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Will The Baltic Dry Index Lead The Market Higher? at Trader’s Narrative

The Baltic Dry Index is a leading economic indicator which can trace its lineage back to the Virginia and Baltick Coffeehouse in London in 1744, where insurers, shippers, brokers, and clients would gather to haggle over rates. It is released daily by the Baltic Exchange and is an amalgamation of three separate sub-indices, of different ship sizes: Capesize, Supramax and Panamax.

The financial crisis and the collapse of international trade caused the Baltic Dry Index to fall harder than it has ever and to reach levels which were perilously close to its all time low reached in 1986 (554 points). The Capesize market was especially hard hit, with rates falling 99% from their highs reached in June 2008.

However, while stock market sentiment is still pretty bad, recently the BDI has mounted a surprising recovery. One that is even more impressive when you consider the Chinese holidays:

baltic dry index long term chart 2003 to 2009

Even just eye-balling the two charts, you can tell that the Baltic Dry Index leads the S&P 500 Index:

SP500 index long term chart 2003 to 2009

In the previous bear market, the Baltic Dry Index started to recover very early, at the start of 2002. And by the beginning of 2003, it was well on its way, hitting new 52 week highs, well before the S&P 500 Index hit similarly new highs.

Right now, the S&P 500 Index continues to be weak but the Baltic Dry Index has made higher highs and seems to be powering ahead, having risen 65% from its low.

Will the Baltic Dry Index lead us out of this bear market also?

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8 Responses to “Will The Baltic Dry Index Lead The Market Higher?”  

  1. 1 blues

    Not sure why you keep on looking for “recovery” And so are those IDIOTS at CNBC… why you guys keep on looking for recovery? Because market has fallen so much (or at least your defenition of too much)? Look at Japan’s deflation implosion… and look like we are heading the same direction… 70-80% drop… SPX to 300-400…

  2. 2 Alb

    What kind of index, EFT that track the Baltic index an average investor can buy?

  3. 3 TR

    SEA is an ETF that tracks the Delta Global Shipping Index and looks to have a decent correlation to the BDIY (history only back to 8/25/08).

  4. 4 Ted Murphy

    Just eyeballing, it looks like the S&P 500 leads the baltic dry index. I wish it were the other way around …

  5. 5 John Egan

    Babak… Replying to your email: I have encountered 3 references to the uptick in the Baltic Dry Index within the last two weeks that suggest that this minor move up might only be temporary. They suggest that it is an effect of China’s pre-Chinese New Year storage of commodities. I guess we’ll see later for sure. Unfortunately, I don’t keep all these references. I believe the first reference was an Australian newspaper (They’re tight with the Chinese), and the second was Interfax-China, which reports on Chinese industry. I did find this Forbes article though and it says in part:

    “Chinese New Year is the likely explanation, according to the chief executive of the company that runs the gauge of shipping costs.

    Jeremy Penn, chief executive of the Baltic Exchange, said the index’s recent firming resulted from a rush of orders for materials like iron ore and steel ahead of the week-long holiday last week. He said while this increase can not be ignored, it should be seen in context of the larger losses the index has suffered the last 12 months.

    “One has to be cautious and see the index in terms of short-term market effects rather than anybody signaling ‘Great it’s all over,’” he said. “What you have to remember is that after a long period of a boom, freight rates have bumped along a bottom.”

    Some investors in recent weeks have bought into shipping stocks by looking at the dipping of the Baltic Dry Index. (See “Abandon Ship.”)

    Penn said it will take a week or two for the Chinese New Year-effect to play itself out, but he wouldn’t say whether that means the index would continue its climb or settle down.


    Also from today’s Interfax-China:

    “China’s TCM export growth to slow down in 2009 - expert says

    by Karl Zhong

    Shanghai. February 3. INTERFAX-CHINA - Growth in China’s traditional Chinese medicine (TCM) exports looks set to decline this year as the financial downturn fully sets in, an official from the China Chamber of Commerce for Import & Export of Medicines & Health Products (CCCMHPIE) told Interfax on Feb. 3.”

    As much as I’d like to see the Chinese dragon belch a little fire here, there are too many incidental issues like a pop in the BDI, that are not **necessarily** real. If you follow China at all ( I suggest Michael Pettis’s blog “China Financial Markets), you’ll know that Chinese officials normally aren’t so blunt about their country’s future prospects. They tend to couch their pronouncements in encouraging terms. When an official tells the world that things don;t look too good this year, where’s the driving force for the BDI?

    Then there’s this from (Australian edition):

    Feb. 2 (Bloomberg) — Fortescue Metals Group Ltd., Australia’s third-biggest iron ore producer, gained the most in almost two months in Sydney trading after forecasting second- half shipments will rise as steelmakers’ demand recovers.

    Fortescue rose 10 percent, the most since Dec. 10, to A$1.95. The Perth-based company may ship 17.6 million metric tons of iron ore in the six months to June 30, after exports in December quarter totaled 6.3 million tons, it said Jan. 30.

    The iron ore market, which slumped as a global recession forced steelmakers to cut output, may have bottomed as Chinese demand recovers, Fortescue said last week. China, the world’s largest buyer of the steelmaking ingredient imported 6.2 percent more in December than November, according to the nation’s customs.

    “This seems more of a relief rally than anything else,” Alex Passmore, head of metals and mining research at Patersons Securities Ltd. in Perth, said today by phone. “They got their results out early and there they seemed very transparent. It seems to be business as usual for Fortescue.”

    ( FYI - Fortesque has dropped to 10% of its value over the last several months. I suspect they’re using what I feel is a temporary rally in ore to pump their stock price back up.. jegan )

    Thanks for the blog! jegan ;-)

  6. 6 Charles
  7. 7 Darrell

    Hi Babak, nice post on the Baltic Dry Index. I also believe that many of the shipping stocks are leading indicators to the indices, they are definitely leaders rather than laggards.

    I was very surprise when Seaspan didn’t cut their dividend (like many of the other shippers did, for example Dry ships, Diana shipping, Eagle Bulk shipping etc). I believe SSW went ex-div’s on FEB 2nd, if they can keep that dividend going its a decent buy. 0.475cent div on a 10$ stock.

  8. 8 diego joachin

    The problem is the difference between correlation and causality. You and I both may have a flu, we are correlated, but you get it because did not protected last night after the game, and I get it in my house because somebody in my family.

    The only thing i can think of is the forward curve of the crude. A thinner spread between spot and next month might have some background for buying oil, which is the commodity more away of the 200ma.

    some calls might bring some profit.

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