rob zdravevski's blog

All you need is USD

Some tips from a friend who was visiting Cairo recently, when riots and protests broke out.

When you find yourself in a “trouble spot” somewhere in the world….

• Follow the Americans as their government seems to be the most passionate in extricating their citizens from conflict zones.
• Gold, travellers cheques and most currencies aren’t desired.
• Carry cash as ATM’s and Banks may not operate.
• In the absence of your own government’s help, always carry a few thousand U.S. Dollars to pay a charter pilot to fly you to Istanbul.

In his experience, no other currency mattered (except maybe for a EUR 500 note), yet the currency markets are bearish towards the U.S. Dollar.

It seems that when the s**t hits the fan, it’s not gold that is the world’s “safe haven” currency, but instead it remains the U.S. Dollar.

Perhaps the USD is in a longer term decline due to economic policy, but as history has suggested, the country or empire that spends the most on its military, maintains the world’s reserve currency and irrespective of which political party is in charge, I can’t see the spending trend reversing.

The mystery about Australian inflation

Woolworths reports a weak profit result as it cites deflation of 3% from its food & liquor business. This division generates ~ 75% of Woolies earnings.

I have wondered about whether retailers can pass on the rising costs of products that are placed on their shelves and I did think they would and could.

So, petrol prices are rising, my groceries cost more as do many other items apart from consumer electronics.

The Reserve Bank posts inflation figures that are comical when compared to the rising costs and prices that I experience and Woolworths are telling us that their profit is low due to deflation.

I don’t know how food prices can be falling when you consider the increase in agricultural commodities and transport costs but supermarkets also sell that other modern staple being the fast moving consumer good (FMCG).

Are batteries, razor blades, toothpaste or shampoo any cheaper than last year ?

Wine prices may be a leading oil price indicator

$2 bottles of wine are now being sold at a couple Margaret River outlets while $5 bottles are easier to find. Supply and Demand folks !

I found a graph in a recent edition of The Economist that showed a correlation between the price of oil and fine wines.

I’m not sure if I can extrapolate this correlation to daily plonk but 1 litre of crude oil is still cheaper than $2 wine, however the wine is now cheaper than bottled water.

Aside from a long term view that I have about oil being able to rise considerably higher in the decade ahead, it may decline first, to match the cheaper prices that wine is commanding…..

note: 1 gallon of oil contains 159 litres.

It continues to be “all about Oil”

Tunisians riot and the President flees, Lebanon’s government collapse leaving, the Iranian Revolutionary Guard supported, Hezbollah in charge.

Taiwan sets off a “test” missile while China’s President Hu is meeting Obama in Washington.

Earlier this month, North & South Korea raised hostilities.

In the last 3 days, Egyptians are protesting against the 30 year commercially corrupt and socially repressive rule of Hosni Mubarak. The Egyptian stockmarket fell 10% last night. It declined 6% the previous day.

Do markets over-react? Aren’t markets supposed to be efficient?

In fact, I’m confused. Egypt’s stock market should probably rise if “democracy” is about to erupt. This is going to be really interesting.

American is a global “backer” of democracy yet Egypt (with a authoritarian regime) is an important Middle Eastern ally for America and is it’s 4th largest recipient of foreign aid, following Afghanistan, Pakistan and Isreal. Seeing the current Egyptian government collapse would not be in America’s interest, ironically even if it meant “democracy”, but Twitter and Facebook could have a larger influence if the government falls or not.

The reason that America needs the 82 year old Mubarak to hold power is because the protest leading group of the Muslim Brotherhood are close buddies with Iran. Hmm, Lebanon under pseudo-Iranian control to the north and Egypt potentially to follow, with Israel sandwiched in between….

Maybe the movements in the Egyptian stock market is justified, but oil has also fallen from $89 to $85 in the past 5 days??

Any coincidence that rioting occurred last night in the city of Suez! Egypt fully controls the Suez Canal.

Ahaaaa !  that’s why America can’t afford to have Mubarak to lose control. They give him $1.4 billion of aid per year (mainly for military purposes), the most populous Arab nation continues to be an American ally, the Suez Canal runs smoothly and thus the oil price remains tempered.

Apple – as good as it gets?

On the eve of Apple reporting its quarterly earnings, Steve Jobs takes leave from the company again due to weight loss associated with his illness.

Principles don’t change, that’s why they’re called Principles

If investors agree that prices of assets seldom move uninterrupted in the one direction, then they should agree that the same prices also revert to their mean at some point. Lately, I get a feeling that investors don’t agree with the latter.

Mean reversion is a mathematical premise that is healthy for the behaviour of assets price, however it is important to understand that asset prices can also overshoot their mean, as markets aren’t always efficient in their discovery of price. Therein lies opportunity.

Opportunity (rather than concern) also lies in the volatility exhibited in an asset’s price. Volatility is often and incorrectly confused with risk.

Whether or not it works in sync with a mean regression theory, volatility is the price you pay for long-term gains in financial markets.

Paraphrasing investor, Sir John Templeton, “the normal range of volatility for stock prices is proportionate to the square root of its price”.

However, I have never seen an industry that is cyclical magically become non-cyclical and nor vice-versa.

Indian Equities

After years of staying away from Indian equities due to concerns that range from politics, neighbouring country tensions and immense bureaucratic red tape, I am once again showing interest in this emerging market. The next step, if my investigations warrant an investment is to determine an initial entry point.

Even though India’s Nifty has risen handsomely, it remains the poorer cousin to China in terms of investment dollar inflows. A rise in the value of Asian currencies could lead to China not being the only game in town.

When they build a new hotel – SELL

I live in the Margaret River region of Western Australia which I have learnt can be a barometer for Australia’s commodity cycle and currently it tells me that this industry is not in a “boom”.

If that’s the case, this is OK as I’d prefer to initiate an investment before an advance occurs and not in the midst of such a frenzy.

There are many houses for sale in my part of the world, which is a beneficiary of Perth’s mining centric prosperity, disposable incomes and financial windfalls.

In fact, Perth metro is also seeing an increasing supply of houses for sale, although I can’t comment on whether it’s a function of  listings due to the seasonal selling period, old stock that has been on the market for longer than normal or new listings due to financial stress.

Don’t get me wrong – My anecdotal experiences are telling me that Western Australia’s commodity economy is growing nicely.

Nicely is just fine. We should be pleased with “nicely”. Remember that all booms, end up going “BOOM”.

Commodity prices and their underlying equities will ebb and flow (prices don’t go up in a straight line) through a revival of this supply and demand story, although it would be nice(ly) if the media omitted the greedy and fearful emotions that the words booms and busts invoke.

Whether a boom, fever, mania, frenzy, stampede or bubble develops I’ll keep you posted on the property barometer that we have “down south”, however I think I may have found another indicator for investors to watch.

I recently stayed in a couple Perth CBD hotels. They both had quite a tired appearance, offered ordinary service and not much change was left from A$400 per night.

Soon after my visit, a friend had stayed in a Perth hotel and had made similar observations. That week, he asked folks the following question, “When was the last time that a major hotel was built or even renovated in Perth?”

A: 1987 (when Perth hosted the America’s Cup defence)

So, when you hear that a new hotel is being built in Perth (or even renovated), perhaps commodities may be establishing a peak in its current cycle.