Cameron 00:06
Welcome to QAV. This is episode 611. Should be 911. What’s going on in the markets today? Not 611. Recording this on the 14th of March 2023. How are you, TK?
Tony 00:21
Not copacetic, Cam.
Cameron 00:24
I just taught Tony a new word off air: copacetic.
Tony 00:29
I’d say not coping and pathetic would be how I’d describe my portfolio today.
Cameron 00:33
Well, yes. What a day. I was having a look at the All-Ords charts just before, looks like the All-Ords has wiped off all of its gains since early November.
Tony 00:47
Wow.
Cameron 00:48
So, that’s exciting.
Tony 00:52
If you’re a short seller.
Cameron 00:54
Yeah. So, obviously, as everyone is aware, of course, the Silicon Valley Bank collapsed late last week, as well as another couple of banks in the US have collapsed, and it’s set fear and gloom into the market. I just read in the Financial Review before I sat down, “Black Monday in the bond market points to pain ahead. The biggest fall in short term bond yields since the 1987 crash is sending investors and central bankers a clear message about what’s to come in the wake of the SVB collapse. The extraordinary price action on global markets is proof the collapse of Silicon Valley Bank is likely to reverberate for months to come as investors find themselves caught between the need for central banks to continue their yearlong battle against inflation, and growing worries that an overly leveraged financial system has become unstable.” Didn’t we fix that after the global financial crisis of 2008, and there was over leveraged banks? Surely, surely the powers that be put things into place, Tony, to make sure that would never, ever happen again.
Tony 02:09
Well, I was reading today in the Financial Review that the Californian state regulator of financial institutions is also the California institution that’s designed to promote the tech economy in California. They’re probably scratching their heads trying to work out how to regulate SVB. The bond market gyrations aside, I’m not really sure what’s driving that, my feeling is that SVB is going to blow over. I thought it was going to blow over last week as well. My gut feel says that this is an overreaction, that people are reliving the GFC as the playbook even though this is completely different to the GFC. And I’ll tell you why I say that, because this is a case of bad regulation in my opinion. I mean, the Silicon Valley Bank is a bit unusual, and it’s very different to the banks we have in Australia, the big commercial banks in Australia. Silicon Valley Bank took deposits from particularly tech companies, and there were all sorts of reasons why tech companies went to SVB; one of them being that they also then link back to tech company founders and tech companies and invested in start-up funds. But if you remember back in 101, in Australia, you know, people put money in the bank, the banks then either lend back as mortgages to a different set of customers, or go into the bond market with it and, you know, try and earn money that way on the deposit. So, banks basically take deposits and then roll them up and try and invest those deposits, either by lending them as mortgages or other investments, and make a spread on the interest rates they charge the customers. SVB was taking money from start-ups, lending it back to the start-ups, and then when that was proving a bit difficult, they were then looking for other investments. They made the mistake of buying a lot of government bonds when the yields were low, and now that interest rates are rising and the yields are up, those bonds aren’t worth very much. And the regulators in the States didn’t make SVB take any losses on the fact that they had negative equity. Their assets should have been written down mark to market, because, just to explain, if I buy a bond for $100 and it pays me 1%, which treasuries were doing as long as a year ago — or as short as a year ago — and now treasuries are paying 4%, my $100 isn’t worth that anymore. If I had to go out into the market and sell that bond, you know, I’d get a proportion of that. I might get $80 for it, or whatever the math works out, such that the person buying it from me gets a 4% yield to match what’s in the market now. So, there was a paper loss for SVB which didn’t have to be marked to market. However, when people started withdrawing money from SVB and they started selling these bonds to pay people out, they were taking a real loss, not just a paper loss, and that’s what caused the problem. As soon as the tech community worked out that’s what was going on they all pulled their money out last week, and of course, that led to a crash. The other interesting thing I think about all this is that US government has said, “that’s okay, we’ll honour the deposits in SVB.” So, that’s helpful in that, you know, Australian companies, a lot of tech companies in Australia were invested and they get their money back, so that’s helpful. However, it creates moral hazard. So, if you have this loose regulatory environment, you’re encouraging people to take risks, and then you’re coming along like mum and saying, “oh, that’s okay. You’ve broken some eggs; I’ll just clean it up for you.” So, you’re actually encouraging people to take more risks and further risks.
Cameron 05:54
It’s like the mum on Bluey. I was watching Bluey this morning and that actually happened: Bingo dropped some eggs, and the mum doesn’t say, “oh, be more careful!” She’s like, “don’t worry, honey, I’ll clean that up for you.” Chrissy was like, “bloody hell. The parents on Bluey, they’re always making us look bad.”
Tony 06:10
Well, that’s right. The parents on Bluey — the regulator — should have said “don’t play with eggs, kids, stay out of the kitchen.”
Cameron 06:17
But the argument I’ve heard is that the depositors weren’t taking risks, they were just depositing their money in a bank, it was the bank that was taking the risk. So, the depositors should be protected, they weren’t doing anything inherently risky. The investors in the bank aren’t getting bailed out, as I understand it, and the executives, of course, will all go to jail, as they always do in America when these things happen.
Tony 06:44
Well, they’ll probably lay low for a while and come back and start up again, because it lacks moral regulations and the states make it easy to do so. I don’t know.
Cameron 06:53
They’ll end up working for the next administration as Secretary of the Treasury or something.
Tony 06:59
Well, you know what they’ll do, they’ll go to the government and argue that they need to get their bonuses paid out, because otherwise they can’t attract good talent to run these banks, and that’s the problem.
Cameron 07:10
Like the good talent that just collapsed the bank. You need more of that good talent.
Tony 07:14
Exactly. Oh, and the other point I wanted to make, Cam; this another illustration of why diversification has flaws. I mean, people have been told forever to put some bonds into your portfolio because, you know, they’re safe as houses, they’re paid by the government, etc. Well, this just bankrupted SVB because the yields are increasing on bonds, which means the capitals going down. So, so much for that theory.
Cameron 07:39
I saw an explanation of the whole story on TikTok. Somebody asked Chet GPT to explain what happened, and I thought this was pretty clever, so I’m going to play this:
07:52
“I used AI to explain to Silicon Valley Bank collapse in Monkey Banana terms, and I’m going to read that response to you. Here I go. ‘Ooh-ooh-aah-aah, me try to explain. Silicon Valley Bank like big tree with many bananas. Many monkeys like bananas and put their bananas in trees. Tree promises to get more bananas to monkeys later, but tree bad. Tree loses many bananas in storm, tree not have enough bananas for all monkeys. Monkeys get scared and want their bananas back. Many monkeys run to tree and grab their bananas, but some monkeys too late. No more bananas and tree monkeys sad and angry. Big monkey come and take tree over. Big monkey say he will find more bananas for monkeys who lost their bananas. Big monkey gives some bananas to some monkeys now and more later, but some monkeys have to wait long time for their bananas. Other trees see what happened to big tree and get worried. Other trees have many bananas too but not lose them in storm. Other trees hope their monkeys not run away with their bananas, too. Me hope you understand now. The big tree is Silicon Valley Bank, the bananas are the money, the monkeys are the depositors doing a bank run, the big monkey is the government, and the other trees are the regional banks.’ That was literally generated by the Microsoft Bing AI, and I think it’s comprehension of this disaster is actually kind of impressive.”
Tony 09:13
It is, yeah. Actually, there’s a couple of other points, too. I mean, you know, the bank run, as we saw last week, is digital these days. So, there’s no longer people standing outside waiting for their cash, this can all be over in twelve hours for a bank. So, that’s important to note as well. And I guess the other thing that’s important to note is, the potential downside from all this is that there are other banks who are poorly regulated in the US who are sitting on lots of paper losses which haven’t had to be declared because they’ve been buying bonds with low, even negative interest rates in some cases, and haven’t been good at selling those off and rebalancing their portfolios as interest rates have gone up. So, I mean, there’s potential out there. Maybe that’s why there’s been a run on the other regional banks; everyone’s shooting first and asking questions later. However, I do think it’s contained to either the small banks or the Silicon Valley Bank.
Cameron 10:07
Don’t they know how to play the game? They’re newbies, are they?
Cameron 10:07
So, another outfit called Silvergate, also collapsed last week due to its exposure to crypto, apparently. I thought crypto was going to save the world, but apparently it didn’t save Silvergate. And then another bank called Signature Bank also collapsed over the weekend, I think, but they’re doing an orderly collapse. They said all of the depositors will get their money out, they don’t require the government to step in.
Cameron 10:27
Yeah. In digital, $42 Billion US taken out of the bank in a day, I read. This is now the largest bank run in US history. But four days before the collapse — I like this — Forbes put out its list of the best banks in the US and SVB was, I think, in the number twenty position in terms of best banks in the US. So, I guess that tells you everything you need to know about how Forbes rate things.
Tony 11:09
And accounting and regulation. I mean, the first question of any bank insto call now will be, what’s your bond portfolio holding and is it mark to market? And is that reflected through the accounts?
Cameron 11:19
I don’t understand your comments there about using mark to market. If they use mark to market, I get that will enable them to write down the value of those assets, but how does that help them when push comes to shove and they’ve got people trying to withdraw $42 billion and they need to come up with the cash to pay them and they need to sell their assets at a loss, then, you know, scrambled to come up with the money? How would that have helped them?
Tony 11:47
It doesn’t. That’s why it’s being hidden. It helps the investors to know what’s going on and it helps the depositors to know what’s going on.
Cameron 11:54
Oh, right.
Tony 11:54
Now, it’s possible that the movements in interest rates have happened within a–no, it can’t have. I was going to say a six-monthly period reporting period, and so therefore, they’re just declaring it now, but they have to report quarterly in the States. But they should have said, “hey, guys we’re insolvent,” about three months ago, at least. Tell their investors and tell the depositors back then, but they just tried to hide it. Well, they didn’t try to hide it. They didn’t have to declare it under US accounting or regulatory rules.
Cameron 12:20
Were they insolvent though? How do you determine that? Like, if there hadn’t been a bank run, they would have been okay, I assume?
Tony 12:29
Yeah, that’s right if the losses had remained paper losses. It was only because — I’m not sure what the sequence of events was — someone I think must have worked out that they were negative equity, and therefore the deposits couldn’t all be paid out if there was a run. So, it’s becoming like, we were talking once before about global warming; it can’t be fixed by the participants, it’s got to be fixed by someone coming in over the top because all the participants are going to keep doing what they’re doing, because it’s in their best interest. So, it’s like, this is the reverse. It’s often called the Spanish Prisoner problem, where if you and I are separated and put in cells and the cops come to you and say, “oh, look, Tony’s confessed. You’d better confess,” you don’t know if I’ve confessed. If they said it to me, too, if we both say shtoom, we both get off. If one of us says something, then the other one gets off. Sorry, then you get off and the other one goes to jail. So, what do you do? So, it’s the same sort of situation. So, as soon as someone thought there was negative equity in the bank and they couldn’t pay the deposits and started withdrawing, that just started the stampede. And then it became a real problem, not just the paper problem.
Cameron 13:38
Yeah. And I heard it was Peter Thiel who started the whole thing. Yeah, co-founder of PayPal, along with many other businesses he’s been involved in. But I read somewhere on Reddit or something over the weekend that he started the thing. I also read that the CEO managed to sell $3.6 million in stock a couple of days before the failure.
Tony 14:10
Well, you’d hope that’s clawed back. I mean, under Australian insolvency laws, it could be clawed back. I don’t know what the US laws say. But yeah, I mean, that’s just egregious, isn’t it?
Cameron 14:21
Well, yes, and no. But again, like he had, I assume, no idea that this bank run was about to happen. I mean, it’s not like the business was failing before the bank run. They just had some assets that were worthless.
Tony 14:38
Yeah, which he knew about, and the investors and depositors didn’t, and he just happened to sell his shares three days before a bank run. He probably had coffee with Peter Thiel and then went, “hmm, shit. Note to self: sell shares.”
Cameron 14:53
We are not alleging that at all if the CEO’s lawyers are listening. Joking, just jokes. There has been some criticism I read today: somebody said “‘the Fed has basically just written insurance on interest rate risk for the whole banking system.'” This is Stephen Kelly, Senior Research Associate at Yale’s programme on financial stability. “And that, he said, could stoke future risk taking by implying that the Fed will step in if things go awry. ‘I call it a bailout of the system,’ Mr Kelly said, ‘it lowers the threshold for the expectation of where emergency steps kick in.'” Now, the Biden administration is saying it’s not a bailout, because the bank is going to shut the doors unless it gets bought out, I guess, taken over, the investors are going to lose their money, etc., etc. So, yeah, I don’t know. I don’t know how to read this. But anyway.
Tony 15:48
It’s a deposit guarantee. Well look, you know, it’s an example of under-regulation in the states and moral hazard. Similar to what people have called the Fed put in the share market when things were going great guns, people will often argue, “well, there’s no risk because as soon as the share market drops, the Federal Reserve will cut interest rates and prop it up again.” So, as long as you have Mum around, you don’t care what you do. You just go crazy, right on the walls. Kick eggs out the backyard, who cares?
Cameron 16:18
As long as the parents from Bluey are running things, you’re gonna be. I mean, yet again, the US banking system has crashed my portfolio. Like, every time they do something over there it affects us. You know, I’ve seen a lot of consternation and gnashing of teeth in our forums and in emails from people. Unfortunately, it has just been one thing after another for the last couple of years since COVID. But last year, Ukraine, China, COVID interest rates, and now this. Did I forget something? I felt like there was another thing. It’s just one thing after another. I wanted to do a comms update because there were a number of commodity changes on our buy list yesterday. Copper has become a Josephine, aluminium became a sell, manganese became a Josephine, nickel became a sell, and wheat became a Josephine. Gold, though, is having a great week, gold is just going crazy. I ended up adding two gold stocks. When I was trying to buy something, I had to sell some things from the light portfolios this morning, and it was very hard to replace them because pretty much everything was having a down day except for some gold stocks. And so, yeah, gold is doing well right now. SVB has been good for gold. I believe this happened during the GFC, too; people pulled their money out of the banking system and put it into gold. But speaking of commodities, I did send you an email about this yesterday I think — not sure if you’ve seen it yet — but S32. You and I both own some S32 according to our disclosure sheet, and I think we’ve got some in some of the QAV portfolios as well. According to my commodity breakdown in the comm stocks tab, S32 is… They cover a bunch of different things, nickel, zinc, aluminium, coal and manganese. The last time I did a breakdown on it, aluminium was 50% of their revenue, and aluminium as I said is now a sell. Manganese was 20% and coking coal was 30%. Coking coal is a buy, but the others are a sell. What do you think about S32 in that situation, Tony? Should we be thinking about selling that if aluminium is a sell?
Tony 18:50
Sorry, I haven’t looked at it. So, aluminium — what was the other ones? What’s manganese doing?
Cameron 18:55
The breakdown I’ve got in my spreadsheet from the last time I looked at it, which wasn’t that long ago, is aluminium is 50% of their revenue. Aluminium is currently a sell. Coking coal was 30%, it’s a buy. Manganese was the other 20%, and it’s a Josephine. So, 70% of their revenue is either a sell or a Josephine, 30% a buy.
Tony 19:18
Yeah, I mean, it’s a hard one, isn’t it? Because it sounds like half’s a sell, the other half is either a buy or a Josephine which wouldn’t be a sell. Don’t know. The share price I’m just looking at it is down today, which I guess everything is. What’s the sentiment doing for South 32? Yeah, it’s down as well. Good question, Cam. I don’t know, I’d probably sell it.
Cameron 19:43
I mean, sentiments down. It’s a Josephine but it’s well above its sell price. The sell price is $3.09, it’s currently trading at $4.15. So, you think sell it?
Tony 19:56
It’s just so hard to know because it’s fifty-fifty, isn’t it?
Cameron 20:00
Yeah.
Tony 20:01
I mean, the safe thing to do would be to sell it. Yeah, leave it with me, I’m going to have to look at all the charts and make a decision. Haven’t done it yet.
Cameron 20:09
One thing I just wanted to have cover, too: the dummy portfolios down a bit, obviously, with the stuff that’s going on, but still doing relatively well. Interestingly, I looked at it for this quarter — and we’re coming towards the end of the quarter — we are now neck and neck with the STW for the quarter. The STW was way ahead of us for most of this quarter, but it’s now fallen back to zero for the quarter, which is around about where we’re at as well. So, it’s been interesting just the last few months, actually, the gap between us and the STW for this financial year has been dropping quite a lot. We’ve been catching up as it’s been taking more hits. It had a lot of growth over the last year, a lot more growth than we did, but it’s giving a lot of that up at a faster rate than we have been giving it up too. So, interesting how that’s starting to balance out. But still, since inception we’re I think two and a half to three times better, but certainly hasn’t been a great year for the dummy portfolio, the last twelve months. It’s been one of those steady as she goes years, hasn’t really been showing a lot of growth. We’ve given a lot back.
Tony 21:26
Yeah, same with mine. It’s been a tough year, I agree.
Cameron 21:30
But we’re not under, though. We’re up, I think, a couple of points in the last twelve months. But yeah, it’s not one of our big growth years.
Tony 21:40
It’s gonna happen.
Cameron 21:42
Yeah. All right. What have you got on your list of things to talk about, TK?
Tony 21:46
I had a couple of things. The RBA lifted interest rates last week to 3.6%. It’s interesting you said that the bond market was down today, because I would have said with the problems with SPV, and if it does go through and cause other problems in the banking system, it’s entirely possible that could have been the last interest rate rise that we’ll see. If the yields are inverted again on bonds, then that might not be the case. Philip Lowe was out in the market last week talking about interest rates and was hinting that he was getting close to the end of raising rates and was saying nice things like he was going to meet with some people, I think, from Lifeline because, unfortunately, there have been some people who have killed themselves over their financial positions due to rising interest rates. So, he was trying to show his soft side, I guess, last week.
Cameron 22:41
I thought he was having to call Lifeline for all of the attacks on him in the media last week.
Tony 22:47
Well, that’s true, too. He might have to call the unemployment office in September when his contracts up for renewal, but that’s another matter. Yeah. So, interest rates are lifted. There’ll be another meeting, of course, in early April, and we will see what happens then. I would have thought if there is a problem with banks that would be the end of the interest rate rises, but we’ll see. I’ve actually been watching the rolling year records tables in the AFR every day, which I tend to do when I read it, just for fun, because we often see the buy list stocks are the ones that are having their rolling highs. So, this is from last Thursday: there were twelve companies that had rolling year records, and there were a lot of companies that had rolling year low points, and Qantas and KFC were both on that list. And QBE and ATF were both on the list as well even though they’ve just fallen off the buy list because their share prices are up. So, what’s that? Four out of twelve stocks? A third.
Cameron 23:48
Can you explain what this rolling thing is? Again? What does this table show us?
Tony 23:53
Yeah, so on most days the Fin Review produces a table on the share market page, and it lists the companies that are at their twelve-month high stock price and then the companies which are at their twelve-month low stock price. It’s a rolling twelve months, so it’s called the rolling year records table. And it’s just a quick and dirty way to see what’s doing well and what’s not doing well, I guess. I just thought it was interesting that we are seeing a lot of buy list stocks on that list. The other thing I think is interesting is it’s been a long time since the rolling year highs have been equal to or outnumber the rolling year lows, so the market is going down at the moment. And I’m actually wondering whether that’s going to be some kind of indicator for us to use in terms of, you know, when we should be sitting on our hands or whether we should be investing. So, I don’t know, if I get some time and resources, I might investigate that and see. It’s certainly a musing of mine. But the good news, I guess, is that as you were saying, the market’s going down but some of our stocks are hitting their twelve-month peaks, which is good for us. One of those stocks which can’t be too far off its twelve-month peak is Myer. It produces its results a month after the rest of the market because they don’t want to be tied up doing results during their busiest selling season, which is Christmas, and so they roll off at the end of January rather than the end of December. And, yeah, it was well received, the profit results were. The report has reinvented Myer in a generous mood, and it’s because they’ve given a dividend increase. “Myer’s shares surged more than 18% to a six year high after the department store rewarded its long-suffering shareholders with a special dividend after posting its highest first half year net profit in almost a decade.” So, to the people who’ve held on to Myer, good on you. It’s turning around, which is nice. Couple of other things. I’ve been meeting with Ryan on Zoom about the analysis he’s doing — he made a comment during our last meeting that we’re still looking at whether buying from the top of the buy list is a better portfolio than buying from the bottom. Early indicators are that it is, which may have some impact on our investing going forward. But the comment he made was that one of the things that was hurting the bottom of the portfolio was that they were churning a lot more because they were breaking their rural ones more often. So, I know we’ve had lots of churns with rule ones in the last six to twelve months, so that’s an interesting observation and I’ll be looking through that in more detail in the coming weeks.
Cameron 26:29
So, explain that to me, again, slowly. The shares that are in the bottom of the buy list…
Tony 26:34
The shares that are in the bottom of the buy list… Yeah, so Ryan’s doing analysis. He’s gone back through our history of buy lists — and in fact, that’s an interesting thing we should do. Maybe we should put the buy lists on our website, or make them available to our listeners, they might be able to short circuit some of the analysis and have a look at things themselves. But anyway.
Cameron 26:59
They’re all available in Dropbox, the whole history of our buy lists.
Cameron 27:04
On the website?
Cameron 27:05
Well, for club members, you know, via the club member section. They have access to all the buy list history, yeah.
Tony 27:11
Okay, well, that’s good. So, Ryan’s taking that history and he’s gone back a couple of years, and he’s reconstructed portfolios based on buying the top ten stocks in the buy list and buying the bottom ten stocks on the buy list, and then he’s tracked them over the last couple of years and sold them if they’ve rule oned or if there’s been a commodity sell, or if it’s been a three-point trendline sell, and replaced them with another stock from the top or the bottom. So, he’s finding the top stocks are performing better than the bottom stocks, and he thinks one of the reasons is because if he has to sell something, there’s more rule ones on the bottom of the buy list, and then the stock he buys becomes a rule one as well quicker than the top stocks. So, interesting observation.
Cameron 27:53
But the ones from the bottom of the list that don’t rule one, there’s not enough upside in those to neutralise the loss in the rule ones?
Tony 28:07
Yeah, I don’t know. I haven’t looked through the numbers yet. But that would be the case, I would think. But yeah, Ryan’s gonna pull it all together and present it.
Cameron 28:14
So, what would your theory be for why the stocks at the bottom of the list get rule oned more than stocks at the top of the list? We rank it on QAV score which factors in the quality score, so it’s lower quality, or just lower QAV score in total means more rule ones?
Tony 28:34
Yeah, I don’t know. Potentially, the stocks at the top of the buy list are more deep value, so they might be at the bottom and going up. Whereas the ones further down the list might be already starting to go up, and now they’re going back down again. I don’t know.
Cameron 28:48
So, this might be an argument for the cut off instead of being 0.1, being 0.2 or 0.5 or something.
Tony 28:55
Yeah, so that was some work that Dylan did for me last year. He thought 0.2 was a better cut off, but never really fleshed it out as to whether it was 0.2, 0.15, 0.18. So, after we get this initial work from Ryan the next step will be to start doing some decile or quintile analysis to see, you know, what the best cut-off is for the QAV score. But we’ll just get through this first bit, first. It’s actually quite painstaking, going through and creating a portfolio and tracking it through for rule ones and three-point trend line sells and commodity sells. But we started with a simple test first of all to see if it was worthwhile going any further, and at this stage it looks like it is, but I’m just still waiting for Ryan to do a finish report.
Cameron 29:38
Okay, interesting.
Tony 29:40
Yeah. So, that was good. I wanted to go back; a couple of weeks ago I mentioned that Brett Fisher, from the Brettelator, had sent me an email about Renko charts. I had misreported saying that he thought that they were as good as the moving average, but I got that wrong. He’s saying that their analogy is to a trailing stop loss. So, again, I’m still waiting for Ruddy to pull that piece of work together. His initial results were that the three-point trendline buy signals were better than Renko charts, but the Renko charts were better for getting us out earlier when things turned down. Which I guess is what a trailing stop loss does. And I think Brett’s point was, it may be easier to use a trailing stop loss rather than a Renko chart, but anyway, we’ll, again, wait for that piece of work to come through and see where that takes us as well. And lastly, I’ve got is the pulled pork, which was a request from last week on SRX.
Cameron 30:37
What’s SRX do?
Tony 30:39
SRX was spun out of Iluka Mining, and it’s a rutile miner. The name is Sierra Rutile Holdings, SRX.
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Cameron 1:00:15
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