Bits and bobs

Tough week - just when you think you have things figured out you get worked over....

Before I get into my post this week I have to post something from Paul Theron over at South African asset management firm Vestact which I thought rang so true:

Deadly financial plan

FINANCIAL planning is deadly boring. What is worse, most of the assumptions are wild guesses, like the rate of inflation, your date of death and returns on equities.

Blogger Carl Richards suggests that it might be better to forget all the thumb sucking and just focus on some of the things we can control, and then hope for the best.

So how’s this for a financial plan. (1) Save as much as you reasonably can; (2) Don’t lose money through risky or stupid investments; (3) Draw down no more than 4%-6% of your assets each year once you retire.

There you go, all sorted.

...... And here we monkeys are trying to time or beat the market with our "systems" and analysis!

Sometimes I think keeping it all nice and simple beats this whole trading lark ... and then I get it right and I feel like a genius for a couple of hours!

Things that occur to me:
I do remain bearish on some aspects of the global economy but there is some genuinely positive data coming through:

• Sometimes we traders get nailed by short-term "noise" that we don't look at what is right in front of us. I took a look at these charts which plotted the Baltic Dry Index (BDI) against Gold, Oil etc etc and it makes for interesting reading - underlying shipping rates are on the up (solidly)
• These string of natural disasters intrigue me and I am surprised they have been given so little coverage by the financial media. There is likely to be a lot of government sponsored re-building which will need to take place here in the coming months. Would be interesting to know how this will impact supply and demand of commodities
• I still think there is tension with Iran and I don't see the oil price going South any time soon except perhaps against a rebound in the dollar (see below)
• While I have been shouted down on it by certain people - I still believe that Pakistan is a far bigger economic and security threat to the world than people are giving it credit for. For crying in a bucket they stormed a millitary base and held soldiers captive in one of the countries which has active nuclear armaments!
• I see Jim Rogers is calling Gold to $2300 over the next decade and oild somewhere between $150 - $200 as well but sounds like a lot of noise and very unspecific.
  

Trades I like:

• I am still long Sasol (probably short-term target of R310). The Rand to Dollar exchange rate has played havoc with this trade but it seems to have ground itself higher, despite the currency. Still think there is a bit more legs to this trade
• I get the sense that we might be about to see the dollar do a short-term bounce (which might tie give a boost to SOL). Yes it has been sold down hard but at some stage but when something is completely out of favour, it suddenly surprises. It is also still a "hard" currency and with many export dependant economies needing a strong dollar exchange rate, it might not be a bad idea to look at the USD recovering in the short-term
• I have put on some SMALL and TENTATIVE shorts on Gold as well on the back of a dollar revival
  
• The 10000 point Dow must be on the cards for this week

Transportation indexes

It is not rocket science to work out that the ‘financial’ crisis has now spread to becoming a global economic crisis that has threatened thousands of jobs and businesses.

This is the problem that is facing stock pickers at the moment – if the problem was limited to a bit of a bit of ‘shock and awe’ as the markets tumbled, then you could feel pretty confident going in and buying some shares at what look like low price to earnings ratios and then sit back waiting for a rebound.

But what if the problem is deeper? What if all these people who are losing their jobs as the stock market shock starts to wear off?

Every time somebody loses their job, it is one more person that does not have a means to pay off any accumulated debt – be it cars, houses, credit cards or other personal debt. What looks like a good price to earnings ratio in 2008 would certainly not be applicable if clients have begun hauling in their spending and hoarding their cash going into 2009.

The reality is that economic activity has fallen off a cliff and nobody really has any idea when it is going to get restarted again.

Looking at a couple of trading boards, an interesting theory has been put forward – tracking the transportation and logistics indexes as a proxy for economic activity.

I thought I would start with the Baltic Dry Index because A) It has been in the news quite a lot recently and B) Being a Grindrod shareholder I’ve heard a lot about it in recent months:

Baltic Dry Index:
In a nutshell, the Baltic Dry Index (BDI) helps ascertain global freight rates based on demand for commodities, how much fleet supply is available to meet the demand and market sentiment for the global shipping industry.

Wikipedia simplifies it saying: “Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g. 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo)”

Local shipping company Grindrod has seen its share price absolutely decimated in recent months as many investors have tried to correlate that performance of the BDI with the anticipated earnings for the shipper.

While this isn’t exactly the case, you can see how much emphasis big firms have placed on using the BDI to track overall market sentiment.

Looking at the graph, you will see some correlation between the two.



Dow Jones Transportation Average
The Dow Jones Transportation Average (DJTA) is the oldest US index. The index includes 20 companies involved in the railroad, shipping, airline and trucking industries.

You can find the constituents here - http://www.djindexes.com/

Below I’ve printed out a graph for the last three years.

What I found interesting was that despite many consumers (retail, commercial and industrial) having slammed on breaks in the last few months, there seems to be a bit of sideways movements in both these indexes, which may indicate that a more ‘real’ level of economic activity has been found.

I am a big believer that historical data doesn’t necessarily point to what is going to happen going forward, but I think building in tools like this to review the ‘bigger picture’ might be very useful in making some investment decisions.

Anyone else using these tools or done any back-testing on this data?