Baltic Dry Index Down 20% in 5 Days: This Clearly Signals the End of Days
Mark Smith
That headline might seem facetious but just a month ago we heard the exact opposite conjecture about a spike in the Baltic Dry Index and all that it "implied". I call this "thesis" trading... hedge funds, traders, and pundits seize upon any glimmer of hope - any atypical data point that does not agree with the other 47 data points in a series to create "thesis". Now, when the Baltic Dry Index was "surging" (from a historical rock bottom low) - jumping from scary awful to just awful we were told it was clearly signaling the globe would be recovering. CNBC would run reports every 2 hours about how the recovery was being signaled and how mustard seeds were in the air. I don't watch CNBC during the day but I can tell from my inbox (anxious people afraid they are missing "the recovery") and watching video in the evening. However, when the inverse happens (a 20% drop in said index in 5 days) the "fair and balanced" pom pom channel does not seem to be reporting about this ketchup seed. Instead I hear: crickets chirping. Other non TV financial pundits who have the same thesis appear to be.... silent. Perhaps they just missed looking at the chart the past few days (ahem).
So let's review : when 1 data point out of 50 agrees with the cheer leading aspect of coming recovery: report it, have the pundits latch on to it, have all the "you should never sell, buy and hold, average down, stick to the long run even when you are down 50% due to my acumen" mutual fund managers talk up said solo data point, and dismiss the other 49 data points that speak to the opposite. Weave magical tails about China being the economic growth engine of the world that will bring us all to nirvana (in "6 months" of course) - as the shipping index CLEARLY showed back then.
BUT... when this data point reverses? Shhh.... don't talk about it. That ruins story time.
On Feb 9th I wrote a quite spirited piece calling shenanigans on the 87th incorrect 'thesis' the bulls have been promoting since mid 2007 [Feb 9: China and the Baltic Dry Index - What's Really Going On?]
I do think Asia will rebound first.... but not yet. In fact I still think Asia is on a downward slope - even the magical place we call China. But Wall Street, in all it's need to find "something, anything" to play has seized on a rebound in the Baltic Dry Index,..... I think this is premature.
the much ballyhooed Baltic Dry Index. Oh lordy, an index that traded in the 3000 to 5000 range during "normal" times in 2005-2006 (don't even ask where it was in 2007 and early 2008) has now rallied from 700s to 1500 ... and this is the signs of a "China recovery" or global "growth" recovering?
Once more, as I wrote last week - we could DOUBLE from here (1500 to 3000) and still be at the LOW end of where this index traded during "normal" economic trade years (2005-2006) pre China Olympic commodity build up.
Citing data that I found with just a little digging (remember, pundits don't dig - they just sell you snake oil)
* THE surge in dry bulk freight driven by a jump in Chinese iron ore imports could be shortlived warns a report Macquarie Research. “What it reflects is a more general recovery in Chinese steel production from the lows of June-October 2008 following an end to steel destocking and a flurry of trader-buying of steel,” said a report by Macquarie.
* The recovery could prove to be a shortlived one, as there is no evidence of an increase in demand for steel in China. A major downturn in iron ore imports continues in Japan and Europe as hefty steel production cuts are implemented.
* A shipping broker said it was conceivable that once the Chinese ore imports faded again, the index would drop again.
Then I finished this subject with....
So this gives a good overview of what is driving the index. No one - but China. And China appears to be (a) restocking iron ore after a buyer's strike and (b) purchasing wheat due to drought conditions. Is that a thesis for the nascent stages of a China driven global recovery? Not in my book. But for the short term, all that matter's is the herd's book. Fit square peg into round hole.
So what's happened 6 weeks later? Well, we begin with a 20% drop (in 5 days) of the storied Baltic Dry Index - again 3000 to 5000 on the BDI is the very wide "normal" range. So if I am to believe the rise from rock bottom rates to simply "putrid" rates signaled the coming glory of economic trade, what do I believe the last 5 days are signaling? You can whisper it in my ear Mr. Pundit; I promise not to tell.
And now reports that since iron ore restocking is done, the Chinese (who all the world's Kool Aid drinkers are counting on to bring us out of this recession "in 6 months") steel mills are packed with oversupply and a freefall in exports potentially awaits.
* CHINA'S steel product exports may tumble 80 percent this year as a global slump hurts demand, the China Iron and Steel Association said yesterday. This was much steeper than its previous forecast of 50 percent, the industry group said in a statement on its Website quoting a speech by its Secretary-General Shan Shanghua. "The export situation is extremely severe," Shan warned.
* Sluggish exports had led to rising inventories after many mills restarted their once-closed capacities before the Spring Festival holiday in late January as they bet demand would rebound after the holiday. But demand stayed slack and the domestic benchmark price has fallen 14 percent since February, ending a short-lived recovery.
* Steel stocks had risen 38 percent to 6.7 million tons by late February in China's 20 major cities from January, Shan said.
* "A short-lived prosperity in steel demand, driven by heavy restocking by traders, no longer exists," he said. (ah prosperity - so elusive to find)
* On March 5, the domestic steel composite price declined to a low last seen in November, which was also the worst since 1994.
As always, 15 minutes of digging and thinking outweighs the Kool Aid spewn on TV. And it was a nice trade for a week or two, eh? Got the heart rate running as we heard talk that "finally after 71 false starts, we FINALLY had signals things were turning around". Not to be once any form of logic is applied - as we outlined. But then again, I'm not a used car salesmen trying to sell a dream (or fill a 60 minute TV show). For that, I'll have to direct you back to financial cheerleading TeeVee (sic).
One more thing - I've said it multiple times; I'll say it again (need to say it over and over to push through all the nonsense).... my prediction is China will be the big surprise of 2nd half 2009. To the downside. See you in "6 months".
seekingalpha.com
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