The following is a guest post by a buy-side analyst working in a US asset management firm. The author's comments are in italics. Please provide feedback in the comments:
- RGE EconoMonitor by Nouriel Roubini: It looks as if the global economy is heading for a serious slowdown this year. Emergency austerity programs in some countries will put a drag on growth. Inventory adjustments will run their course. The effects of tax policies that steal demand from the future – such as the U.S. “cash for clunkers” scheme, tax credits for home buyers or cash for green appliances – will fizzle out. Labor market conditions will remain weak. The slow and painful deleveraging of balance sheets and income-challenged households, financial institutions and governments will continue.
- INTC – v strong earnings for June Q + Sept outlook; key takeaways: 1) inventories up both on absolute basis and days; however, mgmt says very comfortable w/inventory overall and that channel inventories saw a marked decline; 2) mgmt says China + Europe started Q slow but finished strong; 3) mgmt was upbeat on enterprise and SMB (while consumer was seasonal) – corporations now buying in addition to consumers; 4) v bullish comments on new Sandybridge. – Signs of Capex coming alive as corporations get off their hands and spend the record cash levels, which are earning a donut in money markets.
- BP – testing on the new well cap was delayed late on Tues as gov’t and BP officials said further analysis needed to be conducted; Even if the integrity test ultimately fails, U.S. officials said the company could use the same cap to capture all of the oil flowing from the well by the end of the month. (WSJ)
- YUM – Reports Q210 Earnings, Shares trading off 3.5% after the close as Q beats but China SSS fall short of elevated expectations and FY guidance was raised (+12% eps growth vs. prev. at least 10%) but falls shy of the St.'s +14% expectation.
- Hedge fund industry seeing rush of start-ups as trading teams formally part of large commercial banks are spun out as independent companies (FT)
- Business groups to confront White House over policies deemed damaging to job creation and growth - the U.S. Chamber of Commerce, the Business Roundtable and the National Federation of Independent Businesses will air a list of concerns about government policy at a "Jobs for America Summit" at the Chamber's offices Wednesday (WSJ)
- Port traffic jumps ay Long Beach, LA; Demand at the twin port complex in June also prompts the hiring of hundreds of part-time workers. But experts warn that the upswing could weaken in the coming months (LA Times)
- EXPD - transports - co preannounces to the upside. Sees EPS 0.38-0.40 (vs. the St 0.30). "We've experienced very significant year-over-year volume increases in both our airfreight and ocean freight business," EXPD’s upside preannouncement follows pos. news out of other transports cos (in Europe, Maersk and Hapag Lloyd both had pos. earnings revisions in recent days). – Yet the Baltic Dry Index continues its plummet to new depths.
Baltic Dry Index:
And the correlation between Baltic Dry and Transports continues to plummet:
This is a follow up of an earlier article from a few months ago on the relationship of the Baltic Dry Index and the stock market. I wanted to revisit the thesis because it seems I'm wrong and I don't miss an opportunity to point out my errors in the hope that I can at least learn something from them.
My original article presented the Baltic Dry Index as a leading indicator for the stock market. There is some logical rational for that since the BDI tracks international trade and that tracks economic activity which eventually is translated into profits and eventually changes in stock prices. While he disagreed with this thesis, Albert Edwards of Societe Generale mentioned my article and chart in one of his research notes - making my month.
In September 2009 the chart comparing the relationship between the Baltic Dry Index and the S&P 500 suggested that the stock market was in peril. Thanks to 20/20 hindsight, we know that the market plodded along quite nicely. Since then the S&P 500 has gained about +15%.
Here's an updated chart of the BDI and the S&P 500 showing how the stock market has gone on to make new highs while the BDI is still mired in a sideways malaise:
As Daniel Pfaendler commented, there seems to be a more direct relationship between the Baltic Dry Index and the Thomson Reuters/Jefferies CRB Index:
For those interested in doing further tweaking, I would suggest comparing the chart of the Baltic Dry Index with a Chinese stock market index like the Shanghai Composite. If nothing else, the limp commodities and shipping rates charts hint that deflation continues to have the upper hand in the epic economic struggle of the era.Albert Edwards, Baltic Dry Index, commodities, crb index, Daniel Pfaendler, deflation, inflation, leading indicator, societe generale
The problems in Greece have roots that go back many years but the financial crisis that gripped the world in 2007 and 2008 hit the Greek economy especially hard because their most important sector, shipping, went into complete shock as global trade flatlined. Shipping rates, as measured by the Baltic Dry Index, have always fluctuated but they had never fallen as steeply as they did in 2008. Some daily rental rates fell from $240,000 to just $7,000 within a few months. So the public debt was the powder keg and this was the spark.
(It also didn't help that the Greek banks were running around the Balkans taking on housing debt as fast as they could.)
Looking at the Athens stock market index, I couldn't help but see the relationship it had with the Baltic Dry Index. Since I didn't run a statistical correlation maybe my eyes are fooling me but it seems that the Greek equities manage to actually discount future moves in the Baltic Dry Index:
By the way, I was delighted when my previous foray into the BDI was picked up by Albert Edwards in a research note to clients. Let's see if he 'steals' this one as well
And here's a chart of the Baltic Dry Index for the same period. I've marked the time periods that jumped out at me. For example, in early 2004 as the Athens Composite index managed to plateau before falling, the BDI was ahead of the curve, so to speak, by falling below its previous low. And to show the revers, in mid 2006 as Greek equities corrected sharply, the BDI kept rising, signaling healthy global trade demand for container ships and eventually, the equities reversed and went on to reach higher highs:
Finally, in late 2008 the BDI was first to firm up before the stock market. Of course, the relationship that I've outlined isn't perfect. There are times when it does break down. But still, I think there is a rational link between the two.
But even if the Greek stock market does indeed act as a bellwether for the Baltic Dry Index, you might ask why in the world you would want to know where the BDI is heading to next? After all, unless you're in the shipping or export business, it matters very little.
Not surprisingly, since the Baltic Dry Index basically tracks world wide trade, it is also highly correlated to recessions. When the annual rate of change of the BDI index falls below zero we usually see either a full blown recession or a slow down.
I've included the annual rate of change in the chart above and as you can see, it is crashing down mightily. A few more down months and it will easily slip below the zero line - especially since it will cease to be relative to the historical decline in late 2008. More proof then, that deflationary forces still have the upper hand in the global economy and monetary risks lie on the side of deflation, not inflation.Athens composite index, Baltic Dry Index, BDI, economic indicator, Greece, Greek, leading indicator, recession, shipping rates, stock market
A review of September 2009 wouldn't be complete without mentioning this. In his September 10th Global Strategy Weekly, Albert Edwards, the strategist for Societe Generale mentioned this blog:
The chart is from this commentary: Baltic Dry Index as Leading Indicator - which was mentioned by Pfaendler on his blog. Pfaendler, by the way, was correct to dismiss a link between the Baltic Dry Index and the stock market.
I have to admit, after referring to his work so much on this blog, it was thrilling to have Edwards turn the tables. By the way, he continues to be an uber-bear and most recently suggested that based on the lessons provided by Japan's post-bubble experience, it is exactly when things are starting to seem better that the stock market tops out:
For Japanese investors, it took some time to learn the new metrics of investing. Today, investors have no such excuse. After all, Ben Bernanke tells us we should learn the lessons of Japan and so we must. Though many commentators want to complicate the investment business, we try and keep our advice as simple as possible. The leading indicators have begun to turn down in the US (see charts below) and so risk assets are therefore dangerous. Almost no-one will be willing to predict renewed global recession and no-one will predict new lows in equities. And with the market so bullish (cover chart) a cyclical failure will come as a crushing blow to sentiment. It is time for caution. It is time to sell.
Albert Edwards, Baltic Dry Index, ECRI, japan, leading indicators, Pfaendler, research, societe generale, strategist
I wanted to better understand the year that was, as well as get ready for the next year, by taking a brief look back. So for the next few days, I'll review each month by highlighting the most significant commentary from this blog.
As you'll recall from the review of January, the year started with a lot of hope that the worst was behind us. But February was a cruel month. The stock market bounced feebly after reaching the November 2008 levels and soon it sunk to new lows.
Here are the highlights of February 2009 as I saw them:
- Will The Baltic Dry Index Lead The Market Higher?
I noticed that this leading economic indicator was suggesting that things had started to recover. It had lead previous stock market rallies, so I wondered if it was doing so again. This was indeed the case. Throughout the year it went on to higher highs and higher lows - just like the stock market.
- A Brief History Of Contrarian Analysis
If you're a student of contrarian analysis and sentiment, you'll love this look back through history. Not only will you find out more about the origin of the most popular sentiment measures used today, you'll also get to know the men behind them. There is also a list of lesser known books about the subject.
- Nasdaq Relative Strength Continues To Rise
Through the fog of the bear market, I noticed that the Nasdaq Composite had a surprising amount of relative strength (compared to the S&P 500). This was borne out when for the rest of the year, this relative strength continued unabated. While the S&P 500 rose 64% from its March lows, the Nasdaq rose 74% (November 2009 highs).
- Greed Is Not Good
My jeremiad against the surreal Wall Street bailout.
- Howard Ruff on CNBC: Contrarian Signal From Trading Gods?
Unless you've been around for a while, you probably have no idea who Ruff is and why having him on CNBC was such a golden contrarian signal. Check out this interview (video and transcripts) because it will help you to watch for similar signals in the future. While it took a few weeks for the market to find its feet, I consider this an amazingly prescient contrarian call.
- Comparing Bear Market Counter Rallies
Comparing the current bear market to the last one (2000-2003) showed just how brutal we had it this time around. Unlike then, we had almost no respite, no pause, no real rallies. The few counter rallies were shallow and short lived before a new wave of selling came crashing down.
- McClellan Oscillator To Buttress Market At Support
Based on various breadth indicators, I was expecting the market to hold support at the November 2008 lows. That was clearly wrong. But the alternative scenario I suggested did come true: the bears were trapped after prices went slightly lower then recovered sharply.
- The Money Supply & The Stock Market
Looking at the macro picture, it was obvious that the Fed was pumping an ungodly amount of money into the economy. Charting the per capita M2 measure of money, I argued that all that money had to find a home and that eventually, it would start to seep into the stock market and push stock prices higher.
- Volatility Index Divergence: Bullish Or Bearish?
As the stock market teetered on the edge of previous support, volatility was surprisingly serene. The last time the S&P 500 was at 750, it reached an astronomical high of 85 but this time, it was just 45. I offered two interpretations, one bullish, the other bearish. Thanks to hindsight, we now know which was correct.
- Sentiment Overview: End of February 2009
By the end of the month, the extremely bullish sentiment data was piling up: OEX options, the Rydex Nova/Ursa ratio, the various weekly sentiment surveys, etc. We weren't there yet, but the public was clearly panicking at the new lows.