December 27, 2009

Dan Shy
dan.shy@davianletter.com Airelon's
Market Tactics
IN FOCUS: Looking ahead to 2010 …
Approaching 2010

Economic Outlook As I have mentioned before, I don't think there is any 'one way' to trade or
invest. Regardless ... one particular argument that usually arises about this
time of year is one that is similar to the “technical analysis versus fundamental
The Shipping Sector analysis” argument. The argument that I'm speaking of revolves around the
ideas as to whether the markets can be predicted, or should an investor and
trader react to changes that they observe within the markets. To make a long
Trading Environment story short and spare you a lot of unnecessary details … but I see myself as a
'reactive' investor and trader; although I personally believe that much of the
argument comes down to semantics. I say that, to say this … this is not going
Dividend Environment to be a “predictions for 2010” newsletter.
I do not believe any particular market can be 'predicted'
Performance Correction in the sense that absolute eventualities can be laid out. I
do believe an investor and trader can look for an 'edge'
or 'bias' can be applied to determining any particular
markets direction. But an edge or a bias is only that
points towards a probable indication. A bias or an edge
is not a 'definite' indication. As my long time followers
already know, my personal axiom is “None of us are
God, therefore none of us can predict the future ...”. Many know about the
edge and bias that I use when it comes to trading. Well … what about
economics? What is my 'edge' or 'bias' when it comes to an economic outlook?
Well, I think it means truly understanding with as much accuracy as is possible,
the 'road that we are already on today' economically speaking. Then we can
more clearly see the direction which we are already heading
So I approach the new year with that idea in mind. I'm not looking to predict
where the stock market is going, where the price of Gold is going, or even
where the economy is going to end up; as if I could
simply compute a few numbers together, and come
up with a target price for the Silver market in
December of 2010. Because we predict cannot
Nassim N. Taleb's “black swans”. Those events
which are truly random, and completely
unpredictable, and affect our conceptions regarding
the future. “Black Swans” indicate the need for
flexibility as we progress through 2010. We won't
know what “black swan” events occur within the upcoming year, until after
they arrive. So then … how do I approach 2010?

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 December 27, 2009

Well, as I've stated … when building an overall view of the year ahead, I want to know where we already are,
and then I try to keep an eye on a few key data points as indications as to where we are already heading, while
keeping in mind that I need to react quickly to any changes in those data points. What 'key data' points do I look
to for indications? Well, in addition to looking at things like the credit markets, equity prices and commodity
prices that I observe on a daily basis ... I also keep an eye on some key pieces of data that relate to the shipping
sector. I try to determine what sort of trading environment we are in, and finally … the sort of environment we
are in as regards dividends. I then begin to build my 'outlook' for the next 12 months. Some may see this as
'predictive', but I really don't. I believe that where we truly are today, will allow us to see how the road for the
next 12 months has already, partially been formed.
Economic Outlook for 2010
“Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never
does to anyone else“ - Lyndon B Johnson
It is often interesting how many times I hear people speak as if the economy can either go up, or go down. It's
either “in recovery” or “going to get worse”. As if the economy is an 'either / or' statement. This isn't too
surprising, as I sometimes hear the same thing when it comes to the capital markets. I have heard many aspiring
investors and traders say that the market can either go up, or go down.
Wrong. Any option traders out there are already with me..
Markets can also go sideways. As can the economy.
Personally I believe that is the 'economic road' on which we are currently traveling. Sideways … to bleeding.
Early in 2009, I stated that we were beginning down a road that would lead us to what I called “The Detroit
Scenario”1. In that entry I stated that we were in the midst of deflation in asset
prices (in early 2009, we were only beginning down that path), but the deflationary
trap had not yet sprung. At the current time, that economic deflationary trap has
already sprung. In short, this “Detroit Scenario” is a situation of modified
stagflation. The taxes are high, there is no sustainable economic growth, and the
resultant poverty level also chokes out the possibility for capital wealth creation;
because there is no healthy consumer base. Yes, the governments actions keep
everything from completely collapsing. But that does not mean that the economy
is actually improving. If your patient is on life support? That doesn't mean that
they are improving. It means they aren't dying. This … in essence … is what the
“Detroit Scenario” is all about. For instance, some could argue that Quantitative
Easing has kept the credit market from completely collapsing. But could an
argument be made that the credit market is actually improving? No, not really. Interest rates are cheap only
because of Quantitative Easing, and that means nothing in an economy with high unemployment. What do you
care about a great interest rate, if you're out of job?
Of course, due to the moves on the part of the Federal Reserve and
government, we are no longer seeing deflation in asset prices. But that
does not mean that we have crawled out of the economic deflationary
trap. Japans deflationary trap sprung more than a decade ago. And
Japan has seen brief periods of corrections and rising asset prices. But
Japan always returns to this the common denominator, which is the
economic trap with which it has become engaged. At the time of this
writing, they are once again marked within the mire of deflation in asset
prices. Because they refuse to accept that the deflationary trap is larger
than the deflation in asset prices. They treat the deflation in asset prices

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as if it is the primary disease. It's not. It's the symptom of the underlying economic trap.
This is why I call this scenario “The Detroit Scenario”. I've seen this situation play out on a smaller economy
time and time again in Detroit, Michigan. If deflation in asset prices is corrected? Then the unemployment rate
skyrockets due to the crushing tax burden that was meant to 'stimulate' the economy. Naturally, there is then
zero private sector growth. The government “helps out”, or more accurately, crowds out the private sector
through the increase in the tax rate, and poverty increases.
So for “the road that we are on today” economically? I see more of the same. I see a straight, unbending road
ahead of “the Detroit Scenario”. I see nothing that tells me that such a situation will resolve itself quickly, and
we'll see a repeat of the euphoria of the credit bubble years. Even beyond the obvious debt and deficit problems,
I will closely be observing, and would expect to see an increase in poverty levels which will place an immediate
drag on a full macroeconomic recovery.
So in the end? I'm not saying a recovery hasn't begun? But it will be a very, very long, hard fought road
upwards, and that for extended periods of time? It may seem like no progress is being made at all, due to the
poverty levels, and crowding out of the private sector. That's the 'economic' road, as I see it existing in the here
and now, for 2010.
The Shipping Sector
One particular sector that I am somewhat familiar with, and keep track of
when examining the overall economy ... is that of shipping. One of the
reasons that I enjoy following the shipping sector, is not only is it a great
economic tool, but I also because I am a commodity futures trader. Shipping
companies ship not only bulk consumer goods, but … commodities!
Now a question I receive from time to time, is if I trade equities at all, or if I
only trade commodity futures? Well, I do occasionally trade equities, but only
those areas that I am comfortable with. As this is one of those few sectors in
which I am familiar with the fundamentals? This is an equity sector that from
time to time, you will see me trade. However, it should be noted early on, that keeping close track of the
shipping sector does not mean that you have a quick pulse on the strength and heartbeat of the entire economy.
It's more like the diastolic. For instance, a substantial drive to increase the efficiency of industry can lessen the
demand for oil, which would affect the shipping of oil, which in turn would affect the entire shipping sector.
That is only one reason why you cannot consider the entire macroeconomic picture, as dependent on shipping.
But I do think there are some interesting facts to glean from an examination of the shipping sector. It is a sector
that is notoriously volatile. The first thing I look towards, is the Baltic Dry Shipping index. First, I need to say
that this index does not show how much cargo is being shipped worldwide. I find a lot of people looking at this
index, and thinking: “Gee! Shipping of Cargo is back up to where it
was in 2002!”. That's not the case whatsoever. Neither is this a
market that you can trade or speculate in.
To put it as simply as possible, the Baltic Dry Index is an Index that
best measures the demand for shipping (how many vessels can ship,
as opposed to how many vessels are needed), adjusted for the
fluctuations in the value of the U.S. Dollar; in raw materials. It is a
measurement of what is real, and the demand in U.S. Dollars, for real
goods being shipped worldwide with available ships. If we look at
this first chart of the Baltic Dry Index, (As displayed at
Baltic Dry Index – 2009 (Bloomberg)
bloomberg.com) we see that the demand for the entire year has
increased. But let's keep this picture in context.

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If we look to a chart of the Baltic Dry Index for the for the last three years we quickly find that that the index is
in a range far below where we've been for years, and the peak of near 4660 of 2009 is still below our low of
2008. We haven't seen this weak of demand for nearly 5 years.
Thus, the demand is still very soft. The main problem here is
that the tonnage that is available, the 'supply' of ships, is so far in
excess of demand. That gives me some picture of the outlook
overall for the shipping sector. But to be fair? The shipping
sector is famous for it's volatility.
So let's next turn and focus on a particular, specific aspect of the
shipping sector. For example, we can begin to examine the
market for actually shipping of oil. Companies that own or
manage the ships, that ship oil all over the world. Companies
like Frontline Ltd. (FRO), General Maritime (GMR) and even
discovery companies that are involved in shipping, such as Baltic Dry Index – 3 Year (Bloomberg)
Shipping Finance Ltd. (SFL). These companies have been
building their shipping fleets for the last three years, and this fact
was oft discussed in shareholder calls. This led to the problem that we noted above, of weak demand. There's
simply too much tonnage out there, for what's needed.
When we focus our attention towards the oil shipping fleets in particular, it is important to note that there is a
“spot” market, for the lease rate on ships, in dollars per day, to be 'hired on the spot'. Thus ... the 'spot rate'.
Tracking this 'spot rate' gives you some indication as to the demand that shipping companies can charge for
moving oil around the world, as well as part of the revenue
for shipping, and shipping management companies (Please
note there is a difference between a shipping company, and a
shipping management company; such as Frontline Ltd).
Unfortunately, as the chart provided by INTERTANKO points
out? Since May 10th, the spot rate (blue line) for VLCC (Very
Large Crude Carrier) ships in the least two years has virtually
collapsed. This 'spot rate' is one of the 'revenue' life blood for
these companies. At the time of this writing, VLCC's are only
gathering $41,435.00 per day. Suezmax's are only collecting
$27,348 per day. This is also critical, because the shippers,
during good times, are famous for liberally sharing their
profits with shareholders in the form of dividends. There were many quarters throughout 2005, 2006, where I
received $1.50 to $3.50 per share, per quarter from Frontline Ltd. (FRO) alone.
When we look at the income statements, of say a company like
Frontline Ltd (FRO), we see shrinking profit margins. The total debt
for companies that are involved in shipping is higher that most other
industries, so don't be too alarmed if you decide to review the financials
of these companies yourself. But what I'm really worried about with
these companies is the weak macroeconomic outlook, combined with
their high debt, and their weaker cash flow from operating cash flow,
especially in 2009.
Overall, it does not paint a pretty picture. For many years, many long
term followers know that I was almost “flagrantly” bullish about the
shipping sector.

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That is no longer the case.

If you're an investor, and you're long this sector, you may want to either grab profits, or you may wish to protect
your position by properly weighting, timing and planning for a hedging with put options. Of course, that's just
my opinion, nothing more. But I really can't see any aspect of the “road into 2010” in the shipping sector, that
paints a pretty picture. In fact, it dovetails nicely with the weak to flat economic picture that I talked about
earlier.
Trading Environment
In 2004 and 2005, I was primarily involved with investing, rather than trading. I have often described those
years, as a time in which 60% of my efforts were dedicated towards investing. In 2007, I began to peel away
from investing, take profits, and to protect and defend my investment portfolios; while simotaneously increasing
my trading activities. By 2009, I would estimate that 98% of my efforts were dedicated to trading, and I would
only take small nibbles into the world of dividend investing.
As I have already stated, at the present time I cannot see any quarter from which to expect “macroeconomic
wealth creation”. It's not that there aren't sectors that won't do well. If we're just speaking in the realm of
personal opinion, without a lot of 'metric data' behind my statements? I think the technology sector is one that
will perform better than most. But when I speak of “macroeconomic wealth creation”? I'm talking about a
great, economic recovery. Without that wealth creation, I will continue to focus on trading for 2010, as I have
for 2009. For the majority of the time, I plan on approaching 2010 as a trader.
The Dividend Environment
First of all, I would like to state that I see nothing on this 'road through 2010' that changes my previous
statements in this newsletter regards to dividend stocks. In fact, it reinforces my previous statements. In brief,
I'm looking for companies that are survivors. Companies that are cash heavy, and pay a regular dividend that
can be reinvested towards more shares, or that participate in a Dividend ReInvestment Plan (DRIP). I'm looking
for companies that sell things that everyone not only buys, but will no doubt continue to buy. Big macs. Coca-
Cola's. Shampoo. Toothpaste. Remember, however, that not all companies engage in DRIP, neither do all
brokers participate in such plans.
Now … as the end of this decade draws to a close, I have heard some pundits state that the first ten years of the
21st century was a 'bust' and a 'total washout' for investors. I would like to take a bit of space here, to talk about
that idea.
As I see it, nothing could be farther from the truth, and there
is still a lot to do as a dividend, DRIP investor. And I intend
to prove that. The first decade was not a wash out for
investors, as long as those investors were looking for
companies that paid a dividend, and companies that allowed
those dividends to be reinvested in their company.
I'm going to use some charts and calculations from a site
called Drip calculator.2 The calculations assume you
contribute $100 per month to a dividend stock, that engages
in DRIP, and assumes that the DRIP was applied the entire
time. Let's first take a stock I used to be bullish on, and was
bullish on for much of this decade. Frontline Ltd. (FRO)
Does that look like a “lost decade to you”? By investing only
$100 a month, beginning on January 1st, 2001 through December 27th, 2009, you'd have a total of $59,800.70;
although you only contributed invested dollars of about $10,000.00. And that result is the result of strict dollar

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cost averaging. In other words, buying in when the stock is doing well, as well as poor. I try to infer bias when I
average into a dividend stock. In other words, I wasn't a buyer of FRO when it was at $62.00. I bought FRO
only when it was at $42.00 and under; which would give us an even better result.
What about a stock with a less “sexy” dividend? After all, Frontline Ltd (FRO) is a shipper, and the shippers
were notorious for very large dividends. What about a “survivor” such as Johnson and Johnson (JNJ) or Coca-
Cola (KO)?

Not as stellar results as FRO perhaps. But hardly 'a wash' when you also consider that you have increased the
number shares in ownership in public companies of the stature of Coca-Cola (KO) and Johnson and Johnson
(JNJ); and that at any time, the DRIP plan can be switched off, and you can receive straight quarterly cash
dividends on those accumulated shares. And once again, those are results that are gained by strict dollar cost
averaging (which increases your cost basis when you are buying the stock near market highs), which I do not do.
Also, at no point did the investor experience any significant drawdown when the stocks sunk in value. In fact,
for dividend investors the events of 2008 was a mere blip. That is yet another benefit to being a dividend / DRIP
investor.
Let's take a look at a couple of other dividend stocks. Such as McDonalds (MCD) or General Mills (GIS).

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So as we move into the next decade, as we move into 2010? I don't see the last one as a “wash” for investors.
And it also illustrates why I am still a dividend, DRIP investor. I may not be an active investor. But I am an
investor nonetheless.
Money Management: Trading Sister - Correction
Before I conclude I wanted to make one correction from last weeks newsletter. Last week, I posted the
performance numbers for the “Trading Sister” since launch. Unfortunately, a few of the drawdown numbers got
mixed around. I had listed my largest intra-trade drawdown
as $68.32. That number actually was my average
drawdown. Not the intra-trade drawdown. My largest intra-
trade drawdown was $147.00. Performance Analysis
Therefore I'd like to take this opportunity to present the Airelon's Market Tactics Since Launch
corrected money management performance statistics as they
Total Trades: 19
existed from 2009; in the box at the right. This should
Largest Intra-Trade Drawdown: $147.00
make the risk reward ratio make a bit more sense, with the
Consecutive Losing Trades: 2
corrected numbers.
Average Drawdown: $68.32
And that will do it for this weeks newsletter. The next issue Average Loss: $98.60
will be released near or about January 3, 2010. Therefore, I Accuracy Rate: 73.68%
plan to have some thoughts and 'trading plans of action' for Average Reward: $221.58
the markets. Until that time, if you have any questions, or Risk: Reward Ratio: 1 Risk to 1.8 Reward
any other comments, please feel free to contact me at
dan.shy@davianletter.com Until next week, stay safe …
trade well, and remember that loving other people doesn't
cost a dime.
Note: The above should not be construed as an investment or trading recommendation. Airelon's Market Tactics is a newsletter that
allows subscribers to look 'over my shoulder' as it were, for my own personal specific trading and investing ideas for the next week. Any
trades or investments that I discuss within this newsletter are simply my own thoughts regarding my own investing and trading.
Remember, entering any market is an individual decision. I personally only enter any market after watching and reading the tape and I
trade using money management principles 3 The losses in trading can be very real, and depending on the investment vehicle and market,
can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have over 13 years of
experience in trading and investing in these markets. The Model Portfolio accounts are hypothetical accounts, with all of the inherent
problems therein, simply to attempt to track the results of this newsletter, and is run for the education of other traders who should make
their own decisions based off their own research, due diligence, and tolerance for risk.
Footnotes:
1 – Exact Link - http://investorandtrader.blogspot.com/2009/02/invest-and-save-detroit-scenario.html
2 – Exact Link - http://www.dripcalculator.com/
3 – Exact Link - http://www.youtube.com/view_play_list?p=D41865A5A41F4283