rob zdravevski's blog

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 

Looking for ‘higher highs’

Something to compliment your trend continuation/exhaustion analysis or your general ‘reading of the tape’ is to watch whether equities prices which have recently made a ‘lower low’ are able to trade to a ‘higher high’ than their immediately previous high.

Here is an example I’m watching in the shares of Macquarie Bank (MQG.AX) and whether it can break above $184.18 which was its recent high on Sept 13th, 2022

November 11, 2022

by Rob Zdravevski

rob@karriasset.com.au

Mind The Gaps

Today’s stockmarket action isn’t constructive.

Whether traders/investors are celebrating inflation being ‘less’ bad or speculating on a change of interest rate policy……

These sharp moves create gaps in the price charts.

‘Gap-ups’ are often honoured (at some time) that prices trade back down to fill that gap between the previous day’s high and the low seen in the exuberance of the following day.

The chart below of Amazon is one example but you will find this littered globally across a range of stocks.

This a case of caveat emptor.

While rallies can pop a little higher be sure to assess your risk/reward skew amongst the current price action.

I think this is another rally to ‘rent and not own’.

November 11, 2022

by Rob Zdravevski

rob@karriasset.com.au

Happy Remembrance Day

Lest We Forget

A declining Revenue to Employee ratio equals job layoffs

Too many employees and not enough revenue?

Perhaps your revenue to employee ratio isn’t what you are hoping for?

Decades ago, I figured good businesses tend to generate $300,000 of revenue for each employee on the books. That number was and is still considered quite good.

See if that works out close amongst some local businesses that you may know.

Back in original tech boom, Cisco Systems was amongst the gold standard in this category.

In 1998 Cisco had revenues of $8.5 billion and 145,000 employees thus the revenue to employee (Rev/Emp) figure was $586,000

In 2016, their revenue was $49.2 billion versus 73,700 for $668,000 revenue per employee.

In 2021, revenue was relatively steady at $49.8 billion against 79,500 employees for a Rev/Emp of $626,000.

The better gold standard back in 1998 was Apple.

A year after Steve Jobs returned to the company and launched the iMac to replace the ‘Macintoshes’, they were doing $6 billion revenue with 6,700 employees for a Rev/Emp of $895,000

In 2016, revenue of $216 billion using the employ of 116,000 people made that figure jump to $1.86 million

and in 2021, $366 billion revenue with 154,000 employees equals $2.38 million revenue for each employee.

So, when we look at the job layoffs occurring in Silicon Valley this year, perhaps the companies are running with too much fat.

Facebook (Meta) at $1.64 million Rev/Emp and Spotify’s $1.73 million seem to be looking OK, while Twitter’s $667,000, Tesla’s $757,000, Shopify’s $520,000 and Oracle’s $302,000 may help explain labour redundancies.

In comparison, companies such as Coca Cola has a Rev/Emp ratio of $535,000, Boeing is at $430,000, Citigroup is $343,000 and Starbucks does $182,000 based on its $25 billion of revenue compared to their headcount of 138,000 people.

November 10, 2022

by Rob Zdravevski

rob@karriasset.com.au