Signs of Recovery? Hints and Clues

Trying to find the End of the Rainbow. Where is that Pot of Gold?!?

The market has been quiet for the past few months despite horrible data originating from all corners of the world. We have US falling into deflation for the first time in 50 years. We have Japan falling into serious recession not seen since end of the world war. We have Europe and UK admitting their fallacy of not acting faster during 2008 and believe that the economy is plunging into deep recession. Governments around the world try to get their act together to stimulate the economy out of the recession. Despite all the Doom and Gloom, there is a ray of light around the corner.

The Things to Look Out for: Baltic Dry Index (BDI)

The Baltic Dry Index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers dry bulk carriers carrying a range of commodities including coal, iron ore and grain." Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. Other leading economic indicators — which serve as the foundation of important political and economic decisions - are often massaged to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth.

The BDI during May 2008 marks the peak of the commodity markets and the start of the slow down of world economic growth, along with one of the most dramatic market crash to occur in Oct 08. The maritime industry is hurt badly by the sudden fall in shipping rates. One interesting thing to note, the rates has jumped in the past few weeks. Industrial metals such as copper and iron has seen an improvement in prices. Precious metals is also one of the best performing sectors in the market in 2009. All this ties down to one thing: Factories are taking orders again and growth is starting to kick back in. February definitely is an improvement compared to the bleak months from Nov to Jan.

Best Sectors of 2009 - And the Strategy

The best sectors so far belongs to the commodities - precious metals category. Another gleaming beacon is the China market which has been up 20% so far this year. BRIC funds also performed relatively well. The worst performers are the real estate and financial funds. Based on the current situation, it seems that commodities and BRIC funds will be the first beneficiary of the recovery. Extremely undervalued property and finance will probably take a while longer to recover compared to the rest. However, their recovery will be steep and powerful. A portfolio made up of commodities, BRIC and a good 20-30% of the portfolio in financial will be well positioned to take on the recovery. Now that there are hints of recovery, the pace of moving from defensive cash and bonds has to be hastened. The general market will probably trend down and hit new lows before any recovery takes place. However the world is not as gloomy as it is 2 months ago as a few beam of sunlight penetrate the darkness globally.