Bullish on Aussie Banks

After 5 years, I have now become bullish on Australian banks.

For example, Westpac Bank’s 2021 forecasts have it trading below 1x book value, on a P/E of 11 and the dividend yield should be 5%, not including the franking credits.

Furthermore, I think its net interest margins will increase (as longer dates interest rates rise) and all of their bad news and fines are no longer “new news”, Westpac’s stock price also has traded at monumentally oversold readings…….not on a daily nor weekly basis, but on a Monthly reading.

See the chart below and you’ll see it’s only happened twice in 27 years.

October 19, 2020
by Rob Zdravevski
rob@karriasset.com.au

Political Trade Destruction

Dear Australian #auspol politicians involved in incompetent trade and diplomatic rhetoric……it is in the “Chinese” tea leaves, that Iron Ore is next on the list of ‘sanctions’. I just wish the media would call them sanctions. It would sell so much more advertising…..

Politicians who are inexperienced in business and unable reading the geopolitical mood are causing more damage than their pea brains can possibly imagine.

Don’t they understand that a backbencher from an obscure political seat calling for an “inquiry into the origins of a Chinese flu” is a badly weighted bet and ramifications of the rebuttal can hardy be comprehended by someone inadequately positioned to speak in a manner within a nation’s parliament.

In these circumstances, political table-pounding seldom prevails over commercial reality and necessity.

Don’t look know, but to the complacent producers of current and future ‘sanctioned’ products, our politicians are doing some effective price mean reversion on behalf of your wallet.

October 13, 2020
by Rob Zdravevski
rob@karriasset.com.au

First day of September wipes out August

Below is a continuing chart I’ve been posting for a while to disprove the illusion that the Aussie equity market is NOT screaming to new highs.

For the past 3 months, the ASX 200 has been trading sideways and today’s headlines from the Australian Financial Review following todays close of business was…..

“ASX wipes out most of August gains in single session.
The S&P/ASX 200 dropped 1.8 per cent on the first day of September, falling back to where it traded on August 3”

It’s a bit sad that the first day of September’s trading erased the WHOLE month of August’s efforts.

In fact, the ASX 200 is trading back to where it was on June 3rd, 2020.

The age of the stock picker is back….

September 1, 2020
by Rob Zdravevski
rob@karriasset.com.auASX 200 sideways

AUD – now Overbought at a Weekly Extreme

I feel markets are at another acute point.
It’s not about doom but rather to position for the opportunity.

In this note, I’ll start with the AUD and USD.

Since Buying AUD in the depths of March 2020, I’ve been advising clients to sell AUD against the USD in a tiered fashion at 0.66, 0.69 and 0.71.

With a weaker USD, we have also seen a commensurate advance in commodity prices. Note the link ?

I’ve been banging on about overbought readings recently each time they were registered on the “daily” charts, BUT now, significantly, we are seeing “Weekly” extremes.

Please take a look at the AUD/USD chart below and my annotations within it.

It’s only the 10th time in past 18 years that we have seen this and it’s the first time in 9 years.

I’m not calling a crash and of course and 0.7750 is entirely possible but I want to identify that such extremes are not common. Buying AUD at this end of the pendulums arc warrants thought to the probability of mean reversion.

September 1, 2020
by Rob Zdravevski
rob@karriasset.com.auAUD Weekly

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?

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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.

 

 

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