.

The charts below circle the area where traders were deked when going ‘long’ in the tail end of an existing long term bullish trend. Much money has been lost, doing something at the wrong time.

February 23, 2023
by Rob Zdravevski
rob@karriasset.com.au

Compounders – Deere & Co.

Including dividends, the compound return for Deere & Co stock over the past 10 years has been 22% p.a.

Google (Alphabet stock) over the same time has returned 25% p.a.

and the S&P 500 10 year compounded annual rate (including dividends) has been 16%.

Over 25 years, the S&P 500’s annual compound return been 10.7%.

while Deere & Co has returned 14% per annum

and my Dad’s investment property in outer western suburbs of Melbourne, Australia has been 9.6% p.a…….but not including taxes on income, management fees, council rates and maintenance.

Albeit this is a cherry picked sample amidst two decades of declining interest rates, lower tax rates, increased liquidity and the largest asset bull market seen in the past 50 years…..it maybe prudent to recalibrate expected returns for the next 10 years.

Or at the very least, investing will become much more difficult.

February 20, 2023
by Rob Zdravevski
rob@karriasset.com.au

Macro Extremes (week ending February 17, 2023)

A weekly Macro, Cross Asset review of prices trading at extremes which may generate future investment ideas and opportunities.

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)

U.S. 2 year government bond yield

Australian Coking Coal 

Overbought (RSI > 70)

German 2 year government bond yields

Cattle

Italy’s MIB, France’s CAC and Spain’s IBEX equity indices

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)

None

Oversold (RSI < 30)

Natural Gas

Urea (U.S. Gulf) 

Urea (Middle East)

Baltic Dry Index

The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)

None

Notes & Ideas:

This past week seemed to appear as some consolidation and digestion was taking place while I think we saw some “rotation” also occur.

Equities had a quiet week. Some western European indices were amongst the better performers as the started entering Overbought extremes. That’s something for tactical ETF allocators to take note of.

The Nasdaq isn’t overbought anymore and just as media stories jump on the Chinese equities bandwagon, the HSCEI has fallen 10% in the past 3 weeks. Such a decline in western markets would spook many. 

But that matters little since the HSCEI has risen 50% from its Oversold Extremes seen in October 2022.

Amongst bonds, yields generally rose. The U.S. 2 year closed at its highest level since October 31, 2022.

The Australian yield curve is the lowest since March 2020.

Something else to watch is the possible change in trend (downward) in the U.S. 10 year minus Australian 10 year yield spread. It has a healthy correlation with the S&P 500.

 The U.S. 5 year yield minus U.S. 3 month bill yield spread is no longer Oversold.

I’m also watching BAML 5-7 year corporate bond yield, the U.S. 5 year breakeven and the ‘real return’ of the 5 year minus 5 year breakeven yield.

In commodities, we generally saw softs rise and hards fall. Energy was weaker.

Urea broke its 9 losing weeks by rising 0.4% for the week.

Palladium and Platinum prices have fallen 18% and 17% respectively over the past 6 weeks.

Cattle is Overbought for the 19th consecutive week.

Orange Juice isn’t Overbought anymore, Cotton had a bearish outside week while Silver and Platinum are in the midst of 5 and 6 consecutive losing weekly streaks, respectively.

The Japan Korea LNG Marker (JKM) touched its lowest price since August 30th, 2021 and mean reverted back to its 200 week moving average. 

Shipping Rates weakened further with the Baltic Dry Index notching up a 8 week losing streak.

In currencies, had another boring and benign week. Generally, the AUD was lower against many while the USD was slightly firmer. The CAD/USD had an outside bearish week though.

The larger advancers over the past week comprised of;

Australian Coking Coal 2.2%, Rotterdam Coal 3.4%, Cocoa 6.3%, Lean Hogs 12.4%, Copper 2.3%, Copper/Gold Ratio 3.6%, Coffee 6.4%, Uranium 2.5%, AEX 1.7%, CAC 3.1%, MIB 1.7%, IBEX 2.4%, Stockholm 2.2%, FTSE 100 1.6%, Istanbul 7.2%, Mexico 2.5% and Argentina’s MERVAL rose 5.1% (it’s up 20% over the past 5 weeks)

The group of decliners included;

Aluminium (3.5%), Bloomberg Commodity Index (2%), Baltic Dry Index (10.6%), WTI Crude Oil (4%), Gasoil (5.3%), Heating Oil (5.3%), JKM (11.5%), Lumber (3.4%), Tin (3%), Natural Gas (9.5%), Nickel (4.7%), Orange Juice (4.9%), Palladium (2.1%), Platinum (3.2%), Gasoline (3.8%), CRB Index (1.9%), Cotton (4.4%), Dutch TTF Gas (9.1%), Brent Crude Oil (4%), Oats (3.5%), CSI 300 (1.8%), HSCEI (1.9%) and Hong Kong’s HSI fell 2.2%.

For reference, the S&P 500 fell 0.3%, the DJ Industrials eased 0.2%, the Nasdaq Composite rose 0.6%, the S&P MidCap and SmallCap hovered around gains of 1.4%, Toronto’s TSX fell 0.5%, the ASX 200 declined 1.2% and the ASX Small Caps were unchanged at 0.1%.

February 19, 2023

by Rob Zdravevski

rob@karriasset.com.au