rob zdravevski's blog

Tricked by the analyst’s Oil headlines

On Sept 19-20, 2023, many traded the ‘headlines’ when….

Brent Crude Oil was trading at $95.

Then analysts started calling for Brent to reach $100.

Brent is now trading at $85.

It’s fun to observe the crowded, consensus and marginal opportunities and then perhaps consider the antithesis.

November 2, 2023

by Rob Zdravevski

rob@karriasset.com.au

Bargains are starting to appear in equities

How I’m broadly seeing the equities market.

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Lithium’s decline isn’t surprising

It is not a surprise that Lithium related stocks are falling.

They are mean reverting….back to their 200 week moving average (200 WMA).

Some have already done so, while others have more to go.

Some have registered oversold weekly readings too. Others are yet to do it.

In the weekly charts below, the stock price for each featured company is represented by the blue line.

The lithium hydroxide (Comex) futures price is in orange.

While some of the companies are mining (producing) lithium spodumene or lithium carbonate, you get the picture.

Before all of this carnage, many of them were trading at extreme percentages above that 200 WMA. That was a major warning back then which I wrote about and clients received those views directly.

Their fundamental valuations and capital expenditure plans is another discussion.

Gravity is indeed a bitch.

October 31, 2023

by Rob Zdravevski

rob@karriasset.com.au

Pfft…..higher for longer

I think interest rates fall and mean revert.

Specifically, I expect the Australian 10 year bond yield to pull back to the 3% mark in the coming 6-12 months.

It’s currently at 4.88%

Once upon a time, I heard many investors say that would take a 5% return “any day of the week”.

Empirically, the Australian 10 year bond yield has no business being extended this far above its 200 week moving average, especially when coupled with the quantum of the move from its recent depths.

You should find this analog in (many) other government bond yields.

Falling bond yields should ignite discussion that diminishing and continuing negative real interest rate returns makes a positive case for being long equities.

There is also a trap for those fixing their borrowing rates today, possibly at the wrong end of the pendulum frenzy,

while falling rates could put some zip back into those ‘unprofitable’ tech stock stories again?

October 30, 2023

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending October 27, 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) either 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

Australian 3 year government bond yields 

Australian 5 year government bond yields

Swiss and U.K. 10 year government bond yields 

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

Natural Gas

Gold as priced in AUD and CAD

EUR/JPY

Overbought (RSI > 70)

Chilean, Japanese, Turkish and U.S. 10 year government bond yields 

Japanese 5 year government bond yield

U.S. 30 year government bond yields

TBT & TBX

U.S. 10 year bond yield minus German 10 year bond yield spread

U.S. 10 year minus 10 year breakeven inflation rate

Cocoa

Orange Juice

Uranium 

And Rubber

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

Australian 10 year government bond yield

U.S. 20 year government bond yield

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

Copper/Gold Ratio

Shangai Composite

CSI 300 

China A50

Dow Jones Industrials 

Dow Jones Transports

Nasdaq Composite

Spain’s IBEX

KOSPI

Nasdaq 100

ASX 200

S&P 500 

And the Copenhagen, Helsinki and Swiss equity indices 

Oversold (RSI < 30)

TLT

Lithium Hydroxide

Nickel 

JPY/USD

MYR/USD

IDR/USD

The Oversold Quinella – Both Oversold and Traded at < 2.5 standard deviations below the weekly mean)

Nasdaq Biotech Index

Indonesia & Thailand’s equity indices

And the ASX Industrials Index

Notes & Ideas:

Government bond yields fell except in Australia and Japan.

U.S. 5 – 7 year corporate bond yields aren’t overbought this week.

The U.S.10 year minus U.S. inflation rate just eased out of overbought land

And for the 2nd consecutive week, the U.S. 3 month bill isn’t overbought.

Equities continued its slide with another woeful week.

Chinese equities were the odd ones out, rising 1.5%.

The silver lining is that more equity indices are registering oversold extremes.

The CAC, DAX, FTSE 250, IBEX and the DJ Transports are all in 6 week falling streaks.

The latter has declined 19% in13 weeks helping it complete a mean reversion to its 200 week moving average.

The Russell 2000 has fallen for 7 of its past 8 weeks, sinking 9% in the past 3 weeks.

The S&P Small Cap 600 has also eased lower in 7 of tis last 8 week, as it’s now in a ‘new’ 4 week consecutive slide and has sunk 16.5% over the past 13 weeks.

Indonesia’s main index has fallen for the past 5 weeks.

The Nasdaq Biotech index touched its first oversold quinella since May 2022. The Nasdaq 100 and the S&P 500 are at 2.5 standard deviations below their weekly mean for the first time since May and June 2022 respectively.

Copenhagen has registered 7 weekly losses out of its past 9.

The KOSPI Index is at its lowest close since January 2023.

And Stockholm, Toronto’s TSX, the MidCap 400, Singapore’s Strait Times and the ASX 200…..all reverted down to their respective 200 week moving average.

Commodities were mixed, again during the week.

Most energy contracts were weaker while industrial and precious metals firmed. 

Baltic Dry Index isn’t overbought after sliding 24% and breaking its 7 week winning streak.

Inversely, Hot Rolled Coil Steel moved out of its 8 week residence in oversold territory after it rallied 23% in the past week.

Urea prices were amongst the losers for the week while Natural Gas was a notable winner.

Gold (as priced in CAD) has risen 11% over the past 3 weeks. 

Uranium remains overbought for an 11th consecutive week.

while Lithium Hydroxide declining streak extends to 16 consecutive weeks.

Amongst currencies, the Australian Dollar was stronger agains all except the ZAR and THB.

The Loonie was weaker.

The BRL/USD has risen for the past 3 weeks after having declined steadily for the past 3 months to complete its mean reversion.

The GBP/AUD had a bearish outside week.

The JPY/USD is still floating around the extremes.

And the Indonesian Rupiah is in a 8 week losing streak versus the USD.

The larger advancers over the past week comprised of;

Aluminium 1.9%, Cocoa 4.3%, Cotton 2.4%, Lean Hogs 6.8%, Copper 2.3%, HRC 23.2%, Natural Gas 20.1%, Orange Juice 2.1%, Palladium 1.7%, Sugar 1.8%, Dutch TTF Gas 3.8%, Uranium 2.1%, Gold in CAD 2.5%, Oats 5.2%, CSI 300 1.5%, China A50 1.8%, HSCEI 1.8%, Mexico 1.5%, BIST 100 rose 2.6% and the ASX Materials Index rose 0.9%.

The group of decliners included;

Rotterdam Coal (5.8%), Baltic Dry Index (23.6%), WTI Crude Oil (2.9%), Gasoil (5.8%), Heating Oil (3.3%), Coffee (2.6%), LNG (4.2%), Newcastle Coal (4.9%), Nickel (2.1%), Gasoline (2.5%), Urea U.S. Gulf (5.2%), Brent Crude (3.9%), Urea Middle East (7.1%), Corn (3%), Wheat (1.8%), JKM (2.7%), KBW Banks (2.2%), DJ Industrials (2.1%), DJ Transports (6.2%), S&P SmallCap 600 (2.3%), Nasdaq Composite (2.6%), KOSPI (3%), Nasdaq Biotech’s (4.1%), Nasdaq 100 (2.6%), Nifty (2.5%), Russell 2000 (2.6%), S&P Small Cap 600 Value (2.9%), SOX (2.7%), S&P MidCap 400 (2.8%), S&P 500 (2.5%), TAEIX (1.9%), Nasdaq Transports (3.5%), TSX (2%), FTSE 100 (1.5%), ASX 200 (1.1%), ASX Industrials (2.4%) and the ASX Small Caps fell 1.9%.

October 29, 2023

by Rob Zdravevski

rob@karriasset.com.au

Even mega caps have volatility

Last night, Microsoft (MSFT:US) shares fell 4%, which means its market cap declined by US$92 billion.

In Australian Dollars that equals A$143 billion or nearly the total market capitalisation of the Commonwealth Bank of Australia.

But it’s OK, for in the previous day, its market cap rose by US$75 billion.

Even more impressively, 92 million shares traded over the past 2 days.

While that’s only 1.3% of their outstanding shares, it equates to US$31 billion worth of stock changing hands (or A$49 billion).

For some reference, the daily average value of the shares traded on the whole of the Australian (ASX) stockmarket is approximately A$5 billion (or US$3.2 billion).

Furthermore, Alphabet (Google) (GOOGL:US) has seen it’s stock price fall 12% over the past 2 days, meaning its market cap declined by US$211 billion or A$332 billion.

(The combined total market cap of Rio Tinto and BHP is ~ A$390 billion).

Over those days, 141.4 million shares traded or US$17.7 billion worth of stock.

And that’s just the Class A shares.

October 27, 2023

by Rob Zdravevski

rob@karriasset.com.au

Don’t call them value traps

I saw this news today:

Sealed Air’s (SEE:US) President and CEO steps down, effective immediately.

Sealed Air Corporation is a packaging company known for its brands such as Cryovac food packaging and Bubble Wrap cushioning packaging.

It’s a stunning announcement and often a change of CEO is a good catalyst for the stock price, but I was prompted to take a quick glance at financials…and I started typing out some notes.

Market Cap is $4.1 billion

Net Debt is $4.8 billion is more than its market cap, nearly as much as its annual revenue and 5.5 times more than its EBIT of $873 million.

The Interest Expense of $230 million (on that $4.8bn debt) equals 26% of its EBIT and 4% of its revenues

If you write-off or omit the $2.2 billion of goodwill held on the balance sheet, Net Assets are negative $2 billion.

Its inventories (which have doubled over the past 4 years) now equate to 18% of its revenue.

And that is only a quick glance….

To boot, the stock has fallen from $65 to $28 over the past 18 months and today Wall Street analysts are downgrading the stock. Hmmmm…..too late.

Today, I hear the term ‘value traps’ describing such stock price declines. That’s also too late.

The thing is….when the stock was trading at $60 (its market cap would have been nearly $8 billion) it wouldn’t a value trap….it would’ve simply been expensive.

p.s. it’s trading at the same price as seen in 1998.

The assessment about the company’s stock price to be done much earlier, under various ‘what-if” scenarios.

What if the cost of interest doubles?

What if we don’t sell and move our inventory?

What if we don’t receive 100 cents in the dollar for our $730 million in receivables?

While today, Sealed Air’s debt equals 100% of its market cap (I may discuss EV/EBITDA another day), there are other companies today whose debt equals 50% of their market cap.

What if………?

At some stage, this stock could be a really compelling to own but in a world full of other opportunities coupled with 5% risk free rates, do I need to be there especially when conviction is more paramount and in recent memory…..

but then, perhaps owning the debt is better than the equity.

October 24, 2023

by Rob Zdravevski

rob@karriasset.com.au