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December 27, 2009
Airelon's Airelon's
Market TacticsMarket Tactics
Looking ahead to 2010 …
A
s I have mentioned before, I don't think there is any 'one way' to trade or invest. Regardless ... one particular argument that usually arises about thistime of year is one that is similar to the “
technical analysis versus fundamental analysis
” argument. The argument that I'm speaking of revolves around theideas as to whether the markets can be
predicted
, or should an investor andtrader
react
to changes that they observe within the markets. To make a longstory short and spare you a lot of unnecessary details … but I see myself as a'reactive' investor and trader; although I personally believe that much of theargument comes down to semantics. I say that, to say this … this is not goingto be a “predictions for 2010” newsletter.I do not believe any particular market can be 'predicted'in the sense that absolute eventualities can be laid out. I
do
believe an investor and trader can look for an 'edge'or 'bias' can be applied to determining any particular markets direction. But an edge or a bias is only that points towards a probable indication. A bias or an edgeis not a 'definite' indication. As my long time followersalready know, my personal axiom is “
None of us areGod, therefore none of us can predict the future ...
”. Many know about theedge and bias that I use when it comes to trading. Well … what abouteconomics? What is my 'edge' or 'bias' when it comes to an economic outlook?Well, I think it means truly understanding with as much accuracy as is possible,the 'road that we are already on today' economically speaking. Then we canmore clearly see the direction which we are
already
headingSo I approach the new year with that idea in mind. I'm not looking to predictwhere the stock market is going, where the price of Gold is going, or evenwhere the economy is going to end up; as if I couldsimply compute a few numbers together, and comeup with a target price for the Silver market inDecember of 2010. Because we predict cannot Nassim N. Taleb's “black swans”. Those eventswhich are truly random, and completelyunpredictable, and affect our conceptions regardingthe future. “Black Swans” indicate the need for flexibility as we progress through 2010. We won'tknow what “black swan” events occur within the upcoming year, until after they arrive. So then … how do I
approach
2010?
1
Dan Shydan.shy@davianletter.com
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Approaching 2010Economic Outlook The Shipping SectorTrading EnvironmentDividend EnvironmentPerformance Correction
December 27, 2009
Well, as I've stated … when building an overall view of the year ahead, I want to know where we already
are,
and then I try to keep an eye on a few key data points as indications as to where we are
already
heading, whilekeeping in mind that I need to react quickly to any changes in those data points. What 'key data' points do I look to for indications? Well, in addition to looking at things like the credit markets, equity prices and commodity prices that I observe on a daily basis ... I also keep an eye on some key pieces of data that relate to the shippingsector. I try to determine what sort of trading environment we are in, and finally … the sort of environment weare in as regards dividends. I then begin to build my 'outlook' for the next 12 months. Some may see this as'predictive', but I really don't. I believe that where we
truly
are today, will allow us to see how the road for thenext 12 months has already, partially been formed.
Economic Outlook for 2010
“Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else“ - Lyndon B Johnson
It is often interesting how many times I hear people speak as if the economy can either go up, or go down. It'seither “in recovery” or “going to get worse”. As if the economy is an 'either / or' statement. This isn't toosurprising, as I sometimes hear the same thing when it comes to the capital markets. I have heard many aspiringinvestors and traders say that the market can either go up, or go down.Wrong. Any option traders out there are already with me..Markets can also go sideways. As can the economy.Personally I believe that is the 'economic road' on which we are
currently
traveling. Sideways … to bleeding.Early in 2009, I stated that we were
beginning
1
. In that entry I stated that we were in the midst of deflation in asset prices (
in early 2009, we were only beginning down that path
), but the deflationary
trap
had not yet sprung. At the current time, that economic deflationary
trap
hasalready sprung. In short, this “Detroit Scenario” is a situation of modifiedstagflation. The taxes are high, there is no sustainable economic growth, and theresultant poverty level also chokes out the possibility for capital wealth creation; because
there is no healthy consumer base
. Yes, the governments actions keepeverything from completely collapsing. But that does not mean that the economyis actually improving. If your patient is on life support? That doesn't mean thatthey are improving. It means they aren't dying. This … in essence … is what the“Detroit Scenario” is all about. For instance, some could argue that QuantitativeEasing has kept the credit market from completely collapsing. But could anargument be made that the credit market is actually
improving?
No, not really. Interest rates are cheap only because of Quantitative Easing, and that means nothing in an economy with high unemployment. What do youcare about a great interest rate, if you're out of job?Of course, due to the moves on the part of the Federal Reserve andgovernment, we are no longer seeing deflation in
asset prices
. But thatdoes not mean that we have crawled out of the economic deflationary
trap
. Japans deflationary trap sprung more than a decade ago. AndJapan has seen brief periods of corrections and rising asset prices. ButJapan always returns to this the common denominator, which is the
economic trap
with which it has become engaged. At the time of thiswriting, they are once again marked within the mire of deflation in asset prices. Because they refuse to accept that the deflationary
trap
is larger than the deflation in
asset prices
. They treat the deflation in asset prices
2
December 27, 2009
as if it is the primary disease. It's not. It's the symptom of the underlying
economic trap.
This is why I call this scenario “The Detroit Scenario”. I've seen this situation play out on a smaller economytime and time again in Detroit, Michigan. If deflation in asset prices is corrected? Then the unemployment rateskyrockets due to the crushing tax burden that was meant to 'stimulate' the economy. Naturally, there is thenzero private sector growth. The government “helps out”, or more accurately, crowds out the private sector through the increase in the tax rate, and poverty increases.So for “
the road that we are on today
” economically? I see more of the same. I see a straight, unbending roadahead of “the Detroit Scenario”. I see nothing that tells me that such a situation will resolve itself quickly, andwe'll see a repeat of the euphoria of the credit bubble years. Even beyond the obvious debt and deficit problems,I will closely be observing, and would expect to see an increase in poverty levels which will place an immediatedrag on a full macroeconomic recovery.So in the end? I'm not saying a recovery hasn't begun? But it will be a very, very long, hard fought roadupwards, and that for extended periods of time? It may seem like no progress is being made at all,
due to the poverty levels, and crowding out of the private sector.
That's the 'economic' road, as I see it existing in the hereand now, for 2010.
The Shipping Sector
One particular sector that I am somewhat familiar with, and keep track of when examining the overall economy ... is that of shipping. One of thereasons that I enjoy following the shipping sector, is not only is it a greateconomic tool, but I also because I am a commodity futures trader. Shippingcompanies ship not only bulk consumer goods, but … commodities! Now a question I receive from time to time, is if I trade equities at all, or if Ionly trade commodity futures? Well, I do occasionally trade equities, but onlythose areas that I am comfortable with. As this is one of those few sectors inwhich I am familiar with the fundamentals? This is an equity sector that fromtime to time, you will see me trade. However, it should be noted early on, that keeping close track of theshipping sector does not mean that you have a quick pulse on the strength and heartbeat of the
entire
economy.It's more like the diastolic. For instance, a substantial drive to increase the efficiency of industry can lessen thedemand for oil, which would affect the shipping of oil, which in turn would affect the entire shipping sector.That is only one reason why you cannot consider the
entire
macroeconomic picture, as dependent on shipping.But I do think there are some interesting facts to glean from an examination of the shipping sector. It is a sector that is notoriously volatile. The first thing I look towards, is the Baltic Dry Shipping index. First, I need to saythat this index
does
not
show how much cargo is being shipped worldwide. I find a lot of people looking at thisindex, and thinking: “
Gee! Shipping of Cargo is back up to where it was in 2002!
”. That's not the case whatsoever. Neither is this amarket that you can trade or speculate in.To put it as simply as possible, the Baltic Dry Index is an Index that best measures the
demand
for shipping (
how many vessels
can
ship,as opposed to how many vessels are needed
), adjusted for thefluctuations in the value of the U.S. Dollar; in raw materials. It is ameasurement of what is
real
, and the demand in U.S. Dollars, for realgoods being shipped worldwide with available ships. If we look atthis first chart of the Baltic Dry Index, (
As displayed at bloomberg.com
) we see that the demand for the entire year hasincreased. But let's keep this picture in context.
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Baltic Dry Index – 2009 (Bloomberg)
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