Keep Your Eye on the Baltic Dry Index

I previously owned Overseas Shipholding Group (OSG) and sold it for a small loss, only to watch it run up about 50% in my face. It's showing up on a screen of mine that looks for multiples of book, cash flow and estimated earnings in the bottom 50% of all stocks that have underperformed the S&P over the last 52 weeks (i.e., names with low multiples appear on the screen).

While I took profit too soon, I did learn a valuable lesson about the shipping business and economy-watching generally: keep your eye on the Baltic Dry Index. This index measures raw materials delivered via ship. It's a pretty tough index to game given that ships take a couple of years to build and the disincentives are huge for owners to hit the pause button once they're built.

Excess shipping capacity is hard to form. Not impossible, just hard (if the last couple years have taught us anything, it's that when lenders toss enough cheap money around, some very dumb things get built). Moreover, the BDI tracks movement of raw materials, not finished goods. Thus, it's a useful canary in the coal mine.

The BDI has doubled over the last year with only one serious drawdown, lasting from mid-May to mid-June, recovering fully by mid-July. Is this a harbinger of good or bad things to come? I have my opinion (not based on the charts), but I'd love some feedback from the chartists in our midst (non-chartists are invited to comment, too).

I don't have specific plans to get back into OSG, though its appearance on my screen of cheap, unloved names is intriguing.

Baltic Dry Index

Comments

[Rhino127]

BDI reflects coal, Iron Ore, and grain and feed. Dry bulk freight rates are just too high now and basis current wheat prices for example, the freight component on CIF wheat to India from the US gulf would be about 25%. When it should normally be 15% max. Freight needs to come down about 25% equating to a BDI at 6300 to keep things in balance. Wonder how many hedge funds have invested in freight derivatives linking to the BDI? Maybe am too old fashion...