Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

A Chilling Indicator of What’s Ahead for the Economy

Friday, August 17th, 2012
By for Profit Confidential

A Chilling Indicator of What’s Ahead for the EconomyEarlier this year, I introduced a popular key indicator—the Baltic Dry Index—that measures the shipping rates of transporting bulk dry commodities worldwide.

It is considered a key indicator because it gauges the demand of the basic raw material inputs that go into every factor of finished goods, building materials, and food.

This key indicator registers a high number when economies are strong because of strong demand for all commodities like zinc, iron ore, iron, steel, etc. In an economic slowdown, demand falls, and so do rates.

Due to the economic slowdown, in January of this year, this key indicator reached a 25-year low. Since then, the index has just continued to fall, and remains near its low. Since 2008, this key indictor has plunged 90%!

Here is the three-year chart, which is further evidence of a global economic slowdown:

 

bdi stock market ticker chart

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Chart courtesy of www.StockCharts.com

During the economic boom—back in 2006-2007—the orders were flooding into the shipbuilders for new container ships to pick up and deliver all of these raw materials. The premise was that the boom was only going to continue.

After the financial crisis of 2008, the orders for new containers could not be cancelled, resulting in a glut of ships sitting empty or delivering goods for literally pennies…sometimes at a loss.

One of the last remnants of Britain’s industrial revolution, Stephenson Clarke Shipping, just went bankrupt after almost 300 years in business. (Source: The Telegraph, August 13, 2012.)

The company stated that while it was able to weather previous economic slowdowns, it found this current economic slowdown to be one of the worst in its history and, as no rebound was foreseen for at least a year, there was no way it could continue operating.

Germany is home to roughly 40% of the world’s container shipping fleet. The financial crisis wiped out 100 German ship funds. Since then, the global economic slowdown has seen 70% of the remaining shipping fleet in financial distress, with 800 of them on the brink of bankruptcy!

The fleet was hoping for a pick-up in traffic from Asia, especially China, but, due to the global economic slowdown, this has not transpired. Container shipments throughout Europe continue to fall, while shippers remained hopeful that this region of the world would at least stabilize. But with the global economic slowdown, the continued fall in demand has been relentless. The fleet was also hoping for a pick-up in North America, but it seems it is not meant to be.

There are still many clinging to the notion that economic growth will accelerate in the second half of this year, dear reader, but according to the Baltic Dry Index—a key indicator—and comments from the shippers themselves, which is even a more reliable key indicator, we can expect more of the global economic slowdown instead, with the real possibility of a recession.

Michael’s Personal Notes:

I have written in these pages about declining corporate profits in the S&P 500 companies. That same decline is occurring with Chinese corporations, which is one of the main reasons why the Chinese economy’s main stock market, the Shanghai Composite Index, is down 17% from a year ago.

The world’s second-largest airline, Air China, warned that its corporate profits would decline by more than 50% this year. (Source: Forbes, August 5, 2012.)

At one time, it seemed every Chinese consumer was buying a cellular phone in the Chinese economy; but this year, two of China’s largest manufacturers of cellular equipment reported drops in corporate profits of over 12%!

More evidence that the Chinese consumer within the Chinese economy is not going to help global growth: China’s largest electronics retailer reported corporate profits that fell almost 30%. China’s second-largest appliance maker saw corporate profits fall by 30% due to slowing demand. In total, roughly 900 large firms within the Chinese economy are expecting lower corporate profits for 2012.

With lower corporate profits due to slowing global demand and slowing demand within the Chinese economy, capital spending by Chinese corporations is down 35% thus far in 2012 when compared to the same period last year. (Source: Wall Street Journal, August 14, 2012.)

This is why, despite The People’s Bank of China pumping 1.4 trillion yuan into the Chinese economy; bank lending continues to fall; corporations and consumers have no appetite to take on new loans. From June to July of this year, new loans fell 41%. (Source: Wall Street Journal, August 13, 2012.)

So while the above is clear evidence that the Chinese economy is slowing down quite dramatically, there is more evidence that money is flowing out of China.

The People’s Bank of China reported that investors and corporations in the Chinese economy are moving money out of China. In 2008, when the rest of the world was falling into recession, money poured into the Chinese economy. Now the money is flowing out.

As with declining corporate profits, this is a clear sign, dear reader, that investors and corporations are not only worried that the Chinese economy is going to slow down, but also that growth there could come crashing to a halt!

If the Chinese economy does crash to a halt, this will create reverberations around the world and will cause significant damage to the U.S. economy. Careful! While economists debate about the severity of the slowdown in the Chinese economy, corporate profits continue to fall and, more importantly, investors and Chinese corporations are choosing to send their money out of the country. Not a good sign at all.

Where the Market Stands; Where it’s Headed:

You are living through a turning point in the history of the stock market—a very exciting time for market lovers like me.

As we all know, after hitting a record Dow Jones Industrial Average high of 14,164 in October 2007, stocks went into a bear market and fell to 6,440 on March 9, 2009. Since then, the Dow Jones Industrial Average has rebounded (what I call a “sucker’s rally”), but has failed to break to new highs. (Yes, stocks are cheaper today than they were five years ago!)

On May 1, 2012, the Dow Jones Industrial Average hit a new post-2007 high of 13,338. In spite of the world economy moving into a recession, in spite of the weakest S&P 500 corporate revenue and earnings we have seen in three years, the stock market is now attempting to break to new highs. This may be the final blow off for the market rally I have been waiting for. Stay tuned!

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

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  • dave

    since we've gone off the Gold standard, our money is only as good as the paper that its printed on. why not just print more to pay it off our debt??

  • blindbear

    @Jessie: What's wrong with blaming Bush? The depression was his fault in 2008 and it's still his fault in 2012. Did you stop blaming Hitler for WWII after four years? "Oh, that's an old case. He's no longer guilty". What's this, a statute of limitations on causation?

  • Fritz S.

    We've got a submarining economy and Mitt's gonna save us from ourselves…I don't think so. It's not good.

  • Bobby

    “Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know.
    Why, its the age old thing. These people are going bankrupt, so they want to take as many others with them as they can.

  • Ron Edge

    I wonder how many of those bankrupted companies could have made enough profit on those "pennies" is they had been expropriated and reestablished as "Worker Owned" which would have saved 10,000's of jobs and saved the States Billions, maybe: certainly over 1B.

  • Keeg

    The mess the US is in is the result of inaciton on the part of us, the voters. Both the Democrats, and Republicans, never seem to understand the message we try to send them – enough is enough.

    Use your vote wisely and send our elected royalty a better message than what they think they here.

  • being human

    as the writer above said mitt is going to save us all. I can't wait! plus maybe he will talk my wife into letting me marry 4 or 5 more women. She said she needed a break. I can't figure any better way of giving her a break and getting me 4 more servants.

  • dave holmes

    What does this mean for the Panama Canal. Huge expansion has all Panamanians thinking it IS Panama!!

  • alowl

    Vote GOP. Debts only matter when there's a Dem in the White House. It took 25 years and a world war to recover from the last depression. Maybe it's time to resuffle the deck.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles