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Five Things You Need to Know: Factory Orders for Customers' Yachts Surge!; Baltic Dry Index Surges on Customers' Yacht Orders; The Other Side of Liquidity; Why the Russell 2000 is Worrisome; Individual Perspective on Socionomics

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What you need to know (and what it means)!

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Minyanville's daily Five Things You Need to Know to stay head of the pack on Wall Street:

1. Factory Orders for Customers' Yachts Surge!

U.S. March Factory Orders surged 3.1%, their biggest gain in a year, according to the Commerce Department. Yachts all around!

  • Most economists expected a 2.2% increase in Factory Orders.
  • Excluding transportation equipment, bookings rose 1.9% after coming in flat in February.
  • Meanwhile, orders for capital goods excluding aircraft and military equipment, increased 4.8% after February's decline of 2.4%.
  • The report shows increases month-over-month for Durable Goods ex-transportation and shipments of non-defense capital goods excluding aircraft as well.
  • So where are the customers' yachts?


2. Baltic Dry Index Surges on Customers' Yacht Orders

Ok, the Baltic Dry Index doesn't really have anything to do with yacht orders... much. But there's no doubt it's smoking. What gives?

  • First, what is the Baltic Dry Index?
  • The Baltic Dry Index is a number issued daily by the Baltic Exchange, a London-based organization whose members arrange for ocean transport of industrial bulk commodities from producers to end users.
  • Every day they survey brokers around the world to find out how much it costs to book cargoes of raw materials on a variety of shipping routes.
  • The answers are then reformulated as the Baltic Dry Index.
  • Now, why is the Baltic Dry Index considered important?
  • Well, first off, it's not a speculative index. In other words, no one is out there bidding up the Baltic Dry Index because they believe shipping costs will change in the future.
  • Instead, it tracks the actual cost of shipping raw materials by sea based on real cargo bookings and is therefore considered a pretty good indicator of global trade volumes.
  • For those without access to Bloomberg, the Web site Investment Tools.com has updated Baltic Dry Index data available.
  • Second, as Minyanville Professor Sally Limantour has explained on the Buzz & Banter, the Baltic Dry Index reflects global demand for "stuff."
  • Interestingly, an article in today's Financial Times notes that demand for stuff may not be the sole explanation for the surge in the Baltic Dry Index.
  • According to the FT, slow growth in the supply of bulk carriers to the market and underinvestment in port facilities is also fueling the rise in the shipping index.
  • "The lack of investment, not only in new bulk freighters, but also in the facilities to load and unload them has led to the recent highs in shipping rates," Steve Rodley, joint managing director of M2M told the newspaper.
  • Now, here's something to consider going forward:
    - The ISM yesterday noted higher prices paid for materials.
    - In addition to higher prices for raw materials, shipping rates are going up as apparently shippers are having little difficulty passing through their increased costs to buyers of raw materials.
    - Yet further down the line in the production process, sellers are having great difficulty passing through their increased costs to Mr. and Mrs. Jones.
  • Stay tuned, these ingredients are only now getting mixed together.
  • We'll see what comes out of the oven later this year.


3. The Other Side of Liquidity

Japan's April Monetary Base fell 12.2% year-on-year, according to preliminary figures from the Bank of Japan. This is how the deflation train looks when it emerges from the other side of the tunnel.

  • The monetary base in April fell 12.2 pct from a year before to 90.89 trln yen, down for the 14th straight month.
  • The monetary base includes all banknotes and coins in circulation plus all currency held as deposits by the Bank of Japan.
  • The monetary base began declining in March 2006 after the Bank of Japan announced a conclusion to its quantitative easing policy.
  • If you're felling somewhat enterprising, the link below will allow you to download the monetary base data in Excel format going back to 1970.
  • Japan Monetary Base long-term data.


4. Why the Russell 2000 is Worrisome

Year-to-date the Russell 2000 Index is trailing all the major indexes. Sure, it's still up 3.63% on the year, but the fact it is lagging through the first four months of 2007 may be indicative of more serious issues. Below we take a look at why this may be more than a "breather."

  • Between January 2000 and and January 2007 the Russell 2000 was up 56%.
  • Compare that to a loss of 3.475 for the S&P 500 capitalization-weighted index and a loss of 40.6% for the Nasdaq Composite.
  • Only the equal-weighted S&P 500 Index exceeded the performance of the Russell 2000, up 65% over that same period.
  • Now, however, there are signs of important technical deterioration in the Russell 2000.
  • First, according to data from Investors Intelligence, the Russell 2000 Bullish Percent remains negative after reversing down in March.
  • This is a pretty significant divergence from the positive action in the NYSE, Nasdaq-100 and S&P 500 bullish percents and means that, unlike those areas of the market, there has not been enough demand in Russell 2000 stocks to cause it to reverse up.
  • The index has now given a sell signal on a point and figure chart, the first of the major indices to do so, and today is rallying to resistance on the chart near 832.
  • Meanwhile, let's look at the chart of the RUT's relative strength versus the S&P 500.
  • This point and figure chart of the ratio shows the RUT ratio reversing down in March and threatening the multi-year trendline.
  • This correlates to RUT outperformance versus the S&P 500, a violation of the long-term trendline would suggest a very important change in leadership is taking place.

    RUT vs. SPX


5. Individual Perspective on Socionomics

Over at the Website Socionomics.net there's a fascinating three-part series on "An Individual Perspective on Socionomics."

  • What is "Socionomics"? Socionomics is the science of history and social prediction.
  • The basic tenets of Socionomics are as follows:
    1. Social mood trends are patterned according to the Wave Principle.
    2. Social mood governs the character of social events.
    3. Aggregate stock market prices provide the best available register of social mood trends.
    4. Trends in the character of social action and occasionally even specific social events are predictable in probabilistic terms.
  • It's an interesting field of social science no matter whether one believes in the "science" of Socionomics or not.
  • The series "An Individual Perspective on Socionomics" features a three-part discussion between Dan Gough and Alan Hall about how adopting a socionomic perspective can change the way an individual looks at the world and how those changes can be beneficial both personally and financially.
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No positions in stocks mentioned.

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