Transports Leading Indicator
Research for Online Investors

by John Dalt

8/22/11

Two news items are influencing the market today.  Libya and the eurozone.  The rebels in Libya captured one of Muammar Al Qaddafi’s sons Sunday and he is on the run.  Rumors are circulating that he may have fled to Algeria.  Rebels now hold much of Tripoli and claim to have captured his other two sons today.  Qaddafi appeared on television Sunday and claimed he was in Tripoli and would “stay until the end.”  It may be closer than many thought a few days ago.

The apparent success of rebel forces brings hope to world markets that Libyan crude will soon begin shipping.  Italy’s Eni oil company representatives arrived in the country to look at facilities for a planned restart of exports.  Italy was one Libya’s largest customers.  Their refineries are not able to crack the heavier oil from other Middle East countries.  Libyan crude is light and sweet.  Reuters reports that Mustafa Abdel Jalil is head of the National Transition Council (NTC).  Jalil said the NTC would favor exports to those countries that supported the rebellion.

Brent crude oil prices have fallen, while West Texas Intermediate (WTI) is rising.  The two prices are closing the gap in their pricing.  Europe’s price for crude may fall some on the news, but it will take time to understand how long it will take before oil starts flowing out of Libya again.  WTI pricing is being influenced by a tropical storm in the Atlantic that looks to hit the East Coast of the U.S. from Florida to North Carolina later this week.  Tropical storm Irene was upgraded to a category 3 hurricane this morning.

The eurozone credit crisis continues to cause concern for investors.  The news last week that a eurozone bank had to borrow $500 billion dollars for thirty days from the ECB has planted a seed that credit markets may freeze up in Europe like they did in the U.S. after the Lehman Brothers collapse in 2008.  CNN interviewed Patrick Bolton, professor of finance at Colombia University.  Mr. Bolton said, “The mechanism and the players are different but there’s a very similar dynamic to what we saw in 2008.”

Eurozone bank share prices were beat down last week.  This combined with the need by one of the banks to borrow on an emergency basis erodes confidence in the sector.  The London Interbank Lending Rate (LIBOR) has ticked higher.  One of the dangers in the present crisis is the exposure banks have to sovereign debt.  There is political pressure to buy the bank’s resident country’s bonds.  The government also holds the cards to supply rescue funds to the banks that play along with buying their bonds.

Unlike in 2008 the haircuts banks are taking on sovereign debt are known.  In 2008, the mortgage backed securities (MBS) that caused the credit crisis fell in value to pennies on the dollar.  Eurozone haircuts are a known quantity.  Bonds are renewed at a lower interest rate and the maturity date is extended.  The haircut may only be a 30% loss rather than 90% when banks were trying to mark MBS to market in 2008.

The market was oversold and a bounce was expected today.  The market doesn’t look good.  We have tested support in the lower 1100’s on the S&P 500 twice in the last two weeks.  The S&P printed 1101 on 8/9 before reversing for a big rally higher on the day.  The market may try to trade in a tight range this week waiting on Bernanke’s speech on Friday at Jackson Hole.  Hope springs eternal that Bernanke will offer some form of QE3.  This is a dangerous waiting game.  A third test of 1101 to 1120 may not give us the bounce many expect.

After the Philadelphia Manufacturing Index plummeted last week, the market is concerned about economic growth in the U.S. Transportation stocks are seen as a predictor of future economic growth.  The Dow Transportation Index has broken through support.  Check this daily, the symbol is ^DJT or $TRAN (depending on your program).  Think of the Transport index as a halter on a horse (the horse is the general market).  Where the jockey leads the horse, the horse will follow!

The transports are bouncing today.  I have drawn a horizontal line of support at 4050.  If transports cannot hold this line, the market could set new lows in a dramatic fashion.  Notice also the “Death Cross” that occurred last Thursday.  A Death Cross is when the 50-day moving average moves below the 200-day moving average.  Watch your stops.

Mailbag:

Here is a billboard on along I-70 (close to Ft. Riley).  Your readers may enjoy.---subscriber D.H.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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