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 Published Monday, February 23, 2009
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Some reasons for market optimism
by Stephen Butler
I would hate to be branded as yet another economic Pollyanna, but I am excited about some of the good things I see out there in the wilderness.
For example, my analytical friend, Mike Ridenhour, always ahead of the curve, sent me a titillating blurb about the rise of the Baltic Dry Index a few weeks ago. The what? I'm sure you've never heard of it either, but it doesn't matter. What does matter is that the BDI is something that has doubled in value from its low point a few months ago. And, any indicator going up in these troubled times is a good thing.
The Baltic Dry Index is a measure of the cost of shipping raw materials like iron and cement. t has been around since 1744 and is considered to be one of the most tamper-proof barometers of world commerce. The supply of cargo ships is reasonably inelastic. This means that when demand for shipping heats up, the price for shipping goods goes up. Why? It takes too long to fabricate new ships to increase the supply of shipping. With static supply and increased demand, the only thing that can give is price.
A rising price of world raw materials shipping means that more products are going to be manufactured in the near future. If you look at graphs that show the BDI compared to world economic output, this index is a convincing forward indicator.
Right now, it is headed straight up. And, unlike job statistics or other economic data that can be massaged and manipulated, the BDI is an actual price that can be monitored in real time.
Some consider it to be the only indicator worth tracking.
Check it out at www.investmentu.com.
Meanwhile, the market may continue to disappoint, but at least it's operating in a more predictable way.
Last year's surprise market collapse took no prisoners.
It dragged all types of funds right over a cliff. Even bonds were not spared.
The deluge was caused by stricken, hopelessly-leveraged financial institutions having to sell the family farm. Stocks. Bonds. Everything must go!
Now, by comparison, there are some types of funds that are starting to break out of the pack and excel against overwhelming odds. Technology funds have gained 2 percent this year while the rest of the market has lost about 10 percent.
Health funds are up 3 percent. The last time I looked, Vanguard's REIT Index fund was up 17 percent. This is as it should be.
In every normal stock market crash, there are at least some winners. In 2000-2002, it was the small cap value fund category that starting racking up 20 percent annual gains while the rest of the market swooned.
Meanwhile, while even bond funds cratered last year, companies with stellar credit can receive loan proceeds through newly rejuvenated bond markets. Things must be loosening up if I have just refinanced my house with little fanfare at a historically low fixed rate.
What I'm beginning to see is the possibility that the economy will work its way around those "too-big-to-fail" carcasses in the center of the banking industry and find other ways to finance the bulk of our borrowing needs. We can start with the 8,000 regional banks that are, for the most part, solvent and that stand to benefit from a lack of big-bank competition.
Talented rainmakers will leave larger banks bringing customers with them. They'll arrive at smaller banks where they can see what it's like to make a difference.
This is not 1982 or anything like the Great Depression. There is no inflation to speak of today.
Moreover, I would say the bottom has arrived in housing when people are paying cash for 20 houses at a clip and renting them out at competitive rates. Young first-time buyers are jumping at the best housing opportunity of the past 15 years.
It's true that unemployment has been rising, but most people still have jobs, and most companies are still making lots of money. And let's not forget China. They are growing by "only" 10 percent, and the Shanghai index is up 31 percent so far this year. Are we peering into the abyss? Give me a break.
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