Courtesy of Doug Short.
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There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Baltic Dry Index (EOD) INDX Chart Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying equities as it gets more desperate to spur its economy.
And as we all know, the U.S. economy contracted 2.9% in the first quarter of 2014. Another negative for the quarter ended June 30, 2014, and the U.S. will technically be back in a recession.
But for the stock market, it is a different story. The stock market doesn’t see the slowdown (in some cases, contraction) in the global economy.
“Buy now, buy more, or miss out” seems to be the only theme for stock market investors. In the second quarter of 2014, 88 companies were listed on the stock market, 42% higher compared to the same period a year ago and the highest since the third quarter of 2000.
The appetite for stocks is very strong. Companies that listed on the stock market were able to raise $22.6 billion in the first quarter. (Source: FactSet, July 3, 2014.) Investors are paying top dollars for the new issues…sometimes regardless of their ability to be profitable. Sound familiar?
Fear about stocks declining is almost non-existent. The chart below is of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) below. It sits at the lowest level since 2007—when key stock indices formed a top.
Volatility Index – New Methodology ChartChart courtesy of www.StockCharts.com
I continue with my belief that the stock market rally that started in 2009, aided by the Fed’s unprecedented money-printing program, has become a “sucker’s rally.” It seems investors have forgotten everything that happened just a few years ago, before the stock market crash. How clearer can the distorted picture of the global economy contracting while the stock market rises be?
This utopia will end on a very, very sad note. Throughout history, whenever investors became complacent and didn’t care about the fundamentals, it all fell apart. This time will be no different.
Originally posted at Profit Confidential
© Michael Lombardi, MBA
