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Findings & Forecasts 02/08/2012


by Patrick Wood


In last week’s issue of Find­ings & Fore­casts I stated,

“The Baltic Dry Index con­tinues to col­lapse at an alarming rate. In the month of Jan­uary alone it has given up almost 63 per­cent of its value. Today’s reading was 680, just 17 points above the 12/05/08 low of 663. After that, the BDI lev­i­tated back to 4661 by 11/19/09 and has mean­dered lower until December when it really col­lapsed. From the 11/19/09 peak, it has given up over 85 percent.”

Well, it broke through to a new low at 647 on Friday, and has three con­sec­u­tive higher closes on Monday, Tuesday and today. At 647, the BDI is at the lowest point since Feb­ruary 3, 1986, or 26 years ago!

Ship­ping com­pa­nies are wilting as rates go into the red. Bloomberg reported on Monday, “Glen­core Gets Free Ship With a Fuel Dis­count as Charter Rates Go Neg­a­tive”,

Glen­core Inter­na­tional Plc paid nothing to hire a dry-bulk ship with the vessel’s oper­ator paying $2,000 a day of the trader’s fuel costs after freight rates plunged to all-time lows.

Glen­core char­tered the vessel, oper­ated by Global Mar­itime Invest­ments Ltd., a Cyprus-based com­pany with offices in London, Steve Rodley, GMI’s U.K. man­aging director, said by phone today. The daily pay­ments last the first 60 days of the charter, Rodley said. The vessel will haul a cargo of grains to Europe, putting the car­rier in a better posi­tion for its next ship­ment, he said.

“Our other option was to stay in the Pacific and earn poor rev­enues or bal­last to the Atlantic and pay the fuel our­selves,” Rodley said. Bal­lasting refers to sailing without a cargo…

 The Baltic Dry Index, a mea­sure of com­modity ship­ping costs, advanced 1 point to 648 points today, rising from the lowest since August 1986 on Feb. 3. Owners and oper­a­tors of ves­sels are paying as much as $50,000 a day in fuel to travel to ports to win work, or agreeing rates at zero cost as rates fall to records.

Aus­tralian Grain

Char­ters for the so-called back­haul routes that repo­si­tion ships to the Atlantic Ocean region from the Pacific are falling to the lowest since indexes started, exchange data show. Rents for Cape­size ships that haul ore and grain on back­haul routes were at minus $7,342 a day, the lowest since that index began in 1999, exchange data show.

GMI will pay Glen­core as the Panamax-sized vessel travels from near the coast of Yosu, South Korea to Aus­tralia to load grain, reverting to a daily rate linked to a Baltic Exchange index level once the 60 days expired.

Details about the ship hire were included in a list of ves­sels char­ters pub­lished daily by the Baltic Exchange, the London-based assessor of freight costs. This is the first time the exchange has pub­lished vessel char­ters with rates at less than zero, said Derek Prentis, 86, the exchange’s longest– serving member.

D/S Norden A/S, Europe’s biggest pub­licly trading com­modity ship­ping com­pany, said Feb. 3 it hired a Supramax vessel at no cost other than fuel charges, its first such trans­ac­tion in a quarter cen­tury.

Obvi­ously, this cannot go on for long without a real shakeout in the ship­ping fleet. Fleet capacity has been growing as new ships are brought into ser­vice, but growth of bulk ton­nage shipped has lagged at the same time.

The HARPEX index that per­tains to ship­ping rates on inter-modal con­tainer ships has also con­tinued to fall, but not as sharply as the BDI.

Depen­dence on Government

The Her­itage Foun­da­tion just released its 2012 Index of Depen­dence on Gov­ern­ment. The abstract state,

“The great and calami­tous fiscal trends of our time — depen­dence on gov­ern­ment by an increasing por­tion of the Amer­ican pop­u­la­tion, and soaring debt that threatens the finan­cial integrity of the economy — wors­ened yet again in 2010 and 2011. The United States has long reached the point at which it must reverse the direc­tion of both trends or face eco­nomic and social collapse.”

Some selected highlights:

  • 49.5 per­cent of Amer­i­cans pay no income tax
  • 70.5 per­cent of Fed­eral spending goes to depen­dence programs
  • Housing assis­tance jumped 42 per­cent between 2006 and 2010
  • Wel­fare and low-income health care assis­tance surged 41 per­cent between 2008 and 2010
  • Excluding gov­ern­ment employees, 20 per­cent of Amer­i­cans are depen­dent on government
  • Fed­eral gov­ern­ment depen­dence spending (per capita) is now higher than dis­pos­able income
  • 80 mil­lion baby boomers will be added to the roles in coming years, at a rate of 10,000 per day

There is no polit­ical will to face these prob­lems head-on. Per­haps the denial comes from the per­cep­tion that the prob­lems are too large to deal with and thus unsolvable.

Nev­er­the­less, reality is on our side here. A mas­sive mul­tiple train-wreck is in our future.

Pres­i­dent Obama is exac­er­bating this entire pic­ture by cre­ating addi­tional gov­ern­ment depen­dence. This is the socialist’s dream, of course, but also a politician’s dream: Max­i­mizing gov­ern­ment depen­dence guar­an­tees a con­tin­u­ance of estab­lish­ment power. In other words, “we the people” are in a minority.

Deriv­a­tives vs. stocks?

I have written pre­vi­ously that most esti­mates of deriv­a­tive market size range as high as $700 tril­lion. Some have sug­gested $1.2 quadrillion. It’s an incon­ceiv­able size.

There is no reg­u­la­tion or stan­dard­iza­tion in the deriv­a­tives market. There is no cen­tral­ized market maker or exchange. Any kind of “bet” can be written into a con­tract. Any kind of “penalty” can be specified.

There is some evi­dence that the big Credit Default Swap (i.e., deriv­a­tives) issuers have been pledging U.S. stocks against the pos­si­bility of loss in the Greek (and others, too) bond market.  If Greece goes bank­rupt and trig­gers these con­tracts, the issuers must deliver a fixed amount of stocks to the opposing side. Yes, such a deal could have been made promising plain old cash, but appar­ently that isn’t exotic enough for these risk-on bankers and insur­ance com­pany execs.

As Greece is headed for bank­ruptcy, those exposed to mas­sive CDS losses may be buying up stocks early in order to pro­tect them­selves. This is roughly akin to a “short-squeeze” in a market where a large number of short sales are forced to cover at the same time when prices move unex­pect­edly higher, thus spiking prices even higher.

My thoughts are admit­tedly spec­u­la­tive because so little is known about the deriv­a­tives market. There is no sta­tis­tical reporting ser­vice to break it down for us. How­ever, we know from expe­ri­ence that you cannot under­es­ti­mate the banksters’ ability to screw up every market that they touch. After a tax­payer bailout during the sub-prime melt­down, they learned no lessons about tem­pering risk; if any­thing, the propen­sity for risk today may be even greater than before because the tax­payer could be soaked again.


Stocks per­sist in sub­di­viding higher but the Elliot Wave count shows that the move is fully ripe and poised for a reversal. Trader sen­ti­ment is as high as it was at the April/May peak, just before the major indexes started a wicked decline.

Market pun­dits are heralding the start of a new bull market, and if true, it would be the very first time in this writer’s life­time that a  bull market was launched under con­di­tions like these.

So, the top­ping process is taking its time and get­ting as many as pos­sible to go “risk-on” before the hammer drops. The new recovery high in the DJIA means that Pri­mary Wave 2 is extended, and that Pri­mary Wave 3 down has not yet started. The S&P 500 has not hit a recovery high (yet) and thus it’s Pri­mary Wave 2 top is unchallenged.

The pur­pose of a Pri­mary Wave 2 up is to fool the max­imum number of traders, investors and ana­lysts into thinking that it is really the first wave up in a new bull market. This hap­pens on large and small scales alike. What­ever the given fun­da­mental rea­sons, this hope quickly turns to fear when prices decline. During the second half of 2011, we saw ram­pant bullish sen­ti­ment change to abject fear in a matter of a few trading hours.

Gold and silver have kept pace with rising stocks, while the dollar has declined. The “all-the-same” phe­nom­enon is still in place, indi­cating that when one market turns, the others will respond in kind.

As investors moved to equity invest­ments, long term bonds have decreased in price, pushing yields up. The pat­tern clearly looks corrective.When stocks move down, money should travel back to bonds while seeking safety. Thus, I expect that the record low yield of 2.69 per­cent in 30-year U.S. Trea­suries will ulti­mately be broken. Bernanke and the Fed are not helping mat­ters by pledging to keep inter-bank lending rates near zero.

Low bond rates is a killer to investors who must live on fixed income. A person who retired in 2005 with a $1,000,000 port­folio would have expected an annual income of about $50,000. At today’s rates, he is lucky to make $35,000. That is not a real-life sit­u­a­tion, but it under­scores the point: Low rates dec­i­mate pen­sion and retire­ment funds. Those who turn to more risk to com­pen­sate for the loss of income usu­ally wind up losing prin­cipal as well.

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