rob zdravevski's blog

Macro Extremes (week ending December 9, 2022)

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)

Chinese 10 year government bond yields

Silver

Platinum

Gold (in CAD)

NZD/AUD

Overbought (RSI > 70)

German 2 year government bond yields

Cattle

Istanbul BIST Index

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

HKD/USD

Nickel

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

None

Oversold (RSI < 30)

Hot Rolled Coil Steel (HRC)

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

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

None

Notes & Ideas:

The big news for the week was the continued, sustained and notable drop in energy prices.

Oil, Gasoline, Heating Oil and Diesel (Gasoil) fell 10%….imagine that, all amongst a Northern Hemisphere winter.

Seeing energy prices fall (and mean revert) surely adds to my case for deflationary pressures which add weight to the abatement in inflation statistics and government bond yields. 

WTI Crude has declined 40% from their $120 high seen in June 2022. It’s now trading at $71.

Base metals rose with Nickel having a starring role.

Coffee remains Oversold as does Hot Rolled Coiled Steel. Both are on my radar.

There is good news. The S&P 500 didn’t make a lower low than the previous week and the TAIEX had an inside week…….it didn’t trade below nor above the previous week’s low and respective high.

However in last weeks edition I highlighted the concern over the lack of participation in the financials and transports in the recent rally, which still warrants monitoring.

Over the past week we saw bonds being sold, thus yields rose and I’ll be looking at their trend indicators to analyse continuation and strength. For now, many government bond yield ranging from German, British, Spanish, U.S. to French have reverted to their rolling weekly means. 

Inversely, this is currently confirmed with bond TEF’s such as the IEI and IEF equally rallying up to their respective rolling weekly mean.

Gasoline is nearly oversold and at a1 year low, it must be good for trucking companies.

Wheat closed at its lowest since October 11, 2021 which is months prior to the Russian invasion of Ukraine.

And I must look at the correlations associated with AUD/CAD as it’s nearing an extreme level.

The larger advancers over the past week comprised of;

Baltic Dry Index 4.7%, JKM LNG 5.1%, Lumber 4.2%, Tin 8.2%, Nickel 15.3%, Orange Juice 5.7%, Palladium 3.6%, Silver 2%, Dutch TTF Gas 2.6%, Soybeans 3.2%, Istanbul 2.2%, CSI 300 3.3%, HSCEI 7.3% and the Hang Seng rose 6.6%.

The group of decliners included;

Aluminium (2.8%), Rotterdam Coal (2.3%), Bloomberg Commodity Index (2.4%), China Coal (2.3%), WTI Crude Oil (11.2%), Gasoil (10.7%), Heating Oil (11.8%), Coffee (2.7%), Gasoline (9.8%), CRB Index (3.8%), Cotton (2.7%), Brent Crude (10.8%), Oats (6.6%), Rice (5.2%), Wheat (3.5%), S&P GSCI (6.4%), KBW Bank Index (5.5%), DJ Industrials (2.7%), DJ Transports 5.2%, Bovespa (3.9%), Nasdaq Composite (4%), KOSPI (1.9%), S&P MidCap 400 (4%), Nasdaq Biotech Index (3.9%), Nasdaq 100 (3.6%), Russell 2000 (5%), S&P SmallCap 600 (4.8%), SOX (1.8%), S&P 500 (3.4%), TAIEX (1.8%), Toronto’s TSX (2.6%), Australia’s ASX 200 fell 1.2% while the ASX Small Capo index declined 2.7% and had an outside bearish week.

December 10, 2022

by Rob Zdravevski

rob@karriasset.com.au 

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

“For 2023, the bottom-up EPS estimate for the S&P 500 is $232.53…….
industry analysts on average have overestimated the final EPS number by 7.0% one year in advance.”

This article talks about the overconfidence of analysts estimates and the chart within shows the record setting levels the annual EPS have reached.

I have been wanting to write about how EPS have been assisted by declining interest rate expenses and lower corporate tax rates.

Instead, I’ll reference this paper written by Smolyansky, Michael (2022). “The coming long-run slowdown in corporate profit growth and stock returns”

https://www.doi.org/10.17016/2380-7172.3167

He cites, “Both these items accounted for 33% of all profit growth for S&P 500 non-financial firms over the prior two-decade period”.

The Tax Cuts and Jobs Act of 2017 reduced the statutory corporate tax rate from 35% to 21%,
Interest Rates and therefore the cost of capital has been at its lowest in history,
While, corporate leverage grew by 40% over the past 10 years,
And globalisation provided lower input costs.

It was the perfect recipe to juice up the profits.

But the ingredients of that recipe has changed.

Now, when the cost of capital has doubled and nearly tripled,
debt leverage hasn’t been reined in by any notable measure,
local on-shoring is being favoured over the political football of globalisation
and government may potentially look at higher taxation to increase revenues…..

There is no way that the S&P 500 will earn $232 per share in Calendar Year 2023 or even an average adjusted figure of 7% lower.

Going into 2022/2023, U.S. corporations have had it as best as it has been.

Today, with a S&P 500 Index trading at 4,000 and using a $232 per share forward earnings estimate means that the P/E Ratio is 17.2.

This doesn’t seem like an economic environment which neither inspires record earnings (let alone 12% higher than recorded 18 months ago) and a market which I want to pay 17 times earnings for.

Perhaps I want to pay 14.6 times earnings for companies within a mid-cycle slowdown (or a GDP recession) and maybe I think the S&P 500 will earn $192 per share.

Then the S&P 500 touches 2,810

I’ll play around with a few other guesses but my suggestion is to watch how corporate EBIT changes when the (I) interest and (T) taxes start rising.

December 6, 2022
by Rob Zdravevski
rob@karriasset.com.au

Returns and expectations seem out of kilter

I am sensing the most ungracious amount of sentiment from investors in more than a decade.

It is perverse about the expectations that investors think they should ‘deserve’.

If a stock rises 8% in year, many investors would be pleased with that return, especially if you consider the risk you may have been taking.

10% would be nicer.

In fact, those returns have actually happened over the past 4 weeks.

But I sense, the majority aren’t happy with those returns.

It feels as they are still at the table, still pressing and parlaying.

Lately, some stocks are up 30% within 6 weeks.

Many may still be expecting more than that.

Usually what fixes this scenario and such a moment in time, is markets give those investors a re-adjustment with a good kick in the ass.

Put that in your Wall Street brokerage research report 😂

November 5, 2022

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending December 2, 2022)

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)

Chinese 10 year government bond yields

Silver

Platinum

Gold (in CAD)

NZD/AUD

Overbought (RSI > 70)

German 2 year government bond yields

Cattle

Istanbul BIST Index

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

HKD/USD

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

None

Oversold (RSI < 30)

Hot Rolled Coil Steel (HRC)

Chilean 10 year government bond yield

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:

This past week we had reasonably good intra-week swings however on a weekly closing basis, if you closed your eyes, ’twas another benign week.

This is expressed with the 4th consecutive week of the low amount of entrants in the “Macro Extremes” list.

In saying benign, the S&P 500 rose 1.1% and the ASX 200 improved 0.6%.

The big news was that bond yields (as predicted in my various posts) continued to decline. One could call it a trend?

One example in rising bond prices can be seen in the IEF ETF which has rallied in price from $92.70 to $98.70 in 5 weeks.

Keep in mind that my calls for lower interest rates is in the context of moderation (along with inflation) and not a collapse let alone expecting a re-visit those historically abnormal lows.

On the topic of bonds, cryptically the rally in the S&P 500 coincided with my posts about a weekly oversold US5Y minus US3M spread.

Another study which I’ll write about is to highlight the ‘traditional’ yield curve (US10Y-US2Y) is nearing a quinella of being Oversold and what that means.

Oil had a bullish outside reversal week as did the Bloomberg Commodity Index, Aluminium, Hot Rolled Coil Steel, Cotton, EUR/AUD and the Brazilian Real vs USD.

The USD versus South African Rand (ZAR) also pulled off an outside bullish reversal for the week and so I’ll look how a weaker ZAR relates to the prospects for precious metals.

80% of the world’s platinum comes from South Africa.

Urea, Gasoil (diesel) and Gasoline made lower lows.

The Danish Krone (DKK) continued to strengthen against the USD.

The strength in the Aussie Dollar is firming agains the Canadian Loonie.

I’m pondering if there is exhaustion in the S&P 500 as it touched 4,100 points on Thursday December 1st, 2022.

And I’ll be watching if there is trend continuation amongst the DJ Transports, KOSPI, S&P MidCap 400, Nasdaq 100 and the Russell 2000.

The larger advancers over the past week comprised of;

Aluminium 7.4%, Rotterdam Coal 10.6% (up 20% in 2 weeks), Cocoa 2.1%, WTI Crude 4.9%, Copper 6.2%, Hot Rolled Coil Steel 2.4%, JKM LNG 6%, Tin 3.8%, Nickel 3.2%, Palladium 4.4%, Platinum 3.9%, Silver 7.9%, Cotton 3.8%, Brent Crude 2.5%, Silver in AUD 7.1%, Gold in AUD 1.8%, Gold 2.5%, Gold in CAD 3.2%, Dutch TTF Gas 4.8% (up 35% in 3 weeks), Shanghai Composite 1.8%, CSI 300 2.5%, HSCEI 6.7% (up 11% in 2 weeks), Hang Seng 6.7%, BOVESPA 2.7%, Nasdaq 100 2%, Copenhagen 2.4%, Istanbul 2.9%, Nasdaq Biotechnology Index 4%, Nasdaq Composite 2.1% and the ASX Small Caps rose 1.7%. 

The group of decliners included;

Australian Coking Coal (7.3%) down 19% in 4 weeks), DXY Index (1.5%), Lean Hogs (1.6%), Heating Oil (2.2%), Coffee (1.5%), Lumber (6.2%), Natural Gas (10.6%), Orange Juice (3.4%), Gasoline (2.1%), Florida Urea (8.3%), Middle East Urea (6.4%), Corn (3.3%), Oats (6.8%), Rice (2.7%), Wheat (4.5%) and Japan;s Nikkei 225 fell 1.8%.

December 4, 2022

by Rob Zdravevski

rob@karriasset.com.au 

2.5 standard deviations above or below its rolling mean.

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

Chinese 10 year government bond yields

Silver

Platinum

Gold (in CAD)

NZD/AUD

Overbought (RSI > 70)

German 2 year government bond yields

Cattle

Istanbul BIST Index

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

HKD/USD

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

None

Oversold (RSI < 30)

Hot Rolled Coil Steel (HRC)

Chilean 10 year government bond yield

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:

This past week we had reasonably good intra-week swings however on a weekly closing basis, if you closed your eyes, ’twas another benign week.

This is expressed with the 4th consecutive week of the low amount of entrants in the “Macro Extremes” list.

In saying benign, the S&P 500 rose 1.1% and the ASX 200 improved 0.6%.

The big news was that bond yields (as predicted in my various posts) continued to decline. One could call it a trend?

One example in rising bond prices can be seen in the IEF ETF which has rallied in price from $92.70 to $98.70 in 5 weeks.

Keep in mind that my calls for lower interest rates is in the context of moderation (along with inflation) and not a collapse let alone expecting a re-visit those historically abnormal lows.

On the topic of bonds, cryptically the rally in the S&P 500 coincided with my posts about a weekly oversold US5Y minus US3M spread.

Another study which I’ll write about is to highlight the ‘traditional’ yield curve (US10Y-US2Y) is nearing a quinella of being Oversold and what that means.

Oil had a bullish outside reversal week as did the Bloomberg Commodity Index, Aluminium, Hot Rolled Coil Steel, Cotton, EUR/AUD and the Brazilian Real vs USD.

The USD versus South African Rand (ZAR) also pulled off an outside bullish reversal for the week and so I’ll look how a weaker ZAR relates to the prospects for precious metals.

80% of the world’s platinum comes from South Africa.

Urea, Gasoil (diesel) and Gasoline made lower lows.

The Danish Krone (DKK) continued to strengthen against the USD.

The strength in the Aussie Dollar is firming agains the Canadian Loonie.

I’m pondering if there is exhaustion in the S&P 500 as it touched 4,100 points on Thursday December 1st, 2022.

And I’ll be watching if there is trend continuation amongst the DJ Transports, KOSPI, S&P MidCap 400, Nasdaq 100 and the Russell 2000.

The larger advancers over the past week comprised of;

Aluminium 7.4%, Rotterdam Coal 10.6% (up 20% in 2 weeks), Cocoa 2.1%, WTI Crude 4.9%, Copper 6.2%, Hot Rolled Coil Steel 2.4%, JKM LNG 6%, Tin 3.8%, Nickel 3.2%, Palladium 4.4%, Platinum 3.9%, Silver 7.9%, Cotton 3.8%, Brent Crude 2.5%, Silver in AUD 7.1%, Gold in AUD 1.8%, Gold 2.5%, Gold in CAD 3.2%, Dutch TTF Gas 4.8% (up 35% in 3 weeks), Shanghai Composite 1.8%, CSI 300 2.5%, HSCEI 6.7% (up 11% in 2 weeks), Hang Seng 6.7%, BOVESPA 2.7%, Nasdaq 100 2%, Copenhagen 2.4%, Istanbul 2.9%, Nasdaq Biotechnology Index 4%, Nasdaq Composite 2.1% and the ASX Small Caps rose 1.7%.

 

The group of decliners included;

Australian Coking Coal (7.3%) down 19% in 4 weeks), DXY Index (1.5%), Lean Hogs (1.6%), Heating Oil (2.2%), Coffee (1.5%), Lumber (6.2%), Natural Gas (10.6%), Orange Juice (3.4%), Gasoline (2.1%), Florida Urea (8.3%), Middle East Urea (6.4%), Corn (3.3%), Oats (6.8%), Rice (2.7%), Wheat (4.5%) and Japan’s Nikkei 225 fell 1.8%.

December 4, 2022

by Rob Zdravevski

rob@karriasset.com.au 

Rally in gold stocks doesn’t smell right

The rally I’m seeing in gold related equities isn’t stacking up with the moves nor lack of trends in AUD, CAD and USD priced Gold.

Is it a latent move by these stocks to catch up to how they should have acted earlier, due to evident inflation?

I’m thinking that ‘going long’ the equity of gold companies for the medium to longer term is currently a ‘daily’ short term trap.

I’m pondering using the euphoric strength to exit some incumbent positions and take a step back.

Not liking the smell of it.

December 1, 2022
by Rob Zdravevski
rob@karriasset.com.au

A ‘deke’ is short for decoy

Across capital markets, I’m reading the tape whether certain prices can make a ‘higher high’.

If not, exhaustion is setting in.

I’m also watching for bearish outside reversal weeks across various securities.

Inversely, I’m not being paid enough to initiate any new long positions in anything making ‘lower lows’.

Markets are full of dekes.

Similar to when a catcher’s throw to 2nd base looks like its about to sail into centre field, way above the covering baseman……but it doesn’t.

Instead, the leaping shortstop catches the ball.

Upon landing, he looks into the outfield to make out that the ball was thrown too high for him to catch it.

He’s enticing the baserunner to step off 2nd base and ponder heading to 3rd base.

Alas, the shortstop tags him out, with the ‘supposed’ overthown baseball inside his glove.

Try to not get deked out.

November 28, 2022

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending November 25, 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)
None

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)
U.S. 10 year bond yield minus the U.S. 2 year bond yield (curve)

Oversold (RSI < 30)
Hot Rolled Coil Steel (HRC)

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
Chilean 10 year government bond yield

Notes & Ideas:

Following last week’s sensible week, this past week was even more so.

It produced the most benign week (lack) of extremes recorded in the 2 years that I’ve been writing this weekly publication.

If I had to pick the biggest news for the week, it would be the continuing weakness and breaking of support levels in selected energy commodities.

We saw a reverberating bounce in gas and coal prices. Rotterdam delivered coal has soared 25% in the past fortnight.
And bond prices generally held up.

Over the past month, the U.S. 20 year bond yields came in from 4.66% to 3.98% and the 30 year’s firmed from 4.42% to 3.78%.
Or put another way, the ‘TLT’ (the 20+ year Treasury Bond ETF) has risen 9% over that same time.

Not bad for a ‘boring bond investment.
In contrast, the S&P 500 rose 3.4% over the same time.

Although I did see an obscure move in the bond markets where the Brazilian 10 year yield rose (against the grain) for the 3rd consecutive week. They are now back to 13.65% compared to their recent 11.85% plateau.

The larger advancers over the past week comprised of;
Rotterdam Coal 16.3%, Baltic Dry Index 11.4%, China Coal 9.1%, JKM LNG 13.6%, Coffee 6.4%, Natural Gas 11.4%, Orange Juice 4.8%, Silver 2.4%, Dutch TTF Gas 12%, Rice 1.9%, KBW Banking Index 2%, DJ Industrials 1.8%, IBEX 3.6%, S&P 400 MidCap 2%, Nickel 1.4%, Oslo Bourse 3.3%, Copenhagen 1.9%, S&P 500 1.5%, TAIEX 1.9%, FTSE 1.4%, Istanbul BIST Index 10.3%, Toronto’s TSX 2% and Australia’s ASX 200 rose 1.5%

The group of decliners included;
Aluminium (2.8%), WTI Crude (4.8%), Gasoil (3.1%), Heating Oil (7.9%), Tin (7.4%), Nickel (3.4%), Palladium (6.1%), Gasoline (3.8%), Sugar (3.6%), Cotton (4.3%), Urea Florida Gulf Urea (2.3%), Brent Crude (4.6%), Middle East Urea (6.9%), Oats (3.2%), Whet (3%), S&P GSCI (2.3%), HSCEI (2.5%) and Hang Seng (2.3%).

November 27, 2022
by Rob Zdravevski
rob@karriasset.com.au