Looking for a 15% decline in ASX 200

Today, the ASX 200 closed at 6002.

I am watching if the index will trade lower to “fill” the following “gap-ups”,

5918, 5803, 5604, 5394, 5055 & 4701.

Those are declines of 1.4%, 3.3%, 6.6%, 10.1%, 15.8% & 21.7% respectively.

I’m betting on it trading closer to the 5,055 level.

20 July, 2020
by Rob Zdravevski
rob@karriasset.com.au

Iron Ore – As Good As It Gets

June 23, 2020

by Rob Zdravevski
Iron Ore – As Good As It Gets ?

Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.

Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.

The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.

This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.

I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.

However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.

<see chart below>

Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.

Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.

It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.

But I also have the following questions;

  • Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
  • Is it true that Brazil produces a higher grade of Iron Ore than Australia?
  • Will Brazil’s cheaper labour and production give them an advantage?

If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.

Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.

Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.

Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.

And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.

The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.

For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,

Rob
Subscribe to my blog: www.robzdravevski.com

Drop me an email: rob@karriasset.com.au

Disclaimer

 

Some extra reading.

https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0

https://en.wikipedia.org/wiki/Brumadinho_dam_disaster

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

It’s not me, it’s always them

Let’s blame Greece for a swoon in Aussie equities.

Now that the Shanghai stockmarket has declined 20%, let’s blame them too.

China is trying to stimulate their economy. Yep, that’s another thing to pick on.

Hang-on, isn’t Australia also cutting rates? Aren’t we in a monetary easing phase too?

Perhaps other countries should blame us for doing something as preposterous as cutting rates and weakening our currency.

When the Chinese equities market doubled in the past year, we should have blamed them too, ‘cause the Aussie market didn’t follow.

Greece’s woes has nothing to do with the decline in the shares of an Australian company such as Boral, Computershare or Alumina.

Australia needs to looks at itself before blaming others for its stockmarket gyrations. It has a high cost labour force, high taxes, internationally uncompetitive manufacturing, higher cost of money and a high cost of living.

Subjectively, our politics of late, hasn’t exactly been clear, stable and welcoming either.

We’ve not had an economic recession for 23 years and we’re still not happy. Always ready to blame somebody else.

Forget the blaming of the other countries. Many of them are performing much better than Australia’s. Our hubris has not prepared us for the reversion that the Australian economy will suffer during the next cycle.

Iron Ore Gravy Trains

Once upon a time mining companies were making a lot of money by extracting ore from Australia’s crust.

Soon after, the government needed some money to pay for the debts they incurred as a result of the spending promises they made to the Australian public, in their attempt to remain elected to power.

They thought that they could invent a tax which charged mining companies for how much resources that they dig up and sell.

The tax was created. Some were happy and others weren’t. They was lobbying, protests, crying and demanding. The tax had a short life. The new government had mates in the mining sector. The tax was no longer alive.

It was OK ’cause the government still earned some sort of money from whatever businesses the large mining companies conducted, providing that they didn’t cleverly use their offshore subsidiaries to move around and book profits into.

The price of coal had already fallen, but nobody likes them anyway ’cause their industry is a visibly polluting one.

But oh oh – recently the price of Iron Ore has fallen.

This is how I see it,

Government let off the iron ore miners off the hook with the mining tax, less money for the government, then global demand slowed, the giants continued to increase supply, the price of iron ore fell, the companies made less profit but them increasing supply (coupled with falling commodity prices) also pressured the smaller miners, thus the giants are growing their market share, but government still needs more cash, there is no capital gains tax being paid of share profits because the stock prices of the major iron ore companies are the same as 5 years ago, thus shareholder return is poor, but hundreds of employees are making more than $400,000 per year.

It’s important to keep the gravy train going by any means you can, whether you manage to dupe government, the economy or shareholders.

Yet they still are on the look out for federal government help to assist them with their plight of iron ore prices being below their cost of production.

WTF?

My year-end investing newsletter

My latest (December 2014) newsletter is now available

More Immigration = Lower Wages = Being Competitive

It should be simple to understand.

When the labour market is tight, the price of that labour rises.

Australia along with other countries such as Norway, Netherlands and Switzerland all have low unemployment rates. They also have some of the highest average annual wages and minimum wages amongst OECD member countries.

Tight workplace capacity (whether that means offices, factories or other facilities) and a unionised workforce can also add to the cost of labour.

When people earn more, the prices of other products can afford to rise too, simply because rising disposable income means there is more demand for the staples and non-discetionary items.

But today, Australian business operators are complaining that the cost of paying staff is becoming a heavy burden and nationally, we do understand that high wages are making us uncompetitive. They are asking the government for help.

Government doesn’t control the price of labour, so they can’t actually manipulate this price directly. What is confusing furthermore, is that businesses are happy to benefit from the positives of a free market economy, yet they are not willing to accept the cost that comes from such capitalism.

What needs to be done? What help can government provide ?

I would like your comments too.

If  the labour market is tight, then open it up. Allow more immigration. Australia is so large we can easily fit 100 million people here. Make the labour market more competitive and its price will fall. More people will also send the cost of other products down. If there are more consumers, then supply will meet the demand and price equilibrium will weave its magic.

Government needs to take a stronger line on unions and labour contract employment reform. Employees need to be convinced that the statute law passed which governs our land will be steadfastly upheld. The honouring of these laws doesn’t really require the oversight nor lobbying of a union because the “checks and balances” of democracy, its electoral constituents and the Westminster parliamentary system already exist.

I think its time we spoke truthfully about why the cost of labour is high. The headline unemployment rate isn’t the only things that matters, although government seems to think this is the major topic that will keep them elected.

The United States, Spain, Italy & Korea all have higher unemployment rates, noticeably lower wages, export more product (in dollar value), comparatively similar sized GDP per capita and much larger populations.

 

 

At Least 70% Didn’t Chuck A Sickie

TOYOTA, A TELLING TALE…

from The Pickering Post

http://pickeringpost.com/story/toyota-a-telling-tale-/2759

“Two years ago we were working so hard to create conditions whereby we could stay in this wonderful country and produce cars.

“We had restructured the business and, despite acceding to recent union demands for even better wages and conditions, we were seeing a dim light flickering at the end of the tunnel.

“We were honest with our employees and had explained the seriousness of the company’s economic plight.

“They had assured us of their cooperation, so we determined to all pull together in a desperate attempt keep the company viable.

“There was an air of camaraderie, a feeling of hope.

“It was Australia Day that week and it fell on a Thursday. On the Friday, thirty percent of our workforce didn’t turn up, thirty percent called in sick.

“That’s when I finally realised we were stuffed.”

Can You Smell The Deception & Misdirection

This is a periodical post about things that I see in the financial press, which I tend to interpret differently. When managing investors money, you need analyse the news and not just simply read it because you can’t assume you are getting to the truth.

Firstly, Jakarta warns Australia they are prepared to “clash” over border violations incurred by the Australian Navy. Australia best heed their warnings and wipe that smirk off your face because 300 million Indonesians should send your xenophobic fears into overdrive. I hope our government isn’t pinning all of our defensive hopes on U.S. Marines stationed in Darwin?

But equally Telstra is looking to form a 50/50 venture with Telekom Indonesia. Can David Thodey please be our next foreign minister?

I can’t believe why any company in the world wants to pay that much for a small insignificant business such as Warrnambool Cheese & Butter. Good luck to them.

Panic, Panic – protestors block Bangkok streets and the Thai Prime Minister is suspected of corruption. The Thai stock market has risen 9% in 10 days since this story picked up steam.

Alex Waislitz’s Thorney Group raises $68 million. Now I’m not sure what their raising target was but from a distance, their reputation could have easily raised 4 times that amount. My point is, would-be stockbroking firm geniuses should keep in mind that it’s difficult to raise money from the public.

With 65% domestic market share, Qantas still thinks it plays on an uneven playing field.

Franchisee of Australia’s 370 Burger King stores, Competitive Foods Australia, posts revenue of $1.03 billion for fiscal year 2013 and makes $21.4 million profit. That’s a lot of invoices and money to handle in order to make a 2% net profit margin. Last year, revenue was $935 million and profit was $8 million. Hey Jack, I see that cost cutting program is working?

Australian rail operators (in the Pilbra, Western Australia) are complaining that truckers have got an unfair price advantage when they transport iron ore. If trucking iron ore is cheaper than by rail, then the iron ore giants should then give their competitors access to their railroads. Umm, I didn’t think they would.

Various interviewees in newspapers are wishing for a weaker Australian Dollar. Be careful what you wish for. When you see commodity prices rise, it is usually accompanied by a higher Australian Dollar. In Australia we mainly export commodities, ’cause we don’t manufacture things such as cars, televisions or clothes anymore. So if the AUD remains weaker, we can sell US Dollar denominated commodities and receive a lot of AUD once its converted but it’s also good for overseas money to buy up Australian assets (see Australia is “on sale”).

Australia’s stock market falls due to weak Chinese data. Yup, heard this one before. Just like other brokers who actually ask me if I’m staying up late to watch the U.S. unemployment numbers. It doesn’t really affect the earnings of the shares in the companies that I and my clients own but if you need to justify a movement in the stock market with some sort of news, good luck and be my guest. Please continue to manage your investments on the basis of “jumping at shadows”.

Finally, this week, not a single economist who provided an estimate on the Australia Consumer Price Index reading got it correct and Deutsche Bank posted a “surprise” $1.15 billion quarterly loss.

Whether these professionals continually get their ‘calls” incorrect, can’t make money themselves or continue to pay fines for manipulation & price rigging, yet people still give these investment firms their money to manage.

How To Go From Sinophile to Sinophobia – Ask Australia

A country’s Foreign Affairs  isn’t only about setting policy but you need to understand economics in order to achieve your diplomatic objective.

Having a few politicians who are certified Sinophiles isn’t an automatic pass either.

Unfortunately, politicians and their advisors often aren’t financially literate let alone considered to be business people and because of this, they fail to understand how to deal with other countries over the length of many economic cycles.

In Australia’s case, it was the only large developed economy to survive the 2008 Global Financial Crisis. The fact that it has hasn’t posted a year with negative economic growth for 22 years in another anomaly.

Over the past 10 years, Australia’s economy benefitted from China’s appetite for its commodity resources (see China’s stimulus) and we loved them for it but after a while Aussies weren’t happy with what panned out, as the social and financial divide was then blamed on a “Two-Speed” economy.

When a large trading partner saves your economy, you say “Thank You”.

You don’t;

  1. antagonise them by placing U.S. Marines in Darwin and lie about the real reason they are there.
  2. call them dirty polluters (even though you have been one for a 100 years before them)
  3. revile the fact that their students come to Australia to study and “take away places from Aussie students”.
  4. ban their large telecomm networking company from participating in the construction of your own National Broadband Network
  5. obstruct and oppose their companies from buying assets (farms) from a willing seller in a free market enterprise system &
  6. charge their citizens more tax if they choose to buy property in Australia.

Oh Australia, you just don’t get it.

Not snobs – We’re just a bunch of drunks

 

A recent article in The Australian newspaper (see link below) highlighted more than the buying power exhibited by Australia’s dominant supermarkets has over wine producers. It talked about how the supermarket duopoly is selling its own branded wine too.

http://www.theaustralian.com.au/executive-living/fear-and-loathing-in-the-wine-aisles/story-e6frg9zo-1226717170986

A report from Australia’s Bureau of Statistics says that beer consumption amongst Aussies has hit a 66 year low, while wine sales have risen. News agencies have tried to spin their feeble creative minds to develop a story based around our growing sophistication towards finer tastes. Interestingly the report doesn’t tell us at which price point most of the wine was bought at, but I can confidently predict it wasn’t at the middle nor higher end of the price range.The reason that wine sales are growing is because wine is cheap. It is being sold cheaply by the supermarkets who account for 77% of the domestic wine sales. The reason beer sales are falling is because its expensive.

Mainstream consumers are looking for a cheap way to get drunk at the behest of drinking a quality artisan product.

The price of beer has risen over the past 30 or so years, yet we still think you can buy a glass of beer for $1 at the local bowls club.

Some fancy pubs & restaurants charge $9-$10 for a pint of beer and many happily pay for it, because it’s “craft beer”.

Wine producers at the medium to premium end of the market need to continue to focus on improving their brand, the quality of their product & the “love & care” that they put into making their wine. This is their differentiation, just like craft beer makers are doing it.

One benefit of living in “wine country” is that I have friends who are wine makers and mine happen to all be a part of boutique, independent enterprises. They do not try to be volume based manufacturers. They do not create “cookie cutter” batches of wine.

A $9 bottle of wine tastes like a $9 bottle of wine.

If you choose to enter the lower end of the market, you then compete against those who can be the lowest cost producer and have pricing power. This shouldn’t be a surprise.

We drink a $28 bottle of wine because the quality, love & taste shows.

 

 

 

 

 

%d bloggers like this: