Beware the Baltic Shipping Index Signals

One of the challenges that Bulls have during a Bear market is the availability of supporting data. A very popular “point at” is the Baltic Dry Index. This from Wikipedia:

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic — it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the Arizona desert. So marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. “if you have 100 ships competing for 99 cargoes, rates go down, whereas if you’ve 99 ships competing for 100 cargoes, rates go up. in other words, small fleet changes and logistical matters can crash rates…” The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Since hitting a low of some 660 last December, it has climbed back to 1806 this morning. Bulls will say “Hurray!”, the recession is coming to an end. If you hadn’t heard of the Baltic Dry Index before, you’d think that the time had come to open up the wallet again.

Unless you pull up the one year chart. Even with the bump, the Index is down 85% versus a year ago. The only sensible glimmer of hope about the recent upswing in the Index is that it hasn’t been this low since January 2005, which I recall was a decent time in the broader economy.

But is the recession over? Maybe according to shoppers on Bloor Street, but not according to anyone who runs a business.

Comments

[ACCOUNTANT:]

It's got to get to 85% before it can get to 75% or 65%. It's still moving upward which is much better than moving downward.

May 05 08:59 AM

[kelm:]

As the Wiki description states the index is very susceptible to small changes and to expectations. If you have 100 cargoes for 100 ships AND don't have the next 100 cargoes lined up your price quotes are very different from 100 cargoes lined up back to back for months in advance.

May 05 09:23 AM

[AndrewBaker:]

What puzzles me is that with so many people being able to say that we are not yet at the bottom of this recession/depression, there are still so many people piling in to the current rally. Yes, the Baltic Dry index shows that there is not a lot going on, and the banks are known to be bust without tax dollars, yet the buying goes on. Please can someone explain this to me using sensible arguments and talking about sensible people?

May 05 10:12 AM

[Steve0:]

Oh I see, I should buy stocks when the index hits 3000?

May 05 10:17 AM

[hroni:]

I'll reply since, unlike your usual comments, while still wrong this one is decent. The index fluctuates on expectation of demand, a difficult metric for most people. Also, since we're not in a period of explosive demand with ships sitting idle, the marginal cost is not far from the average cost, so it's irrelevant for now.


On May 05 10:15 AM Cetin Hakimoglu wrote:

> It was a flawed index to begin with. The fall in the index has much
> less to do with falling demand than it has to do with decline in
> marginal costs of dry shipping.

May 05 11:00 AM

[Valley Boy:]

Yes, buy stocks when the BDI is in the 2500-3000 range.
Any figure below that indicates the world economy is probably too weak to sustain most over enthusiastic stock market rallies.
The index is reflective of both shipping volumes and shipping rates as per supply-and-demand of materials and commodities. We'll
get to 2500-3000 one of these days.


On May 05 10:17 AM Steve0 wrote:

> Oh I see, I should buy stocks when the index hits 3000?

May 05 12:22 PM

[cayman:]

simple - momentum and trend following + shorts running for cover.
plus there are a lo our there that think the market has bottomed.


On May 05 10:12 AM AndrewBaker wrote:

> What puzzles me is that with so many people being able to say that
> we are not yet at the bottom of this recession/depression, there
> are still so many people piling in to the current rally. Yes, the
> Baltic Dry index shows that there is not a lot going on, and the
> banks are known to be bust without tax dollars, yet the buying goes
> on. Please can someone explain this to me using sensible arguments
> and talking about sensible people?

May 05 02:07 PM

[Fred Voetsch:]

On May 05 10:15 AM Cetin Hakimoglu wrote:

> It was a flawed index to begin with. The fall in the index has much
> less to do with falling demand than it has to do with decline in
> marginal costs of dry shipping.

WOW! If it doesn't agree with Cetin's outlook it must be false. I know that ignoring time-tested data is a sure way to riches but you're just outdoing yourself, Cetin.

Can you dis Dow Theory next?

May 05 04:01 PM

[Fred Voetsch:]

On May 05 10:12 AM AndrewBaker wrote:

> What puzzles me is that with so many people being able to say that
> we are not yet at the bottom of this recession/depression, there
> are still so many people piling in to the current rally. Yes, the
> Baltic Dry index shows that there is not a lot going on, and the
> banks are known to be bust without tax dollars, yet the buying goes
> on. Please can someone explain this to me using sensible arguments
> and talking about sensible people?


Bear market rally. Just look at 1929-1932 and you will see plenty of them. Not to say that things are quite that bad but we are facing a similar situation and generational dynamic.

Look at the data - www2.standardandpoors.... - and you see this:

"341 issues (76.15% mkt val) rptd: initial good reports fading, actuals are 2% behind of estimates, and -36.1% behind last year"

...and yet people want to believe so bad (just read Cetin's posts for an example) and then others get scared that they will miss the "buying opportunity of a lifetime" and off you go. If you can stay disciplined and act on the data available and listen to the few experienced, wise old owls out there (I like Richard Russell and Gene Inger as good contrasts in style but both have a lot of knowledge and experience) you will be able to benefit from these ups and downs.

The worst thing you can do in times like these is lose discipline; that's when you break down and decide everyone is right and buy into the end of a rally. Look, those who are bullish all along are still way down while those who are nothing but bearish are still up but those who understand the market never goes straight up or down are sitting pretty and wondering what all the fuss is about.

Keep in mind that the vast majority of people here will lose money investing and would be much better off with a savings acount or buying and holding stocks over the long term.

May 05 04:12 PM

[elliot_mllr:]

Additional thoughts:
1. Last year's BDI was clearly an aberration, so using that as a standard against which to measure growth or recovery is not appropriate. It would be better to take a five year average and assume a reversion to the mean and use that as a normalized metric.
2. There should be some discussion of the impact of derivatives (FFAs, or Future Freight Agreements) on the BDI, and the pace of current use of FFAs.
3. The BDI has various sub-indexes based on differing vessel types and sizes (Handymax, Supramax, Capesize, Suezmax). These do not trade uniformly. Some can be up and others down on the same day.

May 05 05:09 PM