Baltic Dry Index

From this morning's Market Matters report:

Morning Report Tuesday 10 February 2015

What does the “Baltic Dry Index” reaching all-time lows mean for stocks?

The Baltic Dry Index, is generally viewed by investors as an indicator of global industrial activity, it measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. Last night, it reached an all-time low, note the Index only dates back to 1985. This negativity is an indicator of both the slowdown in China and the lack of pick up by the rest of the world’s economies.

• The Baltic Dry Index basically measures the cost of shipping resources around the world.

There is no real fresh news here, we all know world economies are slowing down resulting in interest rates at their lowest levels in history. What I am looking for is any leading indicators that may help identify the trends of the future. When I trawl through mounds of economic data and stock prices I am looking triggers that can get us ahead of the curve. Unfortunately when I compare the Baltic Dry Index with Australia’s 3 major Iron Ore players all I can clearly see is an extremely strong correlation as opposed to any leading indicator – see chart 1.


However, one point I have been reiterating at length recently is strong trends usually go much further than expected, the below should be considered very seriously:

• The Baltic Dry Index making 30 year lows can go much lower.

• Iron Ore has fallen by over 50% in the last year, BUT it was 75% lower only 12 years ago when the Baltic Dry Index was above current levels!
• I am technically bearish both BHP and Copper on a long term basis.

Conclusion

• The Baltic Index at all-time lows is not a leading indicator of further falls in resource stocks, just confirmation of why they have been falling.
• BHP is likely to consolidate in $US terms for at least a few months after the recent 40% decline, especially as the stock is helped by the depreciating $A, at current levels the stock is actually paying a decent fully franked yield – see chart 2.
• I still have no interest in buying resource stocks as investments.
• There are no signs of world economic improvement confirming that interest rates are likely to be “lower for longer”.


1 The Baltic Dry Index versus Australian Iron Ore Stocks Weekly Chart



Cheers,

Samson