Picking out the cheap commodities

I am constructively bullish about commodity prices, however that opinion is not broad nor blindly so.

I’m working on how to express my best ‘absolute’ view in a specific commodity or theme. Buying scarcity and those who have capacity will be a key criteria.

I remind myself that commodities can trade sideways (as Rio Tinto did for 7 years) and the broader CRB Index had for a 10 year bear market.

While I find analysis on a ‘relative basis’ irksome, commodities are nearing another visit to being inexpensive relative to equities, as the CRB Index to Wilshire 5000 chart shows.

September 19, 2022

by Rob Zdravevski

rob@karriasset.com.au

The effect of currencies on income statements

And the corporate effect of what todays earlier currencies post translates to…..

Aussie companies selling products into Europe, the UK and Japan have been seeing weaker receipts, while those selling to U.S. customers or in USD denominated products (commodities) are booking handsome profits on favourable currency differentiation.

Japanese and European assets are considered cheap for holders of Australian Dollars while Americans (and their corporations) may see Australian assets as being ‘on sale.

Expect those respective benefits to wane while these ‘extreme’ currency movements correct and consolidate.

On a side note, the almighty strength of the U.S. Dollar seems to be a surprise……

2 years ago, I wrote this note when I remember reports of the pending death of the U.S. Dollar to be palpable.

Today, there doesn’t seem to be an opposite case against the bullish prospects of the U.S. Dollar.

September 12, 2022

by Rob Zdravevski

rob@karriasset.com.au

Not trusting some of the signals

In the short-term, markets look like they are about to play a little game which can be considered cruel.

‘Set-ups’ are suggesting rallies and lending to the June and July bottoms holding.

I’ll watch whether those lows still hold or make ‘lower lows’…..and in many assets/securities, I think they will hold.

The head fake may lie with many prices bouncing after having reverted to their long term mean but yet to register Oversold readings.

Keep in mind, that there is no rule saying both need to occur.

I think prices will jump a little, drag in a few more people and then spit them out again in the coming week or three followed up with another swoon.

Markets are cruel.

The price of the Baltic Dry Index and Aluminium are 2 examples, where they have mean reverted but yet to trade to weekly oversold levels and have bounced in the past day or two.

Experience and pattern recognition tells me to be patient for lower prices.

When your count is 3 balls and zero strikes, probability suggests you should ‘take a pitch’. You shouldn’t swing or chase a ball outside of your strike zone.

September 9, 2022
by Rob Zdravevski
rob@karriasset.com.au

The coming peak in USD and low in commodities

Peaks in the USD/AUD have corresponded with troughs in the CRB Index (give or take 1-3 months)

Keep in mind that the Commodity Research Bureau (CRB) Index calculates the pricing of a basket of 19 commodities with energy contracts comprising nearly 40% of the weighting.

In my recent writings and observations, the energy complex is the last holdout in the current mean reversion in commodity prices.

This and the markets are currently telling me……

1) the USD strength is closing in on a peak, while allowing for one more surge higher (read: probability that AUD sympathetically moves a little lower too)

and

2) I expect energy prices to have one more lower leg or wave (RBOB Gasoline has nearly completed its)

So, I am preparing for another moment where this peak and trough synchronise.

September 8, 2022

by Rob Zdravevski

rob@karriasset.com.au

Iron Ore correlations

The Iron Ore futures (Singapore traded, 62%) price dances nicely along with the stock price of Rio Tinto (RIO.ASX)

September 2, 2022

by Rob Zdravevski

rob@karriasset.com.au

Don’t buy at the wrong time

This chart below (and commentary) shows you when you should be buying Aluminium or associated proxies (such as Alcoa) and the power of operational leverage that a corporation can provide shareholders.

The blue line is the rolling 200 week moving average.

Gravity does exist.

While the theme of “having industrial capacity in moments of output gaps” remains intact, at this moment, it is a sellers market.

Beware of chasing the bullish (metals and energy) commodity prices higher.

It’s also the start of an odd period where higher prices of finished goods (due to the higher price paid by buyers of raw/base/industrial commodities) may be left on the shelf.

Rising prices have been evident but we can’t assume that higher prices are automatically paid for.

February 18, 2022

by Rob Zdravevski

rob@karriasset.com.au

Commodities are peaking

The Thomson Reuters (core commodity) CRB Index hits its highest level since November 2014.

Weightings are particularly heavy towards energy and agricultural contracts.

The CRB is a whisker away from the target mentioned in this story written a few days ago, while the AUDUSD has hit my target of 0.7135.

This is part of my call of a peak for broader commodity prices.

Just take a look around the prices of Oil, Gasoline, Heating Oil, Corn, Wheat, Coffee, Cattle, Oats etc etc.

Also, the price action in Crude Oil is suggesting the recent run is waning.

#meanreversion

In turn, I am not owning any related equities across Oil & Gas, Bulk producers of grains and even miners of raw industrial/base metals.

It’s as good as it’s going to get for in this current wave.

So, what else to do…..

Well, I’ll wait…..

then I’ll watch the stock prices of companies who buy these raw commodities such as Kellogg, Starbucks, Kraft Heinz, Nestle, Nucor or Nippon Steel, as their input costs will fall, thus improving their margins.

…….also, the unloved precious metals are worthy of some attention, while the AUD/USD isn’t acting very constructively.

To many, it might seem perverse to Buy USD (and sell your AUD 0.7130) but that is what the market is telling me.

I’m also seeing divergences in currency correlations.

Take a look at the chart below showing the AUDUSD laid over the CRB Index and then the other is the price of BHP over the same currency cross.

I believe currency before I believe the equity.

For extra kicks, I’ve thrown a chart showing the price of Woodside Energy mimicking the CRB Index.

February 3, 2022

by Rob Zdravevski

rob@karriasset.com.au

The Case for Higher Equities, a Stronger USD and Weaker Commodities


The US 10’s are yielding 1.33% and the Aussie 10’s are 1.20%.

That spread (difference) between the US 10 Government Bond Yield and the Australian 10 Year equivalent is currently 0.13%.

But the figure doesn’t really matter, it’s the direction of the trend which is of greater importance.

As we see today………a rising trend (and when coupled with a break above a trend line) portends greener pastures for equity prices.

Below you will find a ‘close-up’ of a Weekly chart, highlighting the current ‘break-out’, while the 40 year chart (on a Monthly basis) illustrates a rising trend (of the spread) equating to an advancing S&P 500 (SPX), while a decline trend results in a lower or sideways travel.

A rising trend in this interest rate differential tend to also equate to a stronger US Dollar, which in turn means a weaker AUD.

Which…..also correlates to weaker commodity prices.

This is an indicator worth watching for your macro and longer term positioning.

Who would think we’d see a stronger US Dollar?

Rising yields on U.S. Treasuries will prolong the advance in the Dollar.

And rising interest rates add to debt servicing stress which can lead to Sovereign Debt pressure (there is no use calling it a crisis, until it becomes one) at which point the U.S. Dollar remains the currency of ‘last resort’.

This can lead to more buying of the U.S. Dollar.

See how this scenario can develop?

August 11, 2021

by Rob Zdravevski

rob@karriasset.com.au

The Delicate Game of Interest Rates & Inflation

Brazil lifts interest rates by 1% to 5.25%. It’s seen as its most aggressive move since 2016.

2 weeks ago, Russia, (another commodity reliant economy) hiked rates too.

It looks like both central banks are trying to curb inflationary pressures. Rising commodity prices are a notable contributor.

Invariably, rising inflation will send government bond yields higher.

Why are the central banks in other commodity sensitive economies such as Australia and Canada still holding interest rates around the 0.50% mark?

Are the Bank of Canada and the Reserve Bank of Australia foolishly towing the same line as other Western economies?

The British, German and French economies are vastly different.

This may turn out to be a perilous policy error.

Are the BOC and RBA not entirely politically independent?

Can it be that the Russian Central Bank is acting for the good of the economy and citizens or is it because Putin doesn’t need to worry about being re-elected and Scott Morrison does?

Or perhaps it’s because the Household Debt to GDP for Russian’s and Brazilians is 22% and 37% respectively,

while in Canada it’s 113% and Australia’s is a world topping 123% ????

August 6, 2021

by Rob Zdravevski

rob@karriasset.com.au

Russia aggressively hikes interest rates

I found this news interesting.

https://www.reuters.com/business/finance/russia-raises-key-rate-65-sharpest-move-since-2014-2021-07-23/


Is the world’s 11th largest economy ahead of the curve and crowd when it comes to managing inflation or does its strengthening currency hinder growth and exports?

Incidentally, South Korea and Australia are ranked 12th and 13th

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