Frank Barbera: Stage Is Set For Disappointment Of Most Epic Sort

Posted the other day: If The Economic Recover Is Real...

On today's financialsense market wrap, market commentator, Frank Barbera, talks about the same issue: Market Messages from the Outer Fringe

• As the bullish headlines continue to sway the masses that hope springs eternal, and that global economic recovery lies directly ahead, the outlook in our view for 2010 remains highly uncertain. In the weeks and months ahead, while it will be key to track a number of tried and true leading economic indicators, we also like to look below the surface as some of the lesser follow economically sensitive gauges. Call them - indicators of the outer fringe. In this case, one of our favorite fringe ‘battlefield’ type gauges is the shipping rate or shipping rate indices put out by the famous Baltic Exchange. These various indices measure the day rates for various types and sizes of merchant shipping. There is an aggregate index known as the Baltic Freight Index, which encompasses a number of sub-indices including day rates for dry goods, and a variety of energy related components which track tankers and of different shapes and sizes. The key point here is very simple, when the global economy is genuinely improving, these day rates tend to trend higher, and to that end, guess what is not happening in recent weeks? In the charts below, we take a look at the trend of the Baltic Dry Index, and some of the energy related, crude oil shipping rates. Get the idea, that things are not trending up? ..........
  
  In our view, this means there is still a lot more proof that needs to be seen coming from the market, --- from the frontlines of global business, where goods are bought and shipped, before we can take solace that a genuine recovery is taking hold. For now, the lackluster behavior in these fringe economic indices is strong evidence that a divergence of substance is present, and while this could end up improving as the year wears on, for now, the trends appear to be on the downside. According to a recent study by the National Bank of Greece, “it is highly unlikely that demand from China will be as strong as it was in the first half of the year.” The report goes on to say that, any pick up in demand should global economies begin to recover is expected to be moderate. National Bank of Greece estimated that it will take another two years before demand for dry bulk cargoes will stabilize, and the same applies for the tanker market as well, while the fact that a large number of newbuildings will hit the market, is expected to make matters in the freight market even worse.
  
  In our view, if it should turn out that next year is not the recovery of substance that so many now expect, the stage will be set for disappointment of the most epic sort. Psychologically speaking, if the herd is heading for another episode of fear and disappointment, the potential ramifications will be felt along a very wide fault line as bullish expectations have been riding very high over the last few weeks.
  
  Take a look at the action in some of the high beta ‘discretionary’ spending stocks. During last year’s contraction, where the ‘high-end’ sphere of ultra-wealthy was only dinged by the major contraction. ---Yes, high end home prices began to decline, but only sold off to a much smaller degree then the middle and low end range for homes where sub-prime mortgages dominated and laid waste to the economic landscape. While it is true that capital market portfolios (equity market declines) hurt those on the high-end, to a very large degree their financial staying power was much greater then that of Joe Six Pack, who saw the plunge in 401K values hit much closer to the financial core. This year, 2009- has been a different story, as high end home values are now falling at a much faster pace, with the lower and middle range of home prices heavily bombed out, and beginning a sort of begrudging plateau. The outlook for 2010 is not rosy, as the number of prime mortgage foreclosures and REO’s is rising steadily. This is the ‘high end’ taking its turn as feeling the recession bite.
  
  In our view, real change is always seen at the periphery, often in the underlying message of obscure markets like the Shipping rates, or perhaps to cite another example, in the value of Gaming shares. In the Gaming shares, we have an entire fringe sector that is absolutely manically leveraged to debt and debt dependent to the extreme. They now reside in the giant hangover of the Great Las Vegas/Macau building/development booms of the last decade. “Take two aspirin and call me in the morning”, is not likely to be any kind of quick fix as this industry is in desperate need of a genuine recovery. Yet, at the heart of a recovery that leads people into the gambling dens of Vegas and Macau, there needs to be a sustained asset re-inflation. To this end, the Gaming stocks are on the far end of the high dive board acting like happy days are here again.. In our view, one small misstep and its off the plank and into the drink, snake eyes for the gaming group. Consequently, we like to watch the price action of the GST Gaming Index, which includes a wide variety of usual suspects such as Bally Tech, IGT, Penn National, Las Vegas Sands, MGM, Wynn and others. So far, what we see is a five wave bull market that ended at the peak in October 2007 (at 87.09), followed by a five wave collapse into the March 2009 lows at 9.44, a heart stopping decline of 89.16%. Since those lows, the index has been fueled by the herd mentality of eternal hope, (ed. right along with other heavily marginal sectors such as Housing and REITS) soaring by a stunning 224.8% in just the last 6 months. Now annualized that!
  
  Here’s the real point. Typical bear market rallies, however powerful, very often retrace about 50% to 61% of the prior decline. In the case of the GST Unweighted Gaming Index, the striking rally of the last few months has led the index back up to a virtual bulls-eye on the 50% bear market retracement mark. This is going to be very telling as to which direction the next 10% to 15% move happens to be. If a real recovery lies dead ahead in 2010, then the heavily leveraged gaming issues should soon be latching onto the pungent aroma of fresh dollar bills heading for the crap tables and the slots. If on the other hand, the outcome for 2010 turns out to be the stench of a double dip contraction, well, then in that case, the Gaming Stocks are likely to start under performing the S&P. That means a declining relative strength ratio in the weeks ahead, and lots of divergence with the S&P...