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Let’s Revisit the Baltic Dry Index

Posted by Larry Doyle on April 2, 2009 10:52 PM |

***Editor’s note: the Baltic Dry Index does not get much attention in the news. This piece has been bumped up from its initial publication at 9:01 a.m.

I have not looked at this shipping index in a while. Is the rally in equities forecasting a pickup in shipping and thus an increase in the Baltic Dry Index? The WSJ sheds light on this critically important index:

baltic-dry-indexOne number to watch today is the behavior of the Baltic Dry Index, a measure of the cost of shipping raw materials around the globe. It’s a volatile measure, but can be a useful signal of shifting trends in global demand. The index collapsed last year, starting in May, foreshadowing the worsening recession.

Some economists have pointed to it recently as a sign that the worst of the recession might be over. The index nearly tripled between the beginning of the year and March 10. But the green shoot is wilting. It’s been down for 16 straight trading sessions, by 31% in all. A drop today would make 17 straight, and could take wind out of the sails of the small recovery crowd on Wall Street. In all, the index is down 87% from its May 20 high.

I find it very interesting that the index is down 31% over the last few weeks, while the equity market is up 20+% in the same time frame. Granted the BDI had tripled during the first few months of 2009, but do not forget that it had declined close to 95% from last May. I view a tripling of the BDI in the same context as an analyst indicating Citigroup’s stock is up 150% from $1.00!! Congratulations!!

If global economic conditions were stabilizing without necessarily improving, I would think the BDI would also be stabilizing. The fact that it is declining at this juncture concerns me.

Many market analysts and political pundits effectively tell us in true Wizard of Oz fashion to “disregard that man behind the curtain.” In navigating the economic landscape, and trying to get to the Emerald City, let’s keep our eye on all the indices.

LD

  • fiscalliberal

    Larry – this is in line with the information I gave you regarding the copper processing industry who has zero orders this week.

    While the equities market likes to consider itself the leading indicator, it is realy things like the Baltic and orders from leading industries that will identify sustainable market activity. So it might be just as valid to track basic metals such as copper, aluminum, steel etc to wait for the upswing.

    It might be that we should bestow the image of fantacy on the equity markets. It certainly is not fundamentals. The accounting rule changes might create a bit of burst, but these are just not sustainable. I think the other factor that has to be watched is how well Geitners plan for private/government investment works. That will take about 6 months. Might just as well plan some time at the beach before things turn around

  • bonddadddy

    when looking at BDI , one has to keep in mind ‘the law of numbers’ . The BDI hit 11,791 last summer ….. now its 1,500 . Talking about 5-10% moves higher ( as we saw in February of 2009 ) being meaningful are a joke when done off 1,500 considering where we were not long ago . I saw same lunacy in 2000-2001 when certain Dot Bomb stocks formerly at $100 that went to $1 and sideways awhile . Then it would jump to $2 and i’d see headlines about 100% spikes and how all was great . Tell it to the folks long at $100 .

  • Larry Doyle

    Beach? I like how that sounds.

    In regard to Secretary Geithner’s PPIP, this relaxation in the mark to market will severely hinder it. If you want to know what one of the most highly respected fund manager’s in the business has to say about PPIP after a thorough review, check out:

    No Private Hedge

    Not exactly a ringing endorsement or vote of confidence…

    Your point of reference about the copper is in sync with the BDI. Thanks again for sharing that.

  • TeakWoodKite

    LD, sorry for the off topic Question but what does “single name risk?

    As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks – effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities – run a chart from say last September to current of say S&P 500 and Itraxx – credit has underperformed massively. This is largely due to AIG-FP unwinds

    Just started House of Cards. a roach motel indeed.

  • TeakWoodKite

    What does it mean. thanks.

  • Larry Doyle

    Teak…good question. Single name risk means protection (the effective insurance provided by the CDS, credit default swap) was written on an individual name, say Bank of America, as opposed to protection on an entire index or industry group.

    • TeakWoodKite

      Many Thanks.

  • McLovin

    Larry,
    The fact that the BDI has been declining lately (while the major indices soared) has had me scratching my head as well. Do you have any thoughts about the recent price movements in copper? They say that the red metal is the only commodity with a PhD in economics…but I’m still skeptical, given all the other shoes that could still potentially drop in the near term.

    P.S. Just discovered your site today. Interesting reading…I’ll be checking back regularly to hear your take on things.

  • Larry Doyle

    McLovin…

    I am guesstimating that the recent price action on a number of fronts represents more technical moves (corrections of overbought or oversold conditions ) than real changes in fundamentals. Why is gold down when copper is up? Why are emerging market stocks up when the BDI is declining?

    When things are not making consistent sense, then it typically strikes me as short term traders unwinding positions than long term investors entering new positions.

    Glad you found Sense on Cents. Please visit and comment often.






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