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Since 1986, The Economist has facetiously but pedagogically tracked the price of a Macca’s Big Mac around the world as a proxy for the fair value of currencies.

In the latest update, the index showed the median price of the burger rose 4% since January in America, the ‘beefiest rate of American McFlation recorded in our index since July 2012’.

That’s pricey, but other countries have fared worse.

In Canada, the Big Mac is 15% more expensive now than it was at the start of the year.

Source: The Economist

What does this mean for the fair value of currencies?

The Economist explains:

‘According to the theory of purchasing-power parity, a currency’s fundamental value reflects the amount of goods and services it can buy, including burgers. If the price of the Big Mac rises, the currency can buy fewer of them. Its fair value has therefore declined. Since the price of burgers is rising even faster in Europe, Japan and Canada than in America, their currencies’ purchasing power is dropping faster than the dollar’s.

‘That is bringing their fair values closer into line with their market values. In January the fair value of the euro, judged by its burger-buying power, was $1.10. That is because €10 could purchase as many Big Macs in Europe as $11 could buy in America. But on the foreign-exchange markets, €10 cost only $10.90. By this measure, the euro looked cheap and the dollar expensive.

‘That is no longer the case. Thanks to the rise in Big Mac prices in Europe and a small fall in the dollar, the fair value of the euro is now $1.06, less than its market exchange rate. The euro now looks overvalued against the dollar for the first time in two years.’

Greg Canavan thinks the risks are to the downside as the Aussie reporting season heats up.

***

In terms of earnings growth across the market as a whole, FY24 looks like a no-growth year. That is, flat earnings on FY23 numbers. Yet the ASX 200 trades on a forward P/E multiple of around 15-times!

The lack of growth in FY24 is largely to do with declines expected in resources (thanks to lower iron ore prices) and the banks.

This weaker earnings outlook is reflected in FY24 price-to-earnings multiples for the big resource stocks that are well below the market average…

Rio Tinto [ASX:RIO] P/E: 10-times
BHP Group [ASX:BHP] P/E: 12.1-times
Fortescue Metals Group [ASX:FMG] P/E: 10-times

It’s the same with the banks…

National Australia Bank [ASX:NAB] P/E 12.4-times
Westpac Banking Corp [ASX:WBC] P/E: 11.1-times
ANZ Group Holdings [ASX:ANZ] P/E: 11.3-times

The Commonwealth Bank is the outlier, with an FY24 P/E of 18-times. More on that in a moment.

The main point to understand here is that if the largest stocks on the ASX are all trading on P/Es well below the market average, it means the rest of the market is trading on above average P/Es.

I saw some research last week that said in the ASX 100, if you take out banks and resources, the median expectation is for 10% earnings per share growth.

The question is, what are you paying for this growth?

I don’t have accurate data on that. But my rough guess is that the market, ex banks and resources, is trading on a forward P/E of around 18–20-times earnings.

That’s a bit on the high side for this value investor. It’s why this coming reporting season is very important.

Starting with the Commonwealth Bank.

At 18-times FY24 earnings estimates, there is a lot of optimism priced in. To justify that price, Wednesday’s result needs to be better than expected, with a sanguine outlook thrown in for good measure.

I can’t see it happening.

Which is why I think short-term risks are to the downside for both Australia’s biggest bank and the market as a whole. But a decent correction would be all it takes to see me turn bullish again.

After all, the ASX 200 peaked two years ago. Sometimes, a long-term sideways moving market is as good as a big, but shorter-term correction. So, you don’t want to get too bearish after such a prolonged sideways move.

Excerpt from Greg Canavan’s latest Insider piece.

***

Annual reporting season kicks off in earnest in Australia this week.

The big one is the Commonwealth Bank of Australia [ASX:CBA], which reports on Wednesday. Before I show you how the market is positioned going into these results, let’s take a quick look at last week’s action…

The ASX 200 fell by just more than 1%. Property trusts and the banks led the falls, down 2.6% and 2.2%, respectively. Interestingly, the Consumer Discretionary sector was the only one to finish the week in the green, up 0.8%.

This move is especially interesting given the poor retail data out last week, as the Australian Financial Review reports:

‘The volume of retail goods and services consumed by households fell by 0.5 per cent in the three months to June, data released by the Australian Bureau of Statistics on Thursday shows, led by sharp falls in household goods like appliances and purchases at department stores.

‘The contraction follows a 0.8 per cent fall in volumes in the March quarter and a 0.4 per cent decline in December, marking only the second time in the data’s 40-year history that volumes have fallen for three consecutive quarters. The other streak occurred during the global financial crisis in 2008.

‘The figures confirm households are cutting back on non-essential spending as they grapple with high inflation and the fastest interest rate tightening cycle in decades.’

Yet, if you look at the chart below, you’ll see the sector bottomed in June last year. The market very quickly priced in the impact of rising rates, then spent the second half of 2022 unwinding some of the move.

However, in my view, the sector is at risk of rolling over again. Interest rates may be close to peaking (if they haven’t already), but they will likely remain high for the rest of the year. In the meantime, the delayed impact of past rate rises will continue to hurt household finances.

Source: Optuma

Over in the US, the S&P 500 fell 2.27% while the Nasdaq sank 2.85%.

Apple Inc [NASDAQ:AAPL] disappointed while Amazon.com, Inc [NASDAQ:AMZN] impressed. However, the Apple vibe won out. As we pointed out in last week’s episode of What’s Not Priced In, Apple’s share price looked vulnerable ahead of the results.

In the show, we pointed out how price and momentum had diverged sharply in recent weeks (see chart below). That’s often a warning sign. And in the prior week’s episode, we showed how Apple was highly leveraged to changes in revenue via something called the ‘equity multiplier’.

The result? Apple’s share price sank sharply on its quarterly earnings result, with the stock finishing the week down 7%, having fallen by 4.8% on Friday. That’s quite a move for the world’s largest company.

Over in the US, the S&P 500 fell 2.27% while the Nasdaq sank 2.85%.

Apple Inc [NASDAQ:AAPL] disappointed while Amazon.com, Inc [NASDAQ:AMZN] impressed. However, the Apple vibe won out. As we pointed out in last week’s episode of What’s Not Priced In, Apple’s share price looked vulnerable ahead of the results.

In the show, we pointed out how price and momentum had diverged sharply in recent weeks (see chart below). That’s often a warning sign.

And in the prior week’s episode, we showed how Apple was highly leveraged to changes in revenue via something called the ‘equity multiplier’.

The result?

Apple’s share price sank sharply on its quarterly earnings result, with the stock finishing the week down 7%, having fallen by 4.8% on Friday. That’s quite a move for the world’s largest company.

The US bond market also weighed on stocks this week, with the benchmark 10-year yield threatening to break out to new highs. Higher yields are problematic for stocks. Generally, high yields mean lower stock prices. Although, having said that, yields and stock prices have gone their separate ways this year.

In October last year, when stocks hit their lows, the US 10-year bond yield peaked at 4.24%. Last week, the 10-year yield hit a high of 4.2%. Yet the S&P 500 was up 30% from October last year!

With the 10-year bond yield threatening to break out, big hitters like Bill Ackman laid out their bearish bond theses on Twitter.

Lake Resources [ASX:LKE] is down 18%, sinking to a new multi-year low.

The last time LKE shares traded at 18 cents a share was in early January 2021.

Once a stock with a market valuation well over $1 billion, Lake is now valued at $300 million.

$LKE continued to slide following its response to an #ASX query centred on $LKE.AX's Kachi Project's targeted plant capacity.

Lake Resources said the 50,000 tpa figure is not a production target under ASX listing rules.

The #lithium stock is trading at multi-year lows. https://t.co/nmgib80jTH pic.twitter.com/eIMgwNioIB

— Fat Tail Daily (@FatTailDaily) August 7, 2023

The following is an excerpt from James Cooper’s latest piece for Fat Tail’s commodities publication.

***

Today I reveal an investment opportunity that I shared with Diggers and Drillers readers in our latest monthly report.

While the specific stock recommendation will be withheld for Diggers and Drillers subscribers only, I think the idea behind it is prudent to share with you today.

If you’d like to get access to the full report, join Diggers and Drillers now by clicking here.

With that, enjoy this peak behind the curtain!

Broken supply chains, geopolitical tensions, war, inflation, rising energy costs, food crisis, droughts, famine, depleting mines…welcome to the 2020s!

The age of abundance is dead.

The patterns defining this decade suggest more volatility is on the way…especially in the things that matter most — food, energy, and shelter.

It’s why you must own commodities.

But so far, we’ve been focusing on critical minerals…

Stocks developing graphite, rare earth, lithium, nickel, and copper mines…the companies set to benefit as the global economy attempts to end its reliance on fossil fuels.

Critical minerals are a major theme, yet they represent just a tiny segment of the overall commodities market.

That means there are other avenues to tap as we head into the pointy end of this emerging commodity cycle.

A perfect storm of tight supply that spans minerals, oil, gas, food, and water is approaching.

The modern world has been spoiled with years of cheap and plentiful supply.

But that’s set to change.

Decades of underinvestment in the old economy means we are embarking on a new era of shortages.

Mines are being depleted without replacement reserves in sight…

Oil, gas, and groundwater deposits are turning into giant underground voids…

Global crop production is declining alongside severe droughts and war in the Northern Hemisphere.

All this while the planet adds around 1 billion people every decade!

And all this while humanity embarks on its most ambitious project yet…ending its 100-year reliance on fossil fuels.

Demand for commodities is not going to stay still in the years ahead — it will surge!

And the timing couldn’t be worse.

We’re on a collision course for global shortages just as the world demands more.

The lifeblood that sustains civilisations is now running on empty…meaning there’s no safety net built into the system to absorb global shocks.

You might remember the consequences from last year…everything from barley to nickel recorded triple-digit price gains after the war broke out in Ukraine.

The same thing happened a few months earlier as the West opened from its COVID hibernation.

An assumption that supply was limitless meant we’ve underinvested in the commodity sector…

The consequences are now boiling to the surface.

So, how did we get to this point?

Years of falling commodity prices and stable supply drove global capital out of the commodities and into the new economy…tech.

To give you one example, let’s take the US tech giant, NVIDIA. The company currently trades on a price-to-earnings (P/E) ratio of 245.

Now compare that to the world’s largest diversified mining company BHP Group [ASX:BHP]. Right now, it trades on a P/E of less than nine!

There’s a deep chasm of value separating those industries producing luxury, ‘nice to have’ items…

Social media, entertainment, streaming service, video gaming, and smartphones versus those that are critical for human survival…

But you can’t build tech devices without mining. In fact, you can’t build, eat, or drink anything without investment in the commodity sector.

This is why a gross misalignment in capital distribution from the old economy into the new is steering us on a dangerous path.

One that promises a critical decline in living standards as we sink into the EVERYTHING shortage.

As an investor bracing for this fallout, the solution is simple…accumulate commodity stocks.

In this report, we’ll be shifting our focus away from critical minerals into perhaps an even more important theme…food.

Other than water, food represents the most basic but critical resource for human survival.

And just like its commodity cousins, the ‘softs’ — as some would describe them — have witnessed massive volatility in the early parts of this decade.

Wheat futures recorded their lowest price in 60 years on 13 April 2019. That followed years of declining prices.

It set the stage for complacency…

https://commodities.fattail.com.au/sneak-peak-an-emerging-food-crisis-and-how-to-play-it/2023/08/04/

Earnings season continued in the US last week.

And we had some more good results.

In my opinion, this probably dampened the effect of the Fitch US credit downgrade too.

Heavyweight index stock Apple Inc [NASDAQ:APPL] posted higher-than-expected quarterly income.

Though, I’d note this was mainly from service spending over hardware with softening in both iPhone and iPad sales.

Amazon’s [NASDAQ:AMZN] cloud division, which contributes a whopping 74% to Amazon’s total profit despite making up only 13% of revenue, slowed down but not as much as expected, sparking hopes of a quicker turnaround.

And Airbnb [NASDAQ:ABNB] announced a solid earnings beat on Friday with earnings (EBITDA) up 12.6%.

That could be interpreted as a good sign of the general healthiness of the underlying economy.

According to a recent NAB survey, travel is in the top five items consumers are willing to cut in the event of money problems.

So, it looks like most people are still feeling pretty good about things…

Close to home, earnings season ramps up in the Aussie market this week with the likes of Commonwealth Bank of Australia [ASX:CBA], Suncorp Group [ASX:SUN], and QBE Insurance Group [ASX:QBE] all reporting.

I’ll be paying attention to bellwether stocks like JB Hi-Fi [ASX:JBH] and Webjet [ASX:WEB] for further insights into how consumers are going.

Property-related stocks will be another interesting space to watch, given their sensitivity to interest rates.

Stockland Corporation [ASX:SGP] and Mirvac Group [ASX:MGR] are two stocks worth keeping an eye out on there.

Though, when you read any results, bear in mind, all earnings are, by definition, historical. They can’t tell you what the next 12 months will look like.

Which, after all, is the hard thing about investing!

https://www.moneymorning.com.au/20230807/a-big-week-for-aussie-investors.html

Lithium minnow Lithium Australia [ASX:LIT] is up 55% after entering a joint development agreement with large miner Mineral Resources [ASX:MIN] to develop a pilot plant testing the efficacy of lithium extraction technology LieNA.

Here is how LIT described the deal:

‘Under the Agreement, MinRes will solely fund the development and operation of a pilot plant and an engineering study for a demonstration plant up to the total budgeted cost of A$4.5 million, and will also supply the required raw materials to support the extraction process at no cost to Lithium Australia. Lithium Australia will contribute its patented LieNA technology, which has the potential to enhance lithium extraction yields by up to 50% over current market performance, and will manage the pilot plant’s production process.

‘Lithium Australia’s patented extraction technology is underpinned by recovering lithium from fine and low-grade spodumene, which is usually disposed of as waste streams, improving mining efficiency, sustainability and potential profitability.’

MinRes footing the bill is handy for Lithium Australia.

At the end of the June quarter, LIT had ~$9 million left in cash and cash equivalents.

In FY22, Lithium Australia’s intellectual property had a closing balance of $2.4 million, as per the balance sheet.

$LIT is up 50% after signing a joint development agreement with $MIN. $LIT.AX $MIN.AX #ASX #lithium pic.twitter.com/hqOvpmOFja

— Fat Tail Daily (@FatTailDaily) August 7, 2023

Struggling lithium developer Lake Resources [ASX:LKE] has responded to a lengthy prospective financial information query letter from the ASX sent last week.

The ASX’s query largely focused on Lake’s plans to extend its planned production capacity from 25,000 tpa to 50,000 tpa of battery-grade lithium carbonate.

Lake’s management stuck to its guns, saying it has ‘reasonable grounds to announce’ the upgrade to 50,000 tpa.

However, LKE denied the 50,000 tpa figure was a production target as defined by the ASX’s listing rules:

‘The references to 25,000 tpa and 50,000 tpa of battery grade lithium carbonate in the Announcement refer to targeted maximum plant capacity, not projections or forecasts of the actual amount of lithium carbonate to be extracted from the Kachi Project in any time period. The Company clearly disclosed in the same Announcement that the targeted date of delivery of the Phase 1 DFS, which will support an actual production target schedule, is not due until the end of this year.

‘The DFS for each phase will determine whether there is sufficient information which can then be provided to support an announced actual production target schedule for each phase (as a result of a plant with capacity to produce 25,000 tpa of battery grade lithium carbonate comes online in Phase 1 and then Phase 2) pursuant to Listing Rule 5.16. Until the DFS for each phase is completed, the Company cannot (and has not) issued an actual ‘production target’ schedule pursuant to Listing Rule 5.16.’

$LKE replied to an #ASX query, saying it has ‘reasonable grounds to announce’ the planned upgrade to 50,000 tpa.

However, $LKE.AX denied the 50,000 tpa figure was a 'production target' as defined by the ASX’s listing rules. #ASX #lithium pic.twitter.com/mzmmgKqqjJ

— Fat Tail Daily (@FatTailDaily) August 7, 2023

Later in its reply, Lake reiterated the messaging that its Kachi Project in Argentina is a ‘very early development stage project, which remains subject to completion of a DFS.’

LKE said it has ‘only ever released targeted maximum plant capacity targets … as it has not finalised its DFS and does not have sufficient information to release an actual production target schedule.‘

Once thought inevitable, now a remote possibility. JPMorgan’s economists have ditched their earlier forecasts of a US recession.

The bank originally thought a downturn was likely in 2023 but now predicts continued economic growth through to 2023 and ‘modest, sub-par growth’ in 2024.

Artificial intelligence played a starring role in JPMorgan’s volte-face.

The bank’s chief economist identified a rising likelihood of ‘healthy non-inflationary growth’ due to potential productivity gains from AI.

Last week, JPMorgan’s peer Bank of America became the first major Wall Street bank to reverse its recession call.

Michael Feroli, JPMorgan’s chief US economist, did say the risk of recession remains:

‘While a recession is no longer our modal scenario, risk of a downturn is still very elevated. One way this risk could materialize is if the Fed is not done hiking rates. Another way in which recession risks could materialize is if the normal lagged effects of the tightening already delivered kick in.’

The last point stood out.

If the lagged effects of monetary tightening are normal and are yet to kick in, should a US recession remain the modal scenario?

Oaktree Capital’s Howard Marks and Justin Miller are pitching new funds to Aussie investors via partner institution, Spire Capital.

In a write up for Morningstar Australia, James Gruber reported that the Oaktree pair are seeing distressed opportunities in enterprise software, healthcare, commercial property, and US regional banks.

‘Healthcare has also had the additional issue of significant labor inflation, which has increased the cost base of many companies.

‘In commercial real estate, Oaktree is seeing potential deals where the equity value of buildings is essentially zero.

‘Marks and Miller addressed the potential competition for deals given the rise of investment managers in private credit. Miller points out that many of these competitors have only been in the game for a short time, compared to Oaktree’s 35 years. And they also have had the same exposure to complex deals such as corporate restructurings.’

https://twitter.com/MstarAus/status/1688339169431465985

If you haven’t tuned in yet, please do check out the latest episode of What’s Not Priced In.

Greg Canavan and I discussed the existence or otherwise of free lunches … and whether the market’s avarice was leading it to believe in costless banquets.

⚠️Latest WNPI episode out⚠️

✅ No such thing as a free lunch
✅ Is the #RBA done hiking?
✅ Stretched #tech stock valuations
✅ $AAPL set for correction?
✅ $XJO's paltry equity risk premium
✅ #ASX not cheap
✅ Oil price starting to move https://t.co/EMl4Vcmimk

— Fat Tail Daily (@FatTailDaily) August 4, 2023

Good morning.

Hope everyone had a good weekend.

I want to cover a few things today:

• RBA’s latest Statement on Monetary Policy
• US jobs data
• ASX lithium stocks
• Latest ASX news of the day