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The Baltic Dry Index crashed by 50.4% to 893 on Friday from a high of 1,799 in the last week of 2011 and is 58.2% lower than October’s high of 2,136. Source: StockCharts.com The Baltic Dry Index is generally viewed as a leading indicator of global economic activity as dry bulk primarily consists of commodities such as building materials, coal, metallic ores and grain. The massive growth in demand for commodities from 2005 to 2008 led to a surge in shipping rates as measured by the Baltic Dry Index. The demand and surging shipping rates subsequently resulted in a significant increase in capacity as the number of ships built increased sharply. Even during the great 2008/2009 crisis capacity continued to be increased as it takes two years to build a ship. Historically the capacity was generally tight and the supply seen as inelastic, resulting in marginal changes in demand causing rapid changes in shipping rates. The current significant surplus capacity in the industry means that supply exceeds potential demand to such an extent that supply elasticity has increased, resulting in rapid changes occurring in what is essentially a downtrend – yes, fundamentally the Baltic Dry Index is in a bear market as shown by the long-term chart below. Source: StockCharts.com But what causes the rapid changes in demand and therefore the Baltic Dry Index? My research indicates that global manufacturing demand has very little to do with it. The answer is Chinese manufacturing demand but not the actual level of manufacturing measured by the CFLP Manufacturing PMI. In previous articles I referred to the CFLP Manufacturing PMI that is supposed to be seasonally adjusted. Despite the seasonal adjustment, a seasonal trend is clearly evident and I therefore seasonally adjusted the series further. I was amazed to find that the monthly seasonal factors and the Baltic Dry Index track each other. The reason why is not hard to find, as China is by far the world’s biggest consumer and importer of commodities and therefore the biggest player in dry bulk. Seasonally weak periods in the economy will lead to low physical demand for commodities and therefore low freight demand. On the other hand, strong periods in the economy will lead to high freight demand. In the graph below I depicted my calculated PMI seasonal factor against the Baltic Dry Index. I have also indicated China’s New Year’s Golden Week holiday on the chart as it coincides with and explains the reasons for the weak seasonal pattern in January/February. The impact on China’s manufacturing sector is massive as the New Year’s Golden Week lasts for 15 days and includes three public holidays, while factory workers are allowed to take Sundays off. This year New Year will be celebrated on January 23, and the festival will last until February 6. The onset of the festive season/weak seasonal patch is therefore the reason behind the tumble in the Baltic Dry Index. Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management, January/February could also mean a seasonal low for the Baltic Dry Index as from a seasonal perspective March and April are the strongest months in China’s manufacturing sector. In March and April last year the Baltic Dry Index failed to rise rapidly due to Japan’s twin disasters in March that severely restricted trade between China and Japan. More on this topic (What's this?) The Most Alarming Chart I’ve Seen All Week (Wall Street Daily, 1/20/12) The Blame Game: Revisiting “The Most Alarming Chart I’ve Seen All Week” (Wall Street Daily, 1/27/12) Baltic Dry Index Slumps To Lowest Since January 2009 (GreenLightAdvisor Views, 1/17/12)
Marc Faber, publisher of the Gloom Boom & Doom Report, talks about the outlook for stocks versus bonds and his investment strategy. Source: Bloomberg, January 20, 2012.
The article below is a guest contribution by Guy Lerner, writer of the Technical Take blog. The “dumb money” indicator has become extremely bullish (bear signal), and this is what one would expect with rising prices. The higher prices go the more bulls that are recruited. But is it the end of the road for the rally? Not necessarily so. In 1995, 2003, 2009, and Q4 2010/Q1 2011 we saw the phenomenon that I have dubbed “it takes bulls to make a bull market”. It is a market characterized by rising prices and excessive bullishness. In the case of 1995, 2003, 2009, the excessive bullishness and multi-month rally seem to be warranted as the markets were bouncing back from steep losses or a prolong period of consolidation (1995). The Q4 2010/ Q1 2011 version of this phenomenon was a QE2 induced feeding frenzy. With investors taking their cues from the Federal Reserve and European Central Bank, the current market environment resembles Q4 2010/ Q1 2011. For now, we need to respect this dynamic as we could be witnessing another melt up. The bulls have the ball in their court and are on the cusp of turning this recent price move into a multi-month barn burner. The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows extreme bullishness. Figure 1. “Dumb Money”/ weekly Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider trading volume was seasonally thin last week, the result of most insiders being locked-up and prohibited from trading until after their companies’ Q4’11 earnings announcements, as well as the market holiday.” Figure 2. InsiderScore “Entire Market” value/ weekly Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 65.09%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. Figure 3. Rydex Total Bull v. Total Bear/ weekly Let me also remind readers that we are offering a one-month free trial to our Daily Sentiment Report, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets and not opinions. Source: Guy Lerner, Technical Take, January 22, 2012. More on this topic (What's this?) Investor Sentiment: Is this the End of the Road for the Rally? (Comments for thetechnicaltake, 1/22/12) The Most Telling Chart of 2011 (Wall Street Daily, 12/30/11) Fourth Quarter 2011 Investor Letter (Disciplined Approach to Investing, 1/27/12)
Don Coxe has updated his popular webcast on Friday, January 20, 2012 – good news for his followers. You can access the recording here or from the sidebar of the Investment Postcards site (the column on the right-hand side) by clicking on Don’s photograph.
The article below comes courtesy of Central Bank News, an authoritative source on monetary policy developments. The past week in monetary policy saw interest rate decisions announced by 8 central banks, with 4 of those announcing interest rate cuts, reflecting the ongoing European sovereign debt crisis and slowing global growth. Those announcing interest rate cuts were Brazil -50bps to 10.50%, Georgia -25bps to 6.50%, Philippines -25bps to 4.25%, and Serbia -25bps to 9.50%. Meanwhile those that held rates unchanged were Canada 1.00%, South Africa 5.50%, Mexico 4.50%, and Latvia 3.50% (Latvia did however reduce its required reserve ratios 100bps). Also making headlines was a widening of the interest rate corridor, an effective easing, in Indonesia. Following are some of the key quotes and comments from the monetary policy statements and media releases issued by the central banks announcing rate decisions:
Looking at the central bank calendar, the week ahead has 8 central banks scheduled to review monetary policy settings. The one on many people’s minds will be the US FOMC, which is unlikely to announce anything but people will be watching for clues of any further quantitative easing measures. The key emerging market economy, India, will also be closely watched, but with inflation still high is unlikely to move just yet. Other than that, the broad geography of banks on the calendar next week will provide a timely insight into the status of the global economy.
Source: Central Bank News, January 21, 2012.
As part of my daily routine, I publish all my reading (including snippets from other well-known commentators) in an Internet newspaper, “Investment Postcards Daily”. Click here to read the latest edition of the paper. The newspaper’s subscription is separate from that of the “Investment Postcards from Cape Town” blog. To ensure you receive daily alerts of the updated paper, click here and then subscribe for free by clicking on “Subscribe” (top right of newspaper, just below my photo) or by following me on twitter (click here). More on this topic (What's this?) The 2012 State of the Union Tax Reforms That Could Affect You (Money Morning, 1/25/12) The Five Stocks You Have to Own in 2012 (Money Morning, 12/23/11) Expecting the Worst, Starting in 2012 (Expected Returns, 1/11/12) | ||||||||||||||||||||||||||||||||||||||||||||||
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