Macro Extremes (week ending November 18, 2022)

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)

Copper

Sugar

Nickel

Platinum

Silver in USD

Italy’s MIB Index

Overbought (RSI > 70)

Cattle

U.S. 2 year government bond yields

German 2 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)

Chilean 10 year government bond yield

Oversold (RSI < 30)

Hot Rolled Coil Steel (HRC)

Coffee

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

U.S. 5 year yield minus U.S. 3 month bill yield spread

Notes & Ideas:

It was a wonderfully quiet and sensible week for capital markets, particularly in equities.

Amongst equity markets, I could generally call it consolidation or digestion. We saw some small declines (the ASX 200 fell 0.1% for the week) although many indices (positively) made higher highs and no outside bearish reversal weeks were registered.

While I’m watching the DAX closing in on the Overbought region.

Copper isn’t overbought following this weeks 7% decline. 

Although, a signal for the equity market to note the decline seen in the Copper/Gold Ratio and respect its correlation to the Small Cap Index. The latter played the function of leading, being the first to decline and the first trough.

Also worth keeping an eye on is the larger declines seen this week in the U.S. Banking and Transports Index.

Tin moved out of oversold territory with a stellar 20% rise for the week.

It was a benign week for the softs, although Cotton is corkscrewing towards making new lows while Coffee is now Oversold.

And the energy complex resumed the decline that I have been calling and aligned to.

Bond yields continue to fall, meaning bonds are being bid higher. In many cases, that moment to buy bonds at the extremes has passed and we are now in between the range.

For example, I have a medium term call that Australian 2 year bond yields come down to the 2.40% range. In the past 4 weeks, they have already firmed in from 3.72% to their current 3.17%. The Australian 10’s have moved from 4.30% to 3.64% in the same timeframe.

Months ago, I wrote about Chile (along with commodity sensitive Mexico and Brazil) leading the global ‘interest rate pack’ in addressing rising inflation. 

Chile aggressively raised interest rates and now its 10 year bond yield is mean reverting.

The yield has fallen from 7.10% to 5.54% over the last 6 weeks.

Chilean Interest Rates Have Doubled

The larger advancers over the past week comprised of;

Rotterdam Coal 9%, Cattle 1%, Tin 19.4%, Natural Gas 7.2%, Nickel 9%, Sugar 2.1%, Dutch TTF Gas 18%, Oats 2.4%, HSCEI 3.8%, Hang Seng 3.8% and Taiwan’s TAIEX rose 3.6%.

The group of decliners included;

Australian Coking Coal (5.6%), Aluminium (2%), Baltic Dry Index (12.3%), Cocoa (2.5%), WTI Crude Oil (10%), Gasoil (4.2%), Copper (7.2%), Copper/Gold Ratio (6.4%), JKM LNG (3.1%), Coffee (7.7%), Palladium (4.3%), Platinum (5.2%), Gasoline (7.2%), Silver (3.1%), CRB Index (3.3%), Cotton (5%), Brent Crude Oil (8.4%), Silver in AUD (3.5%), S&P GSCI (4.3%) KBW Banking Index (3.7%), DJ Transports (2.1%), Russell 2000 (1.8%), KOSPI (1.6%), Nasdaq Small Cap 700 (2.2%) and Brazil’s BOVESPA fell 3%.

November 19, 2022

by Rob Zdravevski

rob@karriasset.com.au 

Taiwan Semiconductor has the Buffett Put

I’ve been writing about the omni-importance of Taiwan Semiconductor (TSM) since February 2022.

Taiwan Semiconductor is the real prize

Then, in May 2022 along with other moments, I highlighted when TSM was trading at oversold levels.

TSMC is now Oversold

A month ago, I pondered that ‘no one is going to blow up Taiwan Semiconductor’

No one is going to blow up Taiwan Semiconductor

But when the media announced that Warren Buffet’s Berkshire Hathaway had bought an approx $5 billion worth of stock equating to 1% of the company, somewhere during the proceeding quarter being between July 1st and Sept 30th, 2022……..

on Tuesday November 15, 2022, TSM stock (a $400 billion market cap company at that) opened 13% higher than its previous day’s close….

I’m puzzled why did people pay 30% more for a stock which they could have acquired below $62 during any 10 consecutive days only a week earlier?

The chart below shows the period which covered the 3rd fiscal quarter.

Maybe they did so because they either figured they’d be getting into the stock at some sort of similar average price that Berkshire Hathaway may have paid or more plausibly, they don’t need to bother doing any research or work behind the investment themselves because Mr Buffett’s team already did that work for them.

Perhaps the market assumes and concurs that now this company (and country) won’t be attacked or ‘muscled’ for the United States has another economic interest to protect.

Is this now called the Buffett or Berkshire Put?

November 17, 2022

by Rob Zdravevski

rob@karriasset.com.au

Pffft….it’s only $275 million

When a sovereign wealth fund or something that resembles a similar description loses (writes down) $275 million in crypto related (FTX) investment, why doesn’t the investment team involved in that decision, CIO and perhaps all lose their jobs?

Maybe they should pay as much of it back from their personal funds?

Of course that wouldn’t happen, for no one will work for any investment fund along with a bunch of other sensible reasons and arguments, including they wouldn’t take any future risk at all.

But I want to ask why do we then laud them as extraordinary investors or exemplary stewards (irrespective if it’s public or government) money?

Partly, because their returns tend to be quite good and sheer size affords them better terms than the rest, which is an advantage that any of us would gladly accept.

Is it because they can hide behind the idea that it only accounts for 0.05% of their total assets under management?

Is it because of one’s size that allows you to produce better returns than many because a (potential asymmetric) bet of $275 million is only 2 days worth of return which is recoverable over one year.

And it’s only equal to 1 day worth of your average annual return spread it out over 2 years.

Can you imagine championing an investment which loses $275 million?

It just doesn’t seem to matter…..

it doesn’t matter if a Swiss wealth management firm posts a $4 billion loss yet people entrust them to manage their money, when they can’t manage their own company…..

nor does it matter when a investment bank blows $744 million backing a hedge fund called Archegos…..

or when an Australian bank is ordered to pay $1.3 billion in fines and the other is penalised $600 million over breaching anti-money laundering rules.

We just all accept this as OK……because none of the people involved own the business nor is it their money.

November 17, 2022

by Rob Zdravevski

rob@karriasset.com.au

A temporary decline in interest rates and inflation

My latest newsletter tells stories how I think inflation and interest rates will moderate,

we can call it deflationary,

but it won’t last too long,

before working up and from new starting points into the decade.

Unless you are trading interest rates, the opportunities in the 2nd and 3rd derivative effect should be broad.

Also feel free to subscribe to the newsletter.

Macro Extremes (week ending November 11, 2022)

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)

Copper

Sugar

Silver in AUD and USD

Italy’s MIB Index

Overbought (RSI > 70)

Cattle

U.S. 2 year government bond yields

German 2 year government bond yields

U.S. 5-7 year corporate 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)

Coffee

Bitcoin 

Chilean 10 year government bond yield

Oversold (RSI < 30)

U.S. 5 year yield minus U.S. 3 month bill yield spread

Hot Rolled Coil Steel (HRC)

Tin

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

None

Notes & Ideas:

If we look back to the past several weeks of Macro Extremes editions, you’ll notice all of those oversold currencies (versus the USD) and overbought bond yields, are no longer appearing currently.

As this publication highlights, once set prices touch their ‘extremes’, they tend to not spend much time at the pendulums highest or lowest arc.

‘All of those currencies’ have rallied, even the Rupee and the Rupiah.

The AUD/USD has risen 8% from 0.62 to 0.67 over the past month.

Bond yields have moved back lower, meaning bond prices are rising. For example, the U.S. listed bond ETF’s, IEF and TLT rallied 2.7% and 3.9% this week alone.

Weeks ago the U.S. 10 year bond was yielding 4.33%, now its 3.85%.

When Liz Truss was trying to torpedo the U.K. economy, its 10 year Gilts plunged and the yield rose to 4.77%. Today, they are yielding 3.35%.

It’s a constant reminder that many people (whether it’s institutional, corporate and individual investors or speculators) do the wrong thing, at the wrong time, at the wrong end of the pendulum.

Amongst the movers list below, it was a week for equities to soar and extend their rallies. The astonishing moves seen in the Nasdaq and the SOX.

The Hang Seng Index added 7% this week, to last week’s 9% advance and South Korea’s KOSPI’s rose a further 6% this week.

Switzerland’s SMI Index has risen 10% over the past 7 weeks, which was from the moment that it last appeared in the Oversold section of this publication.

However, this week saw the first equity index register a ‘Macro Extreme’ Overbought reading in many a week. That index is Italy’s FTSE MIB Index, which is understandable following a 17% advance over the past 6 weeks

Germany’s DAX Index has risen the amount over the same time and it is approximately 1.2% from joining the same overbought category.

Ahhh, that was more than a year’s worth of returns achieved in under 2 months.

Equity indices which didn’t join the party included China’s Shanghai Composite and CSI 300 which ‘only’ rose 0.6% while the U.K’s FTSE 100 fell 0.2% for the week.

The base and precious metals had a very good outing with Aluminium having rallied 12% in the past 2 weeks. Most of the metals had good weeks in U.S. Dollar terms. For example, Silver in USD climbed 4% but in AUD it only rose 0.5%, while Gold in USD firmed 5.4%, in AUD that figure was 1.7%.

And the energy commodities exhibited weakness as they remain the last holdouts of a broader commodity mean reversion.

The softs are mixed with Cocoa rising 4% (9% in 2 weeks), Rotterdam delivered Coal has fallen 22% over 2 weeks, in fact it has halved and it lower than pre-Ukraine invasion prices while Coffee continues to trend lower and is nearing an extreme of its own.

The larger advancers over the past week comprised of;

Aluminium 4%, Baltic Dry Index 2.4%, Cocoa 3.5%, China Coal 7.9%, Lean Hogs 1.7%, Copper 6.2%, Tin 10.5%, Nickel 7%, Palladium 10.2%, Platinum 8.1%, Sugar 5%, Silver 4.3%, Gold 5.4%, Gold in AUD 1.7%, AEX 4.6%, U.S. Banking Index 5.8%, CAC 2.8%, DAX 5.7%, Dow Jones Industrials 4.2%, DJ Transports 8%, MIB 5%, HSCEI 7%, Hang Seng 7.2%, INEX 2%, KOSPI 5.7%, S&P MidCap 400 5.3%, Nasdaq 100 8.8%, Nikkei 3.8%, Copenhagen 5.4%, Helsinki 3.6%, Stockholm 5.5%, Russell 2000 4.6%, SMI 3.2%, SOX 14.9%, S&P 500 5.9%, STI 3.1%, TAIEX 7.5%, TSX 3.4%, S&P SmallCap 600 5.3%, Nasdaq Biotechs 3.9%,  Nasdaq Composite 8.1% and Australia’s ASX 200 rose 3.9%.

The group of decliners included;

Rotterdam Coal (12.8%), Australian Coking Coal (5.1%), WTI Crude (3.9%), DXY Index (4%), Heating Oil (9.2%), Hot Rolled Coil Steel (2.4%), JKM LNG Gas (5.9%), Lumber (1.7%), Gasoil (11.4%), Coffee (4.4%), Natural Gas (8.1%), Orange Juice (4.5%), Gasoline (4.6%), Dutch TTF Gas (14.8%), Florida Urea (2.5%), Brent Crude (2.8%), Middle East Urea (5.3%), Corn (3.4%), Wheat (4%), S&P GSCI (2.9%) and Brazil’s BOVESPA fell 5%.

November 11, 2022

by Rob Zdravevski

rob@karriasset.com.au