rob zdravevski's blog

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 

Inverted yield doesn’t kill the bull market

The genesis of today’s preceding post….was this note written nearly 2 years ago.

What the 10’s-2’s spread may tell us

The notations in the chart within the link said that if the U.S. 10 year minus 2 year spread rose then the bull market is stifled.

Instead the yield curve moved towards and below zero….thus the equities bull market has remained intact.

So much so, the S&P 500 rallied 12% from that June 2021 moment and even today, the S&P 500 is the same price as then.

Hardly, a downdraught let alone a bear market as depicted in the elongated ovals of 2001 and 2008 as per the original post.

Below, is how today’s study looks.

February 17, 2023

by Rob Zdravevski

rob@karriasset.com.au

Could it be a new equities bull market?

My queue in the chart below are the green circles, when the U.S. inverted yield curve is Oversold on a Monthly basis.

This study suggests a new advance or extension in the price of the S&P 500 Index (orange) is underway where the green circles appear.

To counter the bearishness and caution (including mine) along with the growing headwinds that I perceive……the 7th and most recent occurrence over the past 30 years happened in the recent months.

Ignore the pink circles, they relate to the weekly time series but I didn’t want to delete them 😊

February 17, 2023

by Rob Zdravevski

rob@karriasset.com.au