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This is Officer 1BDI, Requesting Backup.

Recs

21

January 30, 2010 – Comments (12)

.... We'll be there in 5 minutes.

And you know what else needs some backup? Yep, you guessed it, the old Baltic Dry Index (BDI). My last post on the BDI was back in October (If the BDI is a Leading Indicator ...). It turns out it needed to make one more high, and in doing so went up to the 38% retrace line and a large resistance zone and turned sharply back down.

This week it confirmed the downtrend by breaking through its first small support. Larger support lies just a little bit below that. If the next support is broken ... look out below.

Additionally, I am continuing with the "Leading Indicator" pun for the BDI. Some still maintain that it is a leading indicator (which is debatable), yet it began its turn down nearly 2 months before the current correction in the equity market. So again I ask, if it is a leading indicator, what direction does it seem to be forecasting?

.... your call dude.

ENLARGE

And the title, besides being a pun on the Baltic Dry Index / BDI symbol, is taken from Leela's call sign in Space Pilot 3000 from Futurama. Good times :)

 

12 Comments – Post Your Own

#1) On January 30, 2010 at 5:19 PM, RUMBLINtasty (< 20) wrote:

well it certinaly isn't good news for industrial metals. But I covered my shorts. They are really oversold now.

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#2) On January 30, 2010 at 5:27 PM, binve (< 20) wrote:

Hey Tasty!

I agree they are oversold on the daily chart and due for a short term bounce in the next couple of days. But I think reshorting after that bounce will be a very good call. I made this chart up for you the last time we discussed Industrial Metals .... BEARISH!!! Wow.

ENLARGE

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#3) On January 30, 2010 at 5:57 PM, topsecret10 (< 20) wrote:

 Great charts binve....  mine are starting to make more sense now. I think that at least some of the manipulation Is now gone with regard to equities. The dollar continues to strengthen,which I said that It would do over 7 weeks ago....  But,there Is something on the horizon that could cause the dollar to fall again,and In turn help reverse the stock markets slide. The rumblings have been getting louder,and at this point It Is pure speculation,but It definitely could play out In the not so distant future...... 

Jan. 25 (Bloomberg) -- Yuan forwards were little changed on speculation the government will cap currency appreciation this year to minimize the impact on exporters.

Commerce Minister Chen Deming said on Jan. 19 that a stable yuan is in the interest of the global economy. Goldman Sachs Group Inc. Chief Economist Jim O’Neill said in an interview on Jan. 23 that China will probably let its currency appreciate by at least 5 percent in a one-time move to curb inflationary pressures.

“The one-off revaluation is impossible because that will devastate exporters who are just about to recover,” said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the country’s sixth largest lender. “Currency appreciation would be the last tool the central bank will use to control inflation.”

Twelve-month non-deliverable yuan forwards traded at 6.6315 per dollar as of 11:38 a.m. in Hong Kong, from 6.6285 late last week. The contracts indicate brokerages are betting the currency will gain 2.9 percent in the coming year from today’s spot rate of 6.8268.

Exports climbed 17.7 percent in December, the first increase in 14 months, customs bureau data showed on Jan. 10. China reintroduced the exchange-rate link in July 2008 to help exporters, after allowing its currency to climb 21 percent in the previous three years.

The premium to buy yuan call options against the dollar over puts, represented by a negative number, is the biggest in 21 months, as inflation forces the central bank to push interest rates higher.

“Traders are betting China will soon de-peg the yuan,” said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, which was approved as an interbank bond- market maker in China this month. “On the medium term, interest rate hikes from China or elsewhere in Asia are supportive of Asian currencies because they will trigger even more capital inflows.”

The dollar’s one-year, 25-delta risk-reversal rate against the yuan was a negative 1.85 percentage points. A negative reading indicates there’s more demand for yuan calls, or the right to buy the currency, than puts, or the option to sell the currency. The rate reached minus 1.95 points on Jan. 13, the lowest closing level since April 1, 2008.       TS

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#4) On January 30, 2010 at 6:59 PM, binve (< 20) wrote:

Thanks TS! Yep, I think we will get a bounce next week. But I think it will only be a bounce. I think equities will be taking another sharp downleg after that. Regarding how the Dollar works into the short term and long term picture for equities, here is a good summary of my position: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=330962#comment331037. Thanks man!

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#5) On January 30, 2010 at 9:55 PM, topsecret10 (< 20) wrote:

#4) On January 30, 2010 at 6:59 PM, binve (23.22) wrote:Thanks TS! Yep, I think we will get a bounce next week. But I think it will only be a bounce       I agree!!!!

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#6) On January 31, 2010 at 10:25 AM, XMFSinchiruna (27.12) wrote:

binve

Thanks yet again for a terrific post!

Fools, have you any idea how fortunate you are to have binve's market insights to ponder as you navigate through this tumultuous period? While I rely a touch less upon the charts than binve, they are nonetheless a critical piece of any comprehensive knowledge base. But binve gives so much more than just charts. He weaves them into a qualitative analysis of fundamental factors with a dexterity that I have seldom seen from TA-prone researchers. The greatest value to be found in TA is in its proportionate combination with meticulous qualitative analysis and careful interpretation of the broader investment landscape. Binve strikes this balance as it must be struck.

I am a sponge for information ... I spend more hours of every day researching than I do writing, due of course to the complexity of all that is transpiring in global markets that is relevant to the commodities space. I comb through information from hundreds of online sources for at least 50 hours every week, and yet some of the most thoughtful and well-formulated commentary on the web continues to come from right here within our own Foolish community.

As you may know, I cover the dry bulk sector. I believe that the virtually unprecedented rate of expansion in the supply (both existing and pending) of dry bulk vessels worldwide has introduced such a disruptive force into this market as to temporarily render the BDI a wholly unreliable predictor of global economic activity. When vessel supply is in relative balance, then the datum can be a helpful indicator, but even then great care must be taken not to place too much faith int predictive potential. In this environment of massive imbalance, and until this begins to resolve itself through a painful deleveraging of the maritime credit segment complete with defaults by operators and lenders alike, BDI must not be considered a reliable leading indicator. That's not to say it can't BE a leading indicator, but rather just that it can't be TRUSTED as a leading indicator.

There is so much that can not be known in the near term. We can not know the extent to which Chinese import activity may taper off after this incredible stockpiling event. We can not know how much the next phase of the global deleveraging event will paralyze global markets in frozen uncertainty as it did in 2008. Because they can not be known, I largely ignore these near-term projections in favor of the one thing that is knowable: namely, that we remain within a multi-year secular bull market for commodities ... a techtonic shift in the global investment landscape that has years of upside remaining. Every dip is a buying opportunity to some degree, and every spike an opportunity to shave some profits. In a secular bull market, however, the core investment must remain long.

I sold 10% of my equity holdings at $1,220 gold, and I am now buying back in gradually. If gold continues down to re-test $1,000, I will redeploy the last of that cash. However, I am buying few gold miners here. :) I am focused intently upon silver and agriculture. I mention this trading activity not to gloat about my timing, which is always a gamble, but rather to point out that I left the other 90% of my long equity allocation entirely intact even though I perceived the likelihood of a correction. Some might decry my inactivity as a weakness in my strategy, but my core philosophy is long-term focused, and traders can be badly burned in an environment this potentially volatile. I will have fun trading 10%-20% in and out as the peaks and valleys warrant, but the other 80%-90% remains resolutely and inalterably long until the fundamental drivers behind the commodity bull market begin to subside. To each their own, of course, but this is what has been working for me thus far, and it is the strategy I will retain.

These are my stream-of-consciousness ramblings for today. :) Fool on!

http://www.fool.com/investing/international/2010/01/20/diana-wants-to-become-a-bottom-feeder.aspx

 

 

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#7) On January 31, 2010 at 11:23 AM, UltraContrarian (31.77) wrote:

18 hours later I finally "got" Leela's call sign :)

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#8) On January 31, 2010 at 3:17 PM, binve (< 20) wrote:

TMFSinchiruna,

Thanks man!

Fools, have you any idea how fortunate you are to have binve's market insights to ponder as you navigate through this tumultuous period? While I rely a touch less upon the charts than binve, they are nonetheless a critical piece of any comprehensive knowledge base. But binve gives so much more than just charts. He weaves them into a qualitative analysis of fundamental factors with a dexterity that I have seldom seen from TA-prone researchers. The greatest value to be found in TA is in its proportionate combination with meticulous qualitative analysis and careful interpretation of the broader investment landscape. Binve strikes this balance as it must be struck.

Man, this is such an awesome compliment. Thank You! You have no idea how much I appreciate that :)

I very much agree with your assessment regarding vessel supply (and perhaps oversupply is a more appropriate characterization). I think there is no true correlation between the BDI and economic activity at the moment.

Which goes to part of my thesis: I do believe that there will be ecnomic contraction for much of the world's economies for the next decade. The finanical bubble and government bubble are still alive and well (actually they are undead and grotesque, a bunch of zombie financials, but that's another post :) ). And I think the next phase of the US economy and many other economies will be characterized by stagflation.

Things you own fall in value and the things you need to buy cost more. We will have falling demand and falling fundamentals in a massively inflationary environment. Here is a very good summary of my position: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=330962#comment331037

The outcome *should* be deflationary. russiangambit had a great post on this: Deflation is only fair - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=315392. Basically we know that economic activity needs to contract, there is still too much risk in the system, and all of this lending the last 20 years needs to be replaced by savings. And that's what deflation does, it punishes excess speculation and rewards savers. It is the market's way to return balance.

But like many of us have been saying for years now, as long as there is a Federal Reserve, the outcome was *never* going to be deflationary. The Fed can not only grow money supply, it can also directly monetize debt. The 1.25 trillion of monetized MBSs is a drop in the bucket compared to what the next QE program will bring. What next program you ask? Last we heard, the MBSs purchases end in March?

.... And if anybody believes that, then there is a bridge in Brooklyn that they may be interested in. The Fed needs a "deflation scare" to get the next round of QE underway. When the market starts tanking and people get scared back into Treasuries (the needs buyers to pick up a little bit of the slack in the Treasury market, otherwise the whole house of cards will fall dramatically), then the Fed can roll out a brand new more aggressive QE campaign. Bernankes reappointment will all but guarantee this outcome.

But does this does not mean that because we have an inflationary environment that stocks will go up. In fact I believe it is quite the opposite. I have written this before, but it is worth saying again:

But wait a minute binv, you said option c = gold up, stocks down. Yet you say the environment will be inflationary. What gives?

To be very clear, I think the environment will be stagflationary. Massive monetary inflation in a falling demand environment.

First we need to talk about the Dollar, as it is an important factor in this discussion. Is it the start of a major multi-year dollar rally (some think so), or is it a bounce that lasts a few months (I am in this camp).

I think the Dollar Carry trade is about to unwind a bit. And I think this bounce was more or less engineered. The QE fund pool is almost dried up, and the demand from foreign governments during the last bond auctions was severely anemic. So the Fed needs a good "deflation scare" to get a second round of Quantitative Easing authorized.

And the purpose of this next round of QE will be to keep the government running, not to prop up the stock market. Like you observe above, tax revenues are down, yet the national debt ceiling is being *raised*. Government is *growing* in the face of shrinking revenues. And the only way to accomplish this is through deficit spending. And if foreign governments won't buy our debt to allow our government to run, then we have to buy our own debt (via debt monetization courtesy of the Fed, of course). It is the only way to keep the government running, other than slashing services. And the chance of that happening in an election year? Approximately 0.0%.

This is why the outcome was never going to be deflationary. As long as there is Fed, debt monetization will always be the preferred expedient action.

But just because the outcome is inflationary, it does not mean that assets will rise. I hemorrhage a lot when I read economic commentary because nobody tries to understand the complexity of the macroeconomic situation. And since 2000, we have seen first hand how little the ramifications of monetary policy decisions are made not only by the public, but even by those who are making them. I still hear a lot of "dollar down = stocks up" or "inflation means stocks will rise".

Inflation "helps" (used *very* loosely) stocks rise ... until it doesn't. Stocks can fall in an inflationary environment, because the economic fundamentals are weak, and the inflation starts to exacerbate the weakness, not hide it. This happened in the 1970s. And it is called stagflation.

When stocks fall again due to poor fundamentals, people will say this is proof of deflation. I mean after all, if assets fall, it's deflationary right? Not if you want to understand cause and effect and not if you want to understand what the macroeconomic ramifications are. Mislabeling the next downturn as deflationary is exactly the misperception that the Fed wants so that it can be more aggressive with QE and similar policies (ramp up inflation while everybody is focused on "deflation" -- which is actually a deflation scare). Hell, they even said they were buying more mortgage back securities today! (monetizing debt is directly inflationary). It believes that it is helping to solve the problem, but in actuality it is reinforcing it.

Peter Schiff had a great bit on his video blog (which kdakota always does a great job of reposting) regarding the PPI interpretation and extrapolation. Check out this post: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=312473 and watch from 3:05 to 5:15. It is easy to see how this argument has ramifications for lower stock prices within an inflationary environment. The comparison between now and the 1970s has a lot of compelling aspects: high inflationary environment, poor fundamentals, and falling asset prices. The only difference now is that the structural imbalances are a lot worse. Which means that the monetary inflation is going to reinforce the problems much more than they did in the 1970s.

A valid question would be "well once the Fed realizes (supposing they do) that it is a positive term in the feedback loop, not a negative one, won't they just stop inflating?".

The first answer is: no. And the first clue is the yield curve. Nobody but the Fed is buying our long term debt. The only reason why the government is running at the moment is because the Fed is funding the Treasury, it isn't getting money from foreign governments (well it is, but in much smaller proportion). And the National Debt ceiling is being *raised*. The Fed needs to inflate to get the government running.

The second answer is: it doesn't matter. Because once the inflation is detectable in general prices, the massive monetary inflation will have already done vast amounts of damage. And because of the inertia in the economy, we will be feeling the aftermath of that inflation for a very long time.

Things you own go down in value, the things you need to consume cost more. Sounds like stagflation to me.

The Dollar and equities are far more positively correlated than they are negatively correlated. And I lay out the case in my Dollar post ( Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog ) where the weak dollar eventually hurts the stock market. Since, like I am saying above, the outcome was always going to be massively inflationary ever since Quantitative Easing was announced, the long term direction of the stock market was sealed: USD-SPX-Correlation_since_1990.png

... Sorry, that was a long ramble, but this brings me to my real point:

I, like you, am very bullish on commodities. Not because of any correlation to positive economic activity, but because they are real assets. There are economies that will grow and demand there will be legitamite, but mostly commodites will retain value because they are real assets. Which is why I continue to be bullish on gold, and is the one asset I stay most bullish on. It is because gold is a monetary asset / is not fiat money / and is not a commodity (it is a monetary asset first and a commodity only a very distant second).

So like with my GYX (Industrial metals) chart in comment 2, I am still very bullish over the long term. But I am not a buyer here. There was a nice run up, but it is at resistance right now and ready for a correction. I think the next correction will be a fantastic opportunity for commodites.

The coming year is where these asset classes will diverge. Commodites will correct and then resume their climb. Equities as a general asset class will crash again. That is why my reasoning and analysis leads me to conclude at any rate.

... Sorry, that was my stream-of-consciousness rambling too :) Much of it was just my thoughts and not directed at you, since I know you already agree with most of what I am saying. Thank You again my friend! Your work will continue to get investors to think critically about these issues, and I am grateful to have such a useful resource as you here at the Fool. Thanks man!!

UltraContrarian,

LOL! Man, I love all the puns in Futurama. One of my all time favorite shows :)..

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#9) On January 31, 2010 at 4:39 PM, blesto (30.88) wrote:

Ow.

My brain hurts after reading all that.

How will all that affect real estate, especially commercial?

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#10) On January 31, 2010 at 5:55 PM, binve (< 20) wrote:

blesto,

LOL! Sorry for causing any migranes (was it the content or the spelling errors :) )

As far as RE / CRE: I am not an afficionado. I am bearish because people whose analysis I have come to trust are bearish on CRE especially. But I do not invest in REITs, either long or short...

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#11) On February 12, 2010 at 6:15 PM, XMFSinchiruna (27.12) wrote:

blesto

Massive asset value deflation has yet to strike the commercial real estate market ... but it will.

Disclosure: I am short real estate via the SRS Ultrashort Real Estate ETN.

I expect a further 40%-50% price drop in existing home values before all is said and done.

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#12) On February 12, 2010 at 6:45 PM, FleaBagger (28.14) wrote:

#11) Is that adjusted for inflation?

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