Sunday, August 16, 2009

Why Commodity/Shipping Weakness Could Predict Next Leg Down in Stocks

Interesting times in the markets. US equities have now completed a standard fare "Fibonacci retracement" off of the March 6 lows. Now, where to from here?

Bulls and bears alike conceded that a strong rally was quite probable. Now that it's happened, what can we expect?

There seem to be two or three prevailing market outlooks today - and all 3 are quite different!

1. We've averted armageddon. Now it's back to business as usual, albeit at lower levels. How much lower is the big question.

2. We haven't yet seen the bottom of this, and the March 6 lows are destined to be taken out. This is nothing more than a parallel universe to 1930.

3. This rally was engineered by the government and driven by the printing of money. Inflation has shown up sooner than expected - thus we should pile into gold, silver, and metals while we still can.

If you discount the less dramatic "Golilocks scenario" of #1, then you're left again with inflation and deflation staring you in the face.

Both sides of the debate have strong arguments for - and against. It's one of the most intellectually challenging forecasts that I can remember seeing in my (young) investing career.

I've accepted the fact that I'm not as smart as the gurus on both sides of the debate...if they can't figure out which it will be, how can I!

While, as regular readers know, I've recently warmed to the deflationary outlook, I'd still like to hedge my bets in case I'm wrong.

So, though I'm not doing much trading, I am watching the commodity sector closer than every. You'll recall that commodities, one by one, rolled over in early 2008, prior to the equity markets. I've come to believe that commodity prices are "smarter" economic forecasters than, say, the S&P 500.

Here are three charts that I pulled up this evening, which appear potentially ominous, at least in the short term.

The Baltic Dry Index shows that, well, less stuff is being shipped:

Where has everything been shipped to? China, of course!

Uh oh...looks like China is starting to turn down:

Finally, let's take a look at oil - which last peaked in June of 2008. Oil looks like it's forming out a "lower high", and is having trouble holding onto the $70 mark.

Bottom Line: There appears to be A LOT of optimism priced into, well, just about everything right now. If US/global growth disappoints later this year (hard to imagine it won't), we could be in for another leg down. So, take heed to these potential leading indicators!

How Productivity May Hold the Secret to the Inflation/Deflation Outcome

My good friend Jonathan Lederer, President of Lederer Private Wealth Management, an investment advisory firm based quite close to my home here in Sacramento. Every quarter, Jon creates a fantastic update and outlook for his clients, where he dives into the current economic situation, and often applies a unique approach to the markets.

Jon really outdid himself in his Q3 update for 2009 - when he was kind enough to forward me a preview copy of his newsletter, I said: "Jon - this rocks! Can we please post this on the blog?"

Lucky for us, he was all for it - and you can read this great inflation/deflation piece here.

Quick Market Hits for the Week Ahead
  • Our old favorite sugar surged to a 28-year high this week. Here are the details...along with some updated thoughts from Mr. Sugar himself, Jim Rogers.

Positions Update

No new trades this week...cotton closed "limit down" on Friday after rallying earlier in the week.

Fundamentals for cotton appear to be quite favorable, and these prices should be a bargain. However if we are, in fact, in a Global Depression, we may very well see cotton, and other commodities, roll over.

Recall in early to mid 2008, commodity prices peaked before the broader equity indices - rolling over one by one as a precurser to the Great Deleveraging. Keep an eye on the commodity sector this time around, as it may serve as our canary in the coal mine.

Cotton continues to "range trade".

And, as mentioned last week, I'm planning to "go long" the dollar index very soon.

Current Account Value: $25,488.91

Cashed out: $20,000.00
Total value: $45,488.91
Weekly return: -3.4%
2009 YTD return: -49.8% (Ouch, that's gonna leave a mark)

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00


Hubris said...

If you think for a moment the market can take out the lows, you are delusion. All the stocks that made the lows were taken out of the index. The only way we make new lows is if CSCO, IBM and other tech stocks make new lows. The last time I check, these companies are making money and guided higher...

Giving credence for the deflation argument is a waste of breath. How can printing more money make it more valuable?? Are you saying all the losers living off social security will have their buying power increased several fold!??

The whole credit contraction argument is bs also. People don't buy food, water, and refuel their gas tanks on credit. They buy cars/houses/jewelry on credit! So yes, people are going to downgrade what they purchase, but the necessities to stay alive are going to continue to inflate as it also has.

Brett Owens said...

Well I guess we'll just have to agree to disagree :)

Though I have to concede one key point - that of me being delusional!

Yuk Yuk said...

Newcomer to the site, but some very interesting comments and links. Just some quick thoughts if I may . . .
I think Prechter's central argument for a deflationary scenario is that 'despite' governmental(i.e. the central banks) efforts at increasing the money supply they will be unable to do so.
In other words, despite the fed/government's 1. monetizing debt/increasing the deficit 2. buying assets (stock,homes) directly from the banks and 3.essentially nationalizing banks (forcing them to extend credit on favorable terms) the money supply will contract. I find this argument may hold true for the short term, but 'helicopter Ben' does have just a little more power than Prechter gives him credit for. I'm no Elliot wave theorist, but I'm finding it harder and harder to reconcile myself to a deflationary scenario (longterm).
p.s. check out this sweet article from M. Farber--> Inflation breeds more inflation, Thorstein Polleit.

Brett Owens said...

I actually think Prechter's deflationary argument is more short term than commonly believed as well. I think he's looking for a total destruction of credit by 2012 or which point he admits hyperinflation could take over, as the little money left over is inflated away.

Prechter and the EWI guys expect "Wave 3 down" to happen really soon as right now...and their case is that tens of trillions in credit will go "poof!" - and even Ben can't print that much (in the short term).

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