The Bears are Back, and more ferocious

(Please consider this more as a preliminary post and the usual research notes with stats, references and charts will be posted over the weekend).

The events surrounding Dubai have led to a renewed round of panic in the markets. It has brought back fears of the financial crisis. The crisis owes its origin to those who are in a perpetual state of intellectual deficiency and were convinced that building those castles in the sand and the sea were good business propositions (and all those morons who actually bought them). The Dubai problem is not per se very large - "only" about 60 billion dollars. But that has upset the "sentiment" which could be rebuilt only after all the government's pumped in about US$12.9 trillion over the past year. This default( though not yet in a technical sense) is likely to lead to exactly all those changes that took place after Lehman, only a more grand scale with all emerging markets likely to be hit by risk aversion, which will lead to a shooting up of the cost of debt and increase their spreads. Imagine this is the position of a government that has liquid assets in the form of oil, which is anyway rising because of speculators. What will it be like if others are hit?

The best case scenario is this: Fed and all the other governments' step in and go back to pumping in another 2 or 5 trillion dollars. That will lead to exactly the type of situation that we saw since march. I think we are likely to have that. Then after the fall, we will have commodities shoot up. It is likely that we will have a dip in the markets and a rise after that (a false dawn) which should probably be used to get out of the markets. The commodity market is likely to witness a 20 percent correction (in the worst case another 35% correction). If you have the stomach for it, short oil below 74. In the intraday hourly chart, it looks like it is likely to break the 75.35 level, which is the head and shoulder break. That should be stop loss. It is getting short-term support at 74.50 level. if that holds then good or else the next major support is 74. If there is a rise in the market over the next week (major trading will take place in the US only on Monday) then use the rally to take up short positions - if one is an aggressive trader. For the next one week there are only two good places, USD and US Treasury bonds. (i know both are bad

In the worst case: Dow will go back to 5000. I think that sums up the worst case in a sentence.

There is one very interesting development that we have been talking about: bond funds drawing a lot of funds over the past two months. Looks like the bond market has got the whole thing right, as usual Equity market it turns out is the dumb money. Currency guys are the thundering hordes who are jumping all over the place, and well commodity markets are somewhere in the middle.

One should not be surprised if the UST10 year note heads back to 127 or even 131.

The Dollar index is most important and interesting. 75.16 is a critical level but the important level to really look out for is the 76.30 level. if it is not able to move above that then expect a new low (well below 70) for the Dollar Index. (my personal level is that it could probably test that and may take out the 76.30 level over the next one month. if it takes out that level by Monday then expect a big rally in USD. Any close above 75.85 on a weekly basis will mean that we have hit a bottom in the dollar index.

Gold market is the next important market to watch out for. Normally in times of crisis (like the one that we are likely to have now with the start of the sovereign defaults) Gold should do well - but, "THIS TIME IT IS DIFFERENT". (pls dont get me wrong when i say that). I think gold is due for a very sharp big (good) correction. This are for a number of reasons:

1. Gold is anyway due for a sharp correction. It has returned 34 pc this year.
2. It may well turn out to be a "buy on rumour, sell on fact case".
3. There are huge long positions in gold in various commodity markets. They are likely to be liquidated.
4. The most important reason is that gold is likely to be sold because, all those who face margin calls are likely to sell gold positions and pay the margin call (i would do that if i were in their position - rather than part with cash, so likely that everybody would do that).
5. Fundamentally, this actually long-term good news for gold. I think governments will keep pumping in more money (now they have a good excuse) and that should lead to gold shooting up in the long term (after this correction). so utilise this correction to buy gold and as a second best alternative, its poorer cousin gold.

For all those who are still comfortable with only buying (long only) buy Exchange traded funds like VXX and FAZ. Then... sit back and enjoy the ride. Nobody in their senses would have actually been comfortable when the VIX touched 20.

I must confess that i was not able to sleep well since it touched 35, but that is the problem, i get on to the train even before they have refueled it for their journey, and i get off just as it has reached its first stop, leave alone the actual destination, but that could be the reason why I have lived to fight another day in the markets.

Happy trading.

10 Year U.S. TREASURY BONDS - CHICAGO BOARD OF TRADE
Commitments of Traders (Delta-adjusted Options & Futures Combined)
November 17, 2009

Category	Quantity of Positions
Total Open Interest	1,720,039(+159,633)
Non-Commercial Long	172,398 (+30,882)
Non-Commercial Short	243,210 (+42,468
Commercial Long	1,008,638(+31,407)
Commercial Short	923,703(-1,560)
Total Long	1,417,825(+120,029)
Total Short	1,403,703 (+199,926)

Source: CFTC

NYMEX Light Sweet Crude
Disaggregated Commitments of Traders(Options & Futures Combined),
November 17, 2009

Category	Quantity of Positions
Total Open Interest	2,491,200 (-417,670)
Producer Long	293,262 (-25,770)
Producer Short	512,711
Managed Money Long	189,923 (-9,212)
Managed Money Short	40,787 (-1,560)
Managed Money Spreading	269,425 (-70,354)
Swap Dealers Long	214,673 (+48,907)
Swap Dealers Short	176,813 (+9,054)
Swap Dealers Spreading	829,158 (-235,640)

Source: CFTC

Deciphering the Rising Baltic Dry Index

The past two months has seen a rise in most of the asset classes. One index that has outperformed all other indices is the Baltic Dry Index, the index that is considered to be a barometer of the world's shipping freight charges. Over the past two months the index has nearly doubled from about 2163 to about 4668. This has led to renewed optimism that the global economy is on the path to a recovery. This is because, shipping (along with other transportation indices) were some of the few advance indicators that signalled the present recession.

The Baltic Dry Index is an index that is computed from the average of twenty two bulk cargoes on a futures basis including iron ore, coal, cement, steel and food grains. It is quoted every working day at 1300 GMT. The index does not include wet goods such as crude oil. The index is a daily average of shipping freight rates. The important feature of the index (and its relevance) may be due to the fact that it is not a tradable contract and is exclusively the preserve of actual users of shipping services. It does not directly include short-term speculative inflows (or ‘hot money’) directly. There are however, derivative products (futures) introduced by other exchanges (the International Maritime Exchange, MAREX) that trade on Baltic Dry Index. There are a number of other ways to trade shipping freight including exchange traded funds like Claymore/Delta Shipping Index exchange traded fund. This exchange traded fund (ETF) trades under the symbol SEA. The ETF does not replicate the BDI and instead invests in shipping companies.

Bubbleomania’s Note of Caution: Be more circumspect on the BDI

The fact that the index was one of the earliest indicators that warned of an impending crisis, has led the investing public to become enamoured with the movement of the index over the past couple of months. While in the past it rare to come across a price quote of the index, it has now become common for the financial media to give this index great prominence, probably a contrarian indicator that should warn investors that it is time to move on to another indicator. Investors as well as observers may be well advised to be more watchful that giving primacy to the index. Circumspection may be in order because it is imperative for investors to keep in mind the fundamental of economics – Demand and Supply – before overemphasising the importance to any one indicator. The global economy is far too complex, sophisticated and dynamic for investors to depend solely on only one indicator. To place the BDI in perspective, it rose from about 5600 in early 2008 to a record of 11,793 in mid-2008 and in the aftermath of the Lehman Brothers’ bankruptcy it collapsed to a low of 666 in December 2008-in about six months.

Baltic Dry Index

                   

If we were to over emphasise the indicator with all the irrationality of a financial herd, then we would have to believe that the world trade would double (as the index more than doubled in 2008) and then expect the world trade to collapse by 98 percent by the end of 2008. WTO indicated that world trade would decline by about ten percent. In May 2009, the New York Times quoted a report that indicated that nearly 735 ships were anchored in ports, due to lack uneconomical freight charges. This seems to have turned around as the present rates would make freight profitable on all routes for the companies. This is not to claim that the BDI as an indicator is redundant.

Questions Galore, Answers limited:

Among the many questions that investors and observers would now have to grapple would be:

-What is the likely consequence of the near doubling of the BDI?

-Does it merely reflect the bubbles that are likely to be being built in the other asset classes of the nearly 150% increase in the monetary base in the US economy?

-Is it the harbinger of a new era of economic prosperity that all of us so desperately yearn for after more than a year of financial turmoil that has not been witnessed since the end of the Second World War?

-Does it indicate that the commodity bull market has just been renewed with great vigour?

-What would be the impact of the rising cost of shipping on the weak recovery?

The simplest answer would: Nobody knows accurately. But nevertheless we hope to provide some valuable insights, which hopefully should enable investors to come to their own informed opinion.

Why is the BDI rising?

The simple answer would be that there is a large, rising demand for commodities in the emerging markets, especially China. Undoubtedly, there is some truth in that assertion, though it would be difficult to quantify the exact quantum of that impact on movement of the index on the movement of the index. There are a number of important factors that have to be kept in mind. The crisis of 2008 has dramatically altered the landscape of the shipping industry (as with most of the other industries).

It should be kept in mind that the recent boom led to an exponential large increase in world trade, due to globalisation, which necessitated the need for more number of ships. This shipbuilding activity increased with the boom, and ship orders increased, especially in 2007. Considering the fact that it takes nearly two years for ordered ships to be delivered, these will increase in 2009 and 2010. It has been pointed out that capacity addition to the present fleet will be to the tune of about 60 percent of existing fleet capacity.

A critical element in the future of shipping would be the state of the economy as a natural corollary, the demand for goods. This unfortunately is likely to be the Achilles heel for the shipping industry. Recent statements by some of the shipping companies is instructive of what we can expect from the sector. A.P Moeller-Maersk, the owner of the largest container shipping line has announced that volumes are likely to grow by 3 percent to 8 percent in 2010. That would indicate that the world economy is unlikely to grow at a pace that the optimists think as it essentially means that the growth is likely to come after a 10 percent drop in container traffic in 2009. The third largest container shipping company CMA is reported to have stated that the while the Europe-Asia route has seen some recovery, the US-Asia route is yet to see demand pick up. Some analysts have pointed out that the proportion of the container fleet that was idel was likely to rise to 15 percent or een 20 percent over the next year.

What is causing the BDI to rise?

The quick answer would be imports by China of Iron Ore, Coal and oil. The Chinese continue to increase their import of most of the commodities, including copper, lead, iron ore, coal as well as oil. This demand is likely to increase as China has announced that it would like to establish a coal reserve that would store at least about 10 percent of the annual consumption in the reserve. The recent rising food prices has only increased the demand.

It is pertinent to note that companies tend to start building stocks for the forthcoming Christmas shopping season, we are likely to see this happening. The fact that business inventories are at their lowest levels in recent years only seems to be aiding the movement of goods.

Two important developments seem to be causing the BDI to rise. The first is the consequence of the financial crisis, where shipping companies were forced to close due to the non-availability of credit. This is to be seen in the context of the fact that shipping a capital intensive business. It has been pointed out that the collapse in the credit markets led to an estimated US$350 billion of orders for new ships unfinanced. To this may be added the cost consequnces of partly funded orders/loans which were cancelled as the banks continue to pull back. This is not likely to improve over the next year.

A second important factor that is positive for the shipping sector and a predominant factor that is supportive of the shipping prices are ironically the activities of speculators in the oil market.

Another important cause for the rise in the Baltic Dry Index seem to be the rise in short positions in the futures segment of the BDI futures. The October 2009 futures indicate that there seem indicte that the rally may have more to do with futures market issue (again a consequence of financialisation) rather than those based on demand and supply of actual goods.

Source: IMAREX

The following chart provides a snapshot of the rising trading in the futures and derivatives segments of the BDI futures.

Source: IMAREX

The charts below provide an overview of the problem of rising inventories in China. This should be a cause for concern as the recent boom in the commodity sector as well as rise in the Baltic Dry Index was largely to import of commodities by China. The Chart below indicate the problem of rising inventories in Shanghai (Copper Inventories)

Source: Bloomberg

Zinc inventories in China too are at their highest level since 2007.

                            

Source: Bloomberg.

A counter weight to the above problem would be that the BDI may find support from the import of Coal and food grains. The world will continue to remain short of food grains and since countries like Philippines and India have announced large import of food grains, this likely to remain supportive of prices in mid 2010, if not a bullish factor.

Interestingly, the number of ships that are waiting for coal load has not increased as one may have expected, considering the Euphoria that we have seen. It has remained more or less constant within the range that we had seen in between 2008-09 as can be discerned from the chart of New Castle Mining port authorities:

Source: Bloomberg

Reasons to be Cautious:
-Shipping freight derivatives for 2010 and beyond imply lower freight rates.
-New ship deliveries are estimated to approach 34 million DWT of capacity in 2009, there is a possibility of another 26 million DWT being added to the capacity, though shipping companies can delay the deliveries.
-What is more worrisome is the fact that we have been witnessing a continuous rise in inventories of various base metals, including copper and lead, among others. If demand were not to return in 2010 due to a faltering global economy, it is likely to lead to yet another round of collapse in the shipping sector as the sector is likely to be hit by increasing capacity which will be aggravated to high commodity inventories.
-According to Paris-based AXS-Alphaliner, 10.7 per cent of the world’s container ship capacity is now laid up out of use, with most of the idle ships belonging to independent owners

Hence, investors may be well advised not to over-emphasise the importance of the Baltic Dry index, while at the same time, we should not be hasty to dismiss the index as redundant.

COMMODITY CORNER
Long/Short Position of Traders

As on 17 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	192,059(+5,499)	10,335 (-1,707)	74,177(-1,774)
Managed Money	192,059(+5,499)	38,393 (+5,045)	768 (-523)
Swap Dealers	192,059(+5,499)	18,013 (+553)	19,759 (+1,070)

GOLD	All Open interest	Long Positions	Short Positions
Producer	773,681 (+36,290)	563,986(+4,650)	262,716 (+1,275)
Managed Money	773,681 (+36,290)	233,540 (-1,676)	3,834(+407)
Swap Dealers	773,681 (+36,290)	38,508 (+1,167)	151,550 (-2,740)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	151,727 (+7,778)	5,920 (+1,221)	69,466(+11,873)
Managed Money	151,727 (+7,778)	38,864 (+6,259)	27,314 (+3,826)
Swap Dealers	151,727 (+7,778)	64,562 (+2,481)	8,410 (+277)

Investor Sentiment Survey



Short Term (3 month) Sentiment
Bulls = 68.1% {55.3%}
Bears = 12.8% {26.3%}
Neutral = 19.1% {18.4%}
Average Prediction = 3.9% {1.1%}

Long Term (12 month) Sentiment
Bulls = 64.4% {57.9%}
Bears = 24.4% {26.3%}
Neutral = 11.1% {15.8%}
Average Prediction = 5.7% {3.8%}

Note: Values in Brackets are those from 4 weeks ago

COMMODITY CORNER
Long/Short Position of Traders

As on 9 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	186,560(+14,654)	12,042 (+1,364)	75,951(+2,540)
Managed Money	186,560(+14,654)	33,348 (-1,201)	1,291 (-82)
Swap Dealers	186,560(+14,654)	17,461 (-428)	18,690 (-1,231)

GOLD	All Open interest	Long Positions	Short Positions
Producer	737,391 (+50,108)	59,336(+59)	261,441 (+21,22)
Managed Money	737,391 (+50,108)	235,180 (-1,787)	3,427(-840)
Swap Dealers	737,391 (+50,108)	37,341 (+4,545)	154,291 (+5,807)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	143,949 (+3,030)	4,699 (+614)	69,466(+11,873)
Managed Money	143,949 (+3,030)	32,605 (-1)	23,488 (+2,950)
Swap Dealers	143,949 (+3,030)	62,081 (+465)	8,133 (-10,846)

Survey of Investor Sentiment

The results of the latest survey of investor sentiment published by Dogs of the Dow:

Note: Values in brackets {} are from 4 weeks ago.

Short Term (3 month) Sentiment
Bulls = 55.8% {64.5%}
Bears = 18.6% {16.1%}
Neutral = 25.6% {19.4%}
Average Prediction = 2.8% {4.0%}

Long Term (12 month) Sentiment
Bulls = 65.9% {80.6%}
Bears = 14.6% {9.7%}
Neutral = 19.5% {9.7%}
Average Prediction = 5.4% {12.7%}

A probable answer to the market rise riddle

Came across this interesting statistic on the web.

Some estimates (not sure about the source) claim that the wealthiest 1% of U.S. society holds 55% of all stocks. More importantly, it has been pointed out that Wall Street controls as much as 70% or more of all equity trading.

Probably a conspiracy theory but worth keeping in Mind.

COMMODITY CORNER
Long/Short Position of Traders

As on3 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	171,906(-37)	10,679 (+1108)	73,412(-1974)
Managed Money	171,906(-37)	34,549 (-4,000)	1,373 (+434)
Swap Dealers	171,906(-37)	17,889 (+562)	19,921 (-1,126)

GOLD	All Open interest	Long Positions	Short Positions
Producer	687,283 (+35,649)	59,276(+5,290)	259,318 (+9,360)
Managed Money	687,283 (+35,649)	236,967 (+15,057)	4,267(+2,269)
Swap Dealers	687,283 (+35,649)	32,796 (+879)	148,484 (+3,506)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	140,919 (+2,244)	4,085 (-267)	57,593(+1,745)
Managed Money	140,919 (+2,244)	32,606 (+861)	20,538 (+2,196)
Swap Dealers	140,919 (+2,244)	61,616 (-167)	18,979 (-747)

COMMODITIES - LONG/SHORT POSITION OF TRADERS

As on 27 October 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	171,943 (-7,389)	9,571 (+57)	75,386 (-280)
Managed Money	171,943 (-7,389)	38,548 (-4542)	940 (-20)
Swap Dealers	171,943 (-7,389)	17,326 (+655)	21,047 (-1,560)

GOLD	All Open interest	Long Positions	Short Positions
Producer	651,634 (-25,222)	53,986(-1747)	249,958 (14,543)
Managed Money	651,634 (-25,222)	221,910 (-18,882)	1,998 (-655)
Swap Dealers	651,634 (-25,222)	31,917 (+1,368)	144,977 (-5,149)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	138,675 (+5,215)	4,352 (+512)	55,849 (+6,475)
Managed Money	138,675 (+5,215)	31,745 (+4,546)	18,342 (-3482)
Swap Dealers	138,675 (+5,215)	61,783 (+1,108)	19,726 (+628)

Historical Statistics

Shareholders in India - 1981

The Stock Exchange Division of the Union Finance Ministry announced in 1981:

• The total number of shareholders in the country (in 1975) was two million (20 Lakhs). 
• This increased to 3.5 million as a result of FERA share issue. 
• In 1981 this figure remained constant. 
• The face value of FERA shares (including premium) was Rs. 58.39 Crores (or about Rs.5.839 billion), while the premium amounted to Rs.12.89 crores. 
• About 35-40 percent of the total shareholding was held by Public financial institutions. Among the Public financial institutions LIC held 10 percent (or Rs.375 crores), GIC Rs.70 Crores
• Until 1980, Hindustan Lever had the highest number of shareholders - 90,000 - followed by TISCO (70,000).
• In 1980 Ambalal Sarabhai Industries crossed Hindustan Lever when they issued shares to the public (which was oversubscribed by 3.5 times) and raised Rs.24 crores. The number of shareholders in the company reached 3.5 lakhs (a record in those days).
  

Source: The Financial Express, 8 July 1981.

A Peek Into History: 

Evolution of Indian Stock Markets

I came across some interesting articles on the evolution of the Indian stock markets. I complied the various interesting statistics and events. The compilation is mostly from old newspaper articles (sources provided as far as possible).

What is interesting to note is that in the recent years, the government seems to believe that the Indian stock markets are "safe" (As a disclaimer, we personally hold the view that speculation can never be safe). This seems to be the thinking after the introduction of dematerialisation of shares and "compulsory rolling settlement". The predominant concern during the period 1060-2002 seems to have been to bring about better compliance and make the system "safe".

On July 6, 1981, the Government of India announced that they they were introducing new norms for the stock exchanges.  These guidelines were aimed at checking irregularities in the functioning of the stock exchanges. They included:

• Tightening the present system of check on benami share transfers
• Computerise the operation of the stock exchanges
• Authorities should move quickly to impound the increase in share prices to curb speculation. 
• Fix a minimum scale of brokerage in order to further curb speculation.
• Prohibit the directors and senior officials of a company from handling the share books of a company once these books are closed. 
• The company management should pass on the information of issue of bonus shares immediately to the stock exchanges. 

The Government thought that they could broad base the equity markets by reducing the face value of shares from the existing Rs.100 per share to Rs.10 per share by 1983. Most of the companies were stated to be opposed to that measure and they were reported to be pressurising the government on that count.

It is pertinent to note that nowhere is there any mention to undertake measures to improve price discovery as well as to increase settle investor grievances.

Source: The Financial Express, 8 July 1981