Global Markets Driving the Dow

This is the most cogent argument for what has been a key supporting element to the US markets: Overseas economic strength. Even as the US decelerates, the overseas strength, driven primarily by China, but with growth in Japan and the rest of the Pacific Rim, as well as Europe, is maintaining the global boom.

We have discussed over the past few Qs exporters, who can sell into those markets, and take advantage of the weak US currency. That continues to be the greatest market strength out there — not so much their consumers, but their massive infrastructure development. And, as strong as the US markets appear, they continue to lag most world markets.

Barron’s Mike Santoli sums it up nicely:

Fast-galloping overseas economies, flush world capital markets and a
sagging dollar fatten multinationals’ earnings and furnish the fuel for
commodity-related stocks to surge.

That’s the takeaway from the earnings beats by Caterpillar (CAT) and Honeywell (HON) last week, the 22% jump in the Philadelphia Steel Producers index since March 5, the continued outperformance of foreign stock indexes, the seven-month high in copper and the run toward $700 an ounce in gold.

As a result, materials stocks are the new momentum
favorites, and more broadly, traditionally cyclical sectors are being
treated and valued as perpetual-growth vehicles — a process even
extending to sectors like railroads and utilities, now considered
implicit plays on the commodity-demand boom."

That makes a ton of sense to me . . .


The Fido Shuffle   
Michael Santoli
Barron’s April 23, 2007

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  1. spencer commented on Apr 21

    It would make sense to me also if I saw capacity utilization and backlogs growing in these industries. But both remain weak in basic metals and steel although they are strong for aluminum. Moreover, the I/S ratio for primary metals is also rising. Finally, metals stocks at the London Metals Exchange are rising. All these variables typically lead spot market prices. But now we are seeing prices rise while these traditional leading-concurrent indicators are weakening.

    Something does not add up.

    I suspect it is hot money driving up spot prices in a final speculative binge.

  2. V L commented on Apr 21

    There is a tremendous explosion of global construction. Building infrastructure and construction are booming in Asia, Latin America, and Eastern Europe. You need a lot of steel to build new skyscrapers, bridges, factories, railroads, highways, etc…
    In addition, there is a shortage of shipping containers and tankers (all made out of steel)
    I see steel sector going much higher from here – it is a global growth story play. (Steel Sector trailing P/E is only 10 and forward P/E is only 7).

    Disclaimer: I am long Steel Sector.

  3. Don commented on Apr 21

    the stock markets of the world are going to new highs and if we
    get a close where we are now on the Dow Industrials and the Dow Transports,
    we’ve got something approaching another Dow Theory buy signal. And NASDAQ
    is about to touch a new high. This is a very impressive performance here,
    but it’s just mimicking what’s happening across the world.

    So the idea of a rise in long-term interest rates and a rise in inflation is
    not something that’s certainly concerning the stock markets of the world at
    the moment. And that, I think will become a source of concern later, but at
    the moment, what stock markets are saying notwithstanding the tightness of
    central banks for the last two years and notwithstanding the sell-off we had
    in stock markets earlier in the week because China announced it was going to
    do something to try to rein in its 11.1% growth rate. It didn’t take long
    before people assumed that the game is still on for the global economy.

    What’s interesting is that there’s no evidence out here at the moment that
    the US stock market is wasting much time worrying about what it was so
    worried about in February and early March, namely the subprime loans.
    However all the work that I’ve been doing since then about the state of the
    subprime market indicates that we are a long way away from reaching bottom
    in that area and that the housing sector of the US is going to be having its
    problems for quite a while to come.

  4. Incognitus commented on Apr 21

    Steel will blow up horrendously, you will have stocks trading at 1/2 or less of their present quotes in the not so distant future.

    China, the LARGEST steel producer by (VERY) far, is increasing prodution at a stupid pace, and went from being a net importer of the stuff to a net exporter.

    Meanwhile, the worldwide housing bubble is fast decaying.

    It’s a matter of time before this all destroys western steelmaker’s margins. At the top, the steel companies will seem “cheap”, much like homebuilders seemed “cheap” during 2005, with PE’s below 10.

  5. Incognitus commented on Apr 21

    “what stock markets are saying notwithstanding the tightness of
    central banks”

    You must be joking, right? eheh. 5.25%, 3.75%, 0.50%, what tightness?

  6. Mr. Beach commented on Apr 21

    This ought to suggest where the growth in Chinese shares is coming from. From today’s Barrons:

    “The Financial Times reports that Chinese retail investors opened more than a million stock-trading accounts last week, or 10-million-plus over the past four months, greater than the previous four years combined. “It’s great to be a broker,” boasted one, eagerly anticipating his bonus.”

  7. Incognitus commented on Apr 21

    “However all the work that I’ve been doing since then about the state of the
    subprime market indicates that we are a long way away from reaching bottom
    in that area and that the housing sector of the US is going to be having its
    problems for quite a while to come.”

    The problem isn’t really the debt people can’t pay (that’s peanuts, whether it is $100bn or $200bn).

    The problem will be the debt people won’t borrow. That can easily be $1 trillion. Right now the $10-$13 trillion economy (I say 10-13 trillion because a lot of what goes into GDP in the US really doesn’t exist, like the value of free checking accounts, or the owner’s imputed rent) needs more than $2 trillion of NEW debt per year to keep growing. Every time debt growth falls below 5% (of the outstanding debt) or so the US goes into recession (wanna know why? Because that’s close to the growth needed to SERVICE the existing debt), so if debt growth slows from the 2 trillion to, like, $1 trillion, it gets UGLY even with what is STILL incredible debt creation.

  8. yc32 commented on Apr 21

    The evidence has been there for a while. Ecomonies in Germany, UK, Australia, China, India etc have been strong despite worries in US. If you actuall go to China and India, you will see the unprecedented consumer demand in new cars, houses, furnitures, cell phones, tvs, etc. Even 5 years ago, the demand was not one third of what is now. Put into context, this will be an unprecedented global economic expansion for many years to come, and a global bull market for commodity and emerging markets. with superior technologies and a great capital market, US will take full advantage. US stock market will do well too, although not as well as emerging markets. When was last time two billion people are drastically improving their productivity and living standards in a relative short period of time?
    Everyone is so fixed about commodity price as indicative of inflation, and not many talk about the real demand from two countries of 1 billion people acturally driving commodity price (not excess liquidity).

  9. Incognitus commented on Apr 21

    “Everyone is so fixed about commodity price as indicative of inflation, and not many talk about the real demand from two countries of 1 billion people acturally driving commodity price (not excess liquidity).”

    Not excess liquidity? With, like, 4-5-6 trillion dollars PER YEAR of new debt around the world?

    The only thing driving the asset craziness around the world is debt creation everywhere.

    Granted, in the Far East some of that debt creation is feeding production. But everywhere else it’s just feeding leveraged asset inflation (be it homes, stocks, bonds, commodities, whatever).

    Economic growth is good but does not necessarily deliver higher asset prices, much less for EVERY asset in every market.

  10. Eclectic commented on Apr 21

    Global economies driving the Dow?

    …yes, but it’s still the American economy that’s a primary driver of the global Cap-Ex that is itself the instrument of deflation of the earning power of the American worker and his Western Economy counterpart.

    Just the other day I identified this as being the very real and focused dilemma of the Fed, and readers of Eclectic understand the case I have made that labor is the core of all monetary exchange, fiat exchange or real exchange, and that wealth occurs at the source of labor’s exchange. No labor exchange… no wealth. Labor is leaving the U.S. and thus also the U.S. economy’s source of wealth is leaving.

    I also likened the U.S. to a city in which its inhabitants had either no jobs or limited jobs and yet they were spending down their sources of capital (equity or credit) in an attempt to preserve a standard of living that world-wide demographics will continuously deplete for probably another generation, more or less. And when debt in an economy is 136% of GDP (was that the figure?), it only reinforces my metaphor.

    Now, let’s face it… we are very nearer to a point in which world-wide economic health will not be so dependent on the U.S. economy. But, as of this moment in time, it still is.

    If there’d been no housing boom in the U.S. the last few years, global Cap-Ex would have been dramatically smaller. So, even as Don Luskin was on Kudlow and should feel rightfully entitled to congratulations for being right, to date, he’s accurately raised the issue of housing still being the “wild card.”

    Supply-siders will attribute supply-side economic theory to China’s economic success. Nonsense… China’s economic boom is a response to U.S. demand, not their own. Otherwise, China’s economy would crash… and may yet if the U.S. economy weakens enough to reveal the imbalances in China’s production capacity build-out.

    The American economic revolution and the aggregate demand that it produced grew out of personal and economic freedom, and they don’t yet exist in China, except in enclaves where China benefits from allowing those freedoms for a limited “elite” to help serve its own interests in maintaining political control via economic prosperity.

    The wide disparity of economic prospects between the westernized enclaves in Communist China and the great bulk of its population are far more likely to result in political upheaval in China than the same divergence would in the U.S. Reason?… Because economic disparity is ordinarily tolerable to a greater extent than political freedom. If you don’t believe it, then go to any economically deprived region of the U.S. and try to take away their political freedom.

    In any event of political upheaval, China would revert to the only political solution it knows… hard line totalitarianism… and that may be a picture more in tune with the reversion that seems to be taking place in Russia.

  11. Eric commented on Apr 21

    Everyone is so fixed about commodity price as indicative of inflation…

    Rising commodity prices do not “indicate” inflation, they are synonymous with it–the definition of inflation is rising prices.

    …and not many talk about the real demand from two countries of 1 billion people acturally driving commodity price (not excess liquidity).

    By definition, “demand” consists of two things: 1) the desire to buy something and 2) the ability to pay for it. We may as well assume part 1 to be a given, that is, people in China and India want to be like Americans and have four cars, three houses, etc. But that isn’t enough to create demand. They need money to pay for that! Where does the money come from? That’s where part 2, liquidity, comes in.

  12. Eclectic commented on Apr 21

    Let me [correct myself].

    “Because economic disparity is ordinarily tolerable to a greater extent than [the loss of] political freedom.”

  13. V L commented on Apr 21

    “Steel will blow up horrendously, you will have stocks trading at 1/2 or less”


    Yes, it will “blow up” eventually, but not anytime soon — most likely after the Olympics China 2008.

    Again, capacity additions in China, India, Brazil, and even Russia are concerning and eventually they will catch up with the whopping demand, but it will be a more gradual process rather than an overnight event.

    I have been in this sector since 2005 and I plan to ride it until maybe a middle of 2008.
    I think there is more money to be made there. We will see…

  14. V L commented on Apr 21


    Do you remember the old apology: “Sorry I wrote a ten-page letter, I didn’t have time to write two”?

    It crosses my mind while reading your posts, not that there is anything wrong with it, on the contrarily I enjoy reading them. It is just a thought.

  15. Winston Munn commented on Apr 21

    First,what do you do when U.S. consumer is spent and cannot sustain his pace? I guess you could try the effect of keeping interest rates low, thereby enouraging a continued decline in the value of the dollar, which would then encourage foreign tourism, and hope that their spending takes up the slack.

    Second, how can producers of steel in the U.S. compete on the global stage? This past December had what could be a major shock to U.S. steel manufacturers:
    “U.S. Regulators Revoke Steel Tariffs
    Associated Press Writer
    December 14, 2006, 6:35 PM EST

    WASHINGTON — Trade regulators on Thursday revoked most of the 13-year-old tariffs and duties against imports of a high-grade steel used in cars, giving U.S. and Japanese automakers a holiday surprise.

    The vote by the International Trade Commission covers all tariffs and subsidy-countering duties against carbon steel plate from 16 countries.

    U.S. steelmakers said the tariffs helped prevent the kind of dumping of low-priced and subsidized imports that almost destroyed the domestic industry in the 1990s”

    And also this quote from a Russ Winter posting at

    “The steel market really isn’t all that strong as only 34% of the buyers polled plan to increase their bookings through April—while 16% plan to less buying and 50% plan to book only what they bought last month. Most steel buyers at original equipment manufacturers (OEMs) say their steel inventories remain in oversupply and they will be reducing stocks over the next six months. Sixty-five percent of the buyers polled by the Institute of Steel Management in February thought their steel inventories were too high for demand and 66% surveyed by Purchasing Magazine in March said the same.”

    I wonder if the higher steel stock prices aren’t anticipation of more foreign purchases as occured with Oregon Steel or simply a result of their comparatively low P/E ratios.

    Just 4 years ago in May, U.S. Steel was trading below $12 and Allegheny Tech was below $4, and now both trade above $100. Has demand risen that much
    in 4 years?

  16. Businomics Blog commented on Apr 21

    Behind the Stock Market

    I’ve been ho-humming while everyone else is swooning. Yes, the market is up. Gee, though, this doesn’t feel like a boom to me. The market is up 15 percent from a year ago, which is very nice, and above average.

  17. V L commented on Apr 21

    Only four companies have reported so far (more will report this week), here are the headlines from last week (it is self-explanatory):

    Nucor profit rises on steel prices

    Reliance Steel 1Q profit surges

    Reliance Steel sees higher 2Q profit

    Steel Dynamics Reports Strong Sales and Earnings for First Quarter

    AK Steel’s 2006 Stock Performance Termed ‘Stellar’ by Fortune Magazine

    IPSCO Inc. Confirms Buyout Talks

    Russia’s Evraz steelmaker in talks to buy Canada’s IPSCO

    Schnitzer Steel sees robust 3Q

    Schnitzer Steel 2Q profit up 35 percent

  18. lurker commented on Apr 21

    Ignore Munn at your peril.

  19. Eclectic commented on Apr 21


    If I told you how many private emails I get from Big Picture Girls and Big Picture Boys regarding my writing… you wouldn’t believe it.

    Why… I think I’m up to maybe even 6 or 7 (or more… I’ve actually lost count) from one particularly sweet Big Pic savage, and a few from some other Bigs who are Bigs in their own rights.

    I enjoy your comments. Thank you for the compliment in that you enjoy my writing. And, damn well you should!

    Not only is it usually cutting wit, but it’s also macroeconomic theory you’ve never read elsewhere… and for good reason, because it doesn’t exist elsewhere, and it’ll be in the history books one day and you can say you read it here first.

    Sorry, but I can’t disappoint my readers.

    All in fun, V.L., all in fun.

  20. m3 commented on Apr 21

    Just 4 years ago in May, U.S. Steel was trading below $12 and Allegheny Tech was below $4, and now both trade above $100. Has demand risen that much in 4 years?

    no, but remember their P/E multiples were in the low single digits, or negative, at the market bottom in 2003.

    ATI went from that level to a multiple of 21 today. and it’s still trading at it’s growth rate, meaning it may still have some upside…

    so you’re right, demand probably hasn’t risen *that* much, but a seven-fold multiple expansion doesn’t hurt either.

    remember, stock prices don’t necessarily correlate with steel demand.

  21. ac commented on Apr 21

    What hasn’t been said yet, but will be: Chinease officials would love for the US to go into recession. That would slow their economy down and eliminate the balances. I am surprised this hasn’t been mentioned more.

  22. Winston Munn commented on Apr 21

    I would like to point out that I am neither a financial professional nor economist – but simply a personal trader who tries almost daily to improve his understanding of finance and economics.

    As to the issue of steel, once again I read something that captured my attention since not long ago Mr.R. posted on Gold versus the Dow. The following information came from Richard Daughty’s article at:

    “In a similar vein, the success of stock markets is just a matter of what unit of value you use to measure it. Our mistake was in using dollars, when we should have used, according to Mike Maloney of, gold, as ‘It took almost 45 ounces of gold to buy 1 share of the Dow in 1999. Today it takes less than 19. Today, if you sold 1 share of the Dow, the proceeds would only buy you 19 ounces of real money. So measured in real money, the Dow has crashed 58%.'”

    Very curious. Has gold decreased in value 58% while the stock market has increased?
    Not according to exchanges of harder assets than equities.

    Gold in 1999 averaged around $290 an ounce, while gasoline cost averaged around $121.5 per gallon. An ounce of gold was equal to 238 gallons of gas. Friday, gold was at $695 an ounce, and gasolone prices are around $3.00 a gallon – an ounce of gold today buys 231 gallons of gas. Certainly no 58% loss – and could be even closer due to my not averaging all daily prices – kind of like +/- 10%, making the difference statistically meaningless.

    If you accept Mike Maloney’s figure of a 58% decline versus gold, then in gold dollars, U.S. steel closed last at $44.89, a far cry from the $106.88 the ticker shows.

    But here is the kicker – if you had bought 1 share of U.S. Steel at its low in 1999 of $23.19 and sold it last Friday at $106.88 you would have realized a 460.8% return. Oh, really? In 1999, the $23.19 would have purchased 19.1 gallons of gas. The $106.88 you received from your sale would have bought 35.6 gallons of gas, an increase of only 87%. And that is before broker’s commissions and long term capital gains taxes are applied.

    As Peanuts creator Charles Schultz had Linus say after watching his sand castle built on the beach wash away by the incoming tide. “There’s a lesson to be learned here somewhere, but I’m not exactly sure what it is.”

  23. Elaine Meinel Supkis commented on Apr 21

    I read Chinese news as well as having connections with the Chinese in Beijing and Shanghai going back to when Madame Mao ran the joint.

    The news out of the Forbidden City is stark: Hu and Wen have decided this Friday to “To prevent fixed assets investment from rebounding, stricter market access and environmental standards should be set for new construction projects and land use should continue to be tightened.

    Facing excess liquidity, China should curb the excessive supply of money and credit, strengthen supervision of cross-border flows of short-term capital and improve foreign currency management.”

    This spells doom for us, you know.

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