A little bit on Baltic Dry Index

My friend just called "Why are you so sure that this current rebound in commodity is different. Just look at the chart, there were rebounds in August, September, October and November, the current December rebound is still moved within the down trend channel, no breakout, why can't it moves south in January 2009 ?" To answer him I have to talk a little bit on Baltic Dry Index (BDI). What is this BDI ? BDI issued daily by the London based Baltic Exchange is a daily averages of prices to ship raw materials. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. It measures the demand to move raw materials and the supply of ships available to move the materials. BDI offers a realtime glimpse at global raw material demand. Unlike stock and commodity markets, BDI is totally devoid of speculative players as trading is strictly limited only to the member companies of Baltic Exchange that have actual cargo to move and that have the actual ships to move the cargo.

Look at the two charts I copied from Bloomberg. The top CRB commodity chart and the bottom BDI chart. The peak for BDI at 11,600 was in June and the peak for CRB at +30 was in July, CRB is lagging behind BDI by one month. By July the transportation rate as measured by BDI has dropped from 11,600 to 9,000 (22% drop) when commodity was at the peak and was projected to go higher. BDI can be treated as a lead indicator for economy. By early November, that was two months ago, BDI was at 790 (from 11,600), it has dropped 93%!!! But since then it has dropped only 2% from 790 to 774 before Christmas. From the chart, it was a sideway movement since November (2 months) whereas CRB (the green line) from November at -25 has continued to drop until early December to -42. Similar to the peak, CRB bottom (if it is a bottom) was lagging behind that of BDI by a month. In the last two months BDI was holding very well indicating that supply and demand of ships is almost balanced. At this point please remember one thing, the supply of cargo ship is generally very tight and inelastic. It takes 2 to 3 years to build a ship. A marginal increase in demand can push up the index very quickly, that is why it is a very good lead indicator. It is likely that BDI will move up one month ahead of CRB. Tomorrow if I have time and not lerthargic, I will try to put up a review for 2008. Happy New Year, wishing all of you a 888 2009.

Looking for Confirmation

Wow, look at the low on 24/12/08, it is slightly above the low on 5/12/08. In the last few days, I really kept my fingers crossed. I still believe the first low is the bottom of the commodity down trend. After retest the low and if it can go above -35, the commodity is going to run again, so do the Dow and the bond yield. I am looking at Dow to reach 12,000 within 6 to 8 months. As they run, I still have to monitor whether this is going to be a sucker wave. I always remember Murphy's Law " If anything can go wrong, it will". The main problem is that you do not know when. Merry Christmas and Happy New Year to all of you.

Look at this latest chart from Bloomberg.com, CRB (green line) has reached -40 a few days ago and if the current down does not go below -40, most likely -40 is the current bottom, commodities should move up from here to just below 0 for a 50% rebound over the next 8 to 12 months. If commodities can move up, it means economy has reach a temporary bottom(or ultimate bottom ?), it also means stock should be moving up.

US 4-week Treasure Bill at -0.01%

Believe it or not, US 4-week Treasure Bill dropped to 0% on 10th December 2008 and on 11th December recorded a Negative 0.01%. Investment Fund is willing to buy the 4-week bill and lose 0.01% of the fund immediately. If this is not a bubble, what can it be. I still remember in 1996 when KLSE was at its peak, there was no stock below Rm 2.00, and some investor bought Rm 1.00 face value Non-convertible Redeemable Loan Stock at Rm 1.20. As an amateur technician in stock investment, I don't really understand the implication of this bubble. My observation is, in the past whenever the funds switched out of stock, they moved into bond, that is why whenever Dow goes down, bond price goes up and bond yield goes down. Based on the same logic, does it means that if the fund switches out of treasury bills, it will move into the stock ? Lately the Dow is quite well behaved technically. Refer to the chart above from Yahoo, if it drops to 8300 early next week and then moves up strongly with high volume exceeding 8 billion, chances is very very high that the 7,392.27 intraday low on 21st November 2008 is the end of wave A (that dropped from 14,279.96 on 11th October 2007 to 7,392.27 on 21st November 2008. 48% drop in 13 months). Assuming 50% up for Wave B, it should move from 7,392.27 to 11,100 by October 2009. I hope it can be confirmed by end of next week.

A little bit worried about the US Treasury Bill

We have seen how US investment fund rushed into US property market, rushed into stock market and commodity market. All the three have burst. Now we are seeing a rush of fund into US Treasury bills. The short term 4-week bill has dropped from 3.08% in January 2008 to 1.95% in June, 1.63% in September and on 4/12/08 it touched 0.01%. 13-week bills have dropped in a similar way from 3.26% in January to last week low of 0.02%. The belief is "US Government will not default." To push the rate down to o.o1% indicates a mad rush into Treasury Bills, the safest asset. It appears to me that this is another bubble. What will happen if due to some reason, a panic stampede to get out of treasury bills takes place ??? September 2008 record shows that at the top three places, China is holding US$585 billion, Japan is holding US$573 billion and UK is holding US$338 billion with the rest of the world holding US$1.702 trillion giving a total of US$2.86 trillion. The top three is holding 52% of the total treasury bills issued until September 2008. I can't think of any reason why these three counties should unload their holding indiscriminately. No danger in the near future.

A little bit on KLCI

Thanks to asiachart.com, they produce very good charts. Both the charts shown above are produced by asiachart.com. The top chart is KLCI weekly and the bottom chart is KLCI Daily. Refer to the daily chart, KLCI after setting a peak of 1516 on 11/1/08, it has been moving downwards untill today with only one major rebound from begining of March to middle of May. The current downtrend is near completion. If the 3 waves down so far is wave ABC and if we have seen the worst of Dow, from the weekly chart, we are going to have another bull run. However, if the financial packages and interest rate cut by all the major countries do not reverse the direction of the world economy, and the whole world is heading towards a great depression, looking at KLCI weekly chart, the peak of 1516 is actually a major wave B with A at 262 on 1/9/1998 and the current downtrend is a major wave C heading south towards 262. This is possible but at this moment I would say unlikely. The next rebound is crucial, if the next rebound is of the same magnitude as the rebound in March-May, then there is a possibility that the down wave from 1516 so far is not ABC but 123 with the coming rebound as wave 4 follows by a sharp wave 5 that plunges together with the rest of the world.

Why keep on talking about Dow and not KL Composite Index

To find the entry point in stock investment , I always make sure the Dow has bottomed or is about to have a substantial rebound. Why Dow ? Because the whole world is following Dow in general. When Dow plunged, European market, Tokyo, Hong Kong, Singapore...... all followed. When Dow runs, the world may or may not follow depending on individual economy and political situation, but at least no danger. So, make sure Dow is right first, then only make sure CI is right, then only see which sector is right and which counter to buy. To sell is easier, when Dow is not right irrespective of our market's direction, sell. But for small fish, no hurry, a few lots only, enjoy the last ride before we get out. I love this photo from toursaver.com. I will try to fish for my pot of GOLD.

Dow going for Diagonal 5th Wave?

When Dow moves above the downward trend line on 28th November, it failed to pull away, it is a false breakout. The current wave is likely to be wave 3 of 5. If so, it will most likely stop at around 7300 follows by wave 4 of 5 rebound to the upper trend line again before ending the wave 5 lower at 7000. But if the current wave break through the lower tend line, it will come down very fast, under this circumstances, Wave 5 is no more a diagonal formation. If the current wave is able to hold above the last low, the last low is still the end of wave A and we are still at the starting of the 10 to 12 months uptrend Wave B.