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HomeBaltic Dry Index Submerges
Posted by Larry Doyle on July 7th, 2010 12:39 PM |
What happens when consumer demand drops off a cliff as it has over the last quarter? Shipments of goods and raw materials will likely follow. How are those shipments measured? Let’s check in on trends and developments within the Baltic Dry Index.
The Financial Times highlights the fact that the BDI is submerging precipitously and writes today:
…worrying signals about the global recovery remained. The Baltic Dry Index, a gauge of dry bulk commodity shipping costs seen by many as a leading indicator for growth, fell for a 29th successive session to its lowest level for more than a year.
Here is a chart of the BDI relative to gold over the last 18 months:
That recent submersion of the BDI is clearly sending a strong signal as to the grinding halt of the global economy.
Can you spell disinflation if not outright deflation? Start with BDI and go from there. In fact, given these developments in the BDI, I would expect that gold may have further downside from current levels.
LD
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November 14, 2009: Month to Date Market Review
Posted by Larry Doyle on November 14th, 2009 7:32 AM |
Do as I say, not as I do. Why? What do I mean?
The markets in general and equities in particular were once again supported by talk rather than actual economic actions. Who was talking? What were they saying? Very simply, communication from G-20 ministers last weekend indicated strong support for ongoing fiscal stimulus. That talk drove the equity markets 2% higher on Monday of this week. On the heels of that, during the midweek we experienced Fed-speak once again indicating a strong likelihood of keeping rates at very low levels for an extended period. Markets immediately reacted by once again ratcheting higher. 
I have never been fully inspired by talkers versus doers, but these are unique times . . . so let’s collectively navigate the economic landscape. If you have any questions, please do not hesitate to ask.
ECONOMIC DATA
Economic reports and developments are carrying less and less weight currently. Why? Fed policies are not going to change. That comfort level has solidified the case for those who have sold and continue to sell the U.S. dollar short and use the proceeds to buy risk-based assets, primarily equities. That said, I am compelled to report significant data as I view my mission in helping people navigate the economic landscape, not strictly trade the markets.
Of note this week, the Federal Housing Administration is likely in need of an imminent bailout from Uncle Sam as defaults on FHA-insured loans show no signs of diminishing. This potential bailout has been discounted by FHA officials ad nauseam. They have no credibility.
The University of Michigan Survey of Consumer Confidence plummeted to a level of 66% from 70. Consensus opinion had this survey bouncing back toward 72%. With no legitimate bounce or improvement in the housing or labor markets, I do not know why the survey would improve.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis: (more…)
October 24, 2009: Month to Date Market Review
Posted by Larry Doyle on October 24th, 2009 7:32 AM |
Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.
ECONOMIC DATA
I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.
Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
U.S. DOLLAR
$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%
Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.
I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”
COMMODITIES
Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%
Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.
I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate. (more…)
October 10, 2009: Month to Date Market Review
Posted by Larry Doyle on October 10th, 2009 10:12 AM |
We are reaching a point in our new “Uncle Sam” economy where rhetoric from Wall Street, Washington, and global financial centers seems to be having greater impact than true market and economic fundamentals. Why? Our financial and political ‘wizards’ are working overtime to reconnect the great ‘disconnect’ between Wall Street and Main Street. While we receive glimmers of hope in certain economic statistics, the dark clouds in employment and housing remain daunting.
Are the ‘Washington wizards’ (Bernanke, Geithner, Summers) providing hints of support for our greenback while truly hoping for a manageable decline? I believe they are, and I believe this financial engineering is a very dangerous game.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Non-manufacturing Institute of Supply Management: this report rose above 50 (an indication of growth) with a positive development in new orders (this is clearly good), but with no signs of improvement in employment and pricing power by manufacturers.
> Redbook: indications of slight improvement in same store sales although next week’s Retail Sales report will likely look exceptionally weak as it incorporates an end to the ‘Cash for Clunkers’ program. Overall signs point to what is expected to be a weak holiday retail season.
> Jobless Claims: overall claims declined, which presents a sign of stability within employment. That said, it is hard to be optimistic on the employment front on the heels of the employment report released on October 2nd (embedded within the Equity section of this commentary).
> Trade Deficit: this deficit surprisingly narrowed, with a slight increase in exports combined with a slight decrease in imports. All other things being equal, this report would be positive for our dollar but the noise surrounding our currency is overwhelming the focus within this one month reading.
I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
How did the markets handle the Fed-speak, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
U.S. DOLLAR
$/Yen: 89.78 vs. 89.68
Euro/Dollar: 1.4709 vs. 1.4635
U.S. Dollar Index: 76.35 vs. 76.72
Commentary: the overall U.S. Dollar Index has declined by approximately .5% this month, but the volatility and focus on movements in this space have been tremendous. Precipitated by an increase in rates by the Australian Central Bank midweek, the U.S. Dollar Index plunged below 76 which represents multi-year lows. The dollar weakness led to a move higher in global equities as traders, investors, and speculators were emboldened to enter into more ‘positive dollar carry trades.’
While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments. Adding further fuel to dollar weakness was speculation that the trading of oil and a basket of other commodities, which are currently transacted in U.S. dollars, would shift trading away from being dollar-based. On that note, let’s review the action in commodities.
COMMODITIES
Oil: $72.29/barrel vs. $70.39
Gold: $1050.1/oz. vs. $1008.2 !!!! THE BIG WINNER !!!!
DJ-UBS Commodity Index: 129.177 vs. 127.683
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index has moved higher by approximately 1.2% on the month, but the movements within specific commodities is gaining the real focus. Gold specifically has soared by over 4% this month. Why? Market speculation about a potential further slide in the greenback would be inflationary. Oil and other commodities also benefited from the story I referenced above. The conundrum I find in this space revolves around overall levels of international trade. Are these commodities moving higher truly because of an increase in demand or merely because of speculative investing and trading? Where do we go to get a pulse on that? The Baltic Dry Index. How is our friendly indicator of global shipping activity doing?
The Baltic Dry Index continues to move marginally lower. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not for the long haul, but for a period of time a cheap funding vehicle, that is the U.S. dollar, can override market fundamentals.
I read these commodity tea leaves as sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate. What a world.
EQUITIES
DJIA: 9865, +1.6%
Nasdaq: 2139, +0.8%
S&P 500: 1071, +1.3%
MSCI Emerging Mkt Index: 946, +3.6%
DJ Global ex U.S.: 197.6, +1.5%
Commentary: equities regained momentum after last week’s selloff. Recall how just one week ago, we faced a remarkably weak and disappointing Unemployment Report which culminated a week in which equities had given up approximately 2%. Well, we not only recaptured that decline but rallied further by another 1-2%. This past week accounted for the strongest advancement in equities since early July. Are we poised for a breakout past 10,000 on the Dow? Well, we need to remain focused on what is driving the market . . . and that is the weak greenback.
Indications of economic strength in Australia compelled the Australian Central Bank to raise rates which drove the Aussie higher and the dollar to new lows. In the process, the ‘dollar carry trade’ gained momentum propelling global equities higher.
The initial earnings reports released continue to show no real signs of improvement in top line revenue generated by increased sales while the bottom lines have improved given ongoing cost cutting progams. If a company cuts ALL its costs, will its stock still go higher? Rising stock values ultimately need to be driven by ‘growth.’
BONDS/INTEREST RATES
2yr Treasury: .97%, an increase of 2 basis points or .01%
10yr Treasury: 3.39%, an increase of 9 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) under the weight of another Treasury refunding (3yr, 10yr, and 30yr). The 30yr auction on Thursday was disappointing which precipitated the selloff. The bond market has been trading in sync with equities for the last few months. That price action is an anomaly as typically bonds will trade in an inverse relationship with equities. Comments by Bernanke in the latter part of the week about an eventual and timely increase in rates by the Fed did take the wind out of the bond market’s sails.
COY (High Yield ETF): 6.64, +3.8%
FMY (Mortgage ETF): 17.85, +0.3%
ITE (Government ETF): 57.77, -0.3%
NXR (Municipal ETF): 14.46, +0.1%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains on fire as that sector is benefiting from a lot of hedge funds allocating capital via the ‘dollar carry trade’ referenced previously.
Summary/Conclusion
The game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
If Shipping Is Up, What About Rail Activity?
Posted by Larry Doyle on May 13th, 2009 3:26 PM |
I just reported in my prior post that the Baltic Dry Index (measuring global shipping activity) is rising and has risen close to 45% over the course of the last month. This is clearly a sign of increased economic activity and a turn in both our domestic and global economy, correct? Clearly the rise in the BDI must be correlated with a rise in rail activity here in the United States as we get our goods and commodities to port. Let’s jump on the rails and go for a ride navigating this part of our economic landscape.
Uh-oh!! It is not widely broadcast but rail activity is not only down year over year (no surprise there) but the pace of decline is quickening. The theory behind the green shoots is promoted by analysts as a slowing in the pace of economic decline. How did they miss this data? Are they not looking or not reporting?
Let’s review. The Heard on the Street column in the WSJ reports, Risk In Market’s One Track Mind.
In reviewing this piece, I was particularly struck that the pace of decline in rail activity from the 1st quarter 2009 to this point in the 2nd quarter is QUICKENING.
As the WSJ highlights:
The slump in weekly rail traffic reflects sluggish industrial activity and consumption. Shipments of industrial products are down almost a third in the past year, while raw materials like coal, metals and crops also show steep drops. The pace of decline has picked up relative to the first quarter’s 16% fall, according to Credit Suisse analyst Chris Ceraso.
In commodities, while crude oil and copper have been on a tear, prices for lumber and natural gas remain depressed. Lumber is exposed to construction and has been in a bear market since 2004, so it might be regarded as a special case. Still, there is little sign of a rebound.
The fact that rail traffic is declining at a quickening pace is inconsistent with other analysts promoting that our economy is turning. This same trend is occurring in trucking as well.
That light in the economic tunnel? It may not be daylight. Based on this report, it may not be a train either. Perhaps it is merely a reflection of overly optimistic analysts and pundits who are trying to sell you something. Ask them what they think about rail traffic.
LD
Let’s Get Some Chinese: A Review of Economic Activity in China
Posted by Larry Doyle on May 13th, 2009 11:59 AM |
China’s stock market closed today at the highest level since August ’08. Is that an indication that China is ready to resume its economic expansion and can literally pull the global economy right along with it? Well, let’s check out a number of items on the menu:
1. The Baltic Dry Index has rebounded over the last few weeks. The BDI is extremely volatile. It plummeted approximately 95% from its high in early 2008, rebounded strongly earlier this year only to suffer a setback in March as our equity market started to regain its legs. The recent rebound in the BDI is again credited to increased shipping activity of commodities into China. Prices of commodities (copper, oil, iron ore) have been very highly correlated with the BDI as a result.
So far, so good . . . let’s try some more items on the menu.
2. How about Chinese lending activity? Is the well directed Chinese stimulus precipitating an increase in activity by non-governmental borrowers? The FT reports, China Cuts Lending Amid Asset Bubble Fears.
I will give those in charge of China’s fiscal stimulus and government programs credit. As this article highlights, these authorities have real concerns about inflation and irresponsible lending practices.
The FT reports:
Chinese bank lending slowed dramatically in April because of fears that loan growth in the first quarter had been excessive and could pave the way for loans of deteriorating quality, so possibly creating a new round of asset bubbles.
That led to fears among regulators that money was being funnelled illegally into the stock market and handed out to state-sponsored stimulus projects of dubious commercial value that could become non-performing assets.
Some regulators also worried about the potential for rampant inflation. Those fears were somewhat eased by price measurements released on Monday showing China remained in deflationary territory in April for the third consecutive month.
Wow! Can you imagine if a regulator in our country had the integrity to voice concerns about government funds being utilized illegally or fraudulently?
This item did not taste so good in regard to leading the global economy to greener pastures, but I commend the Chinese for addressing potential pitfalls in their programs.
3. Away from the government stimulus, the Chinese economy remains largely dependent on exports. Let’s take a taste! Again, our friends at the FT provide some spice, Slide In Chinese Exports Will Hit Growth Strategy:
The FT reports,
Chinese exports fell steeply in April for a sixth month in succession, suggesting that the worst might not be over for the world’s third largest economy.
The total value of Chinese exports fell 22.6 per cent to $91.9bn (£60.2bn) last month compared with the same month a year earlier – a faster rate of decline than the 17.1 per cent year-on-year drop in March.
Why are Chinese exports falling? Well, please review our first post this morning which highlighted that domestic retail sales here fell by .4% after a decline of over 1% last month. If American consumers aren’t buying, Chinese producers aren’t exporting.
4. LD, it is only a matter of time, though, before the American consumer returns to his old ways of spending and the Chinese exporters will be happy, right? Let’s go for the fortune cookie and see what it says: U.S. Lawmakers In Threat To Raise Tariffs On China.
Congress is raising this threat given rising unemployment here at home and concerns that China manipulates its currency. Will this tariff fly? Perhaps.
The FT reports:
a group of lawmakers from manufacturing-dominated states are determined to give it another try and some analysts think the US recession could help build support this time. The charge in the Senate will be led by Debbie Stabenow, a Democrat from Michigan, and Jim Bunning, a Republican from Kentucky. In the House, it will be pushed by Tim Ryan, a Democrat from Ohio, and Tim Murphy, a Republican from Pennsylvania.
Whether these tariffs are the right maneuver or not, increased protectionsist measures are not one way streets. If we are looking to grow our own economy without being dependent on the American consumer, we will need global trade lines to be open.
So, what did you think of our sampler?
To me it was more sour than sweet. In my opinion, our future/fortune remains decidedly mixed at best.
LD
For more in depth BDI analysis, check out Baltic Dry Index and Commodity Graphs
Let’s Revisit the Baltic Dry Index
Posted by Larry Doyle on April 2nd, 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:
One 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
