Baltic Dry

Whether it is an over-abundance of ships (mis-allocation of capital) or a slowing global growth story (aggregate demand), the crash in the Baltic Dry Index has been significant to say the least. Seasonals are prevalent (and Chinese New Year impacts) but to try and clean up that perspective, we find that so far this year the Baltic Dry has fallen 42% more than its seasonal normal and is down by more than 50% since 12/30/11. Nothing to see here move along.

Two things of note in today's Rosie piece. On one hand he breaks out the 10 good and bad things that investors are factoring, and while focusing on the positive, and completely ignoring the negative, are pushing the market to its best start since 1997. As Rosie says: "The equity market has gotten off to its best start in a good 15 years and being led by the deep cyclicals (materials, homebuilders, semiconductors) and financials — last year's woeful laggards (the 50 worst performing stocks in 2011 are up over 10% so far this year; the 50 best are up a mere 2%). Bonds are off to their worst start since 2003 with the 10-year note yield back up to 2%. The S&P 500 is now up 20% from the early October low and just 3.5% away from the April 2011 recovery high (in fact, in euro terms, it has rallied 30% and at its best level since 2007)." Is there anything more to this than precisely the same short-covering spree we saw both in 2010 and 2011? Not really: "This still smacks of a classic short-covering rally as opposed to a broad asset- allocation shift, but there is no doubt that there is plenty of cash on the sidelines and if it gets put to use, this rally could be extended. This by no means suggests a shift in my fundamental views, and keep in mind that we went into 2011 with a similar level of euphoria and hope in place and the uptrend lasted through April before the trap door opened. Remember too that the acute problems in the housing and mortgage market began in early 2007 and yet the equity market did not really appreciate or understand the severity of the situation until we were into October of that year and even then the consensus was one of a 'soft landing'." Finally, Rosie steps back from the noise and focuses on the forest, asking the rhetorical question: "Isn't this still a "modern day depression?" - his answer, and ours - "sure it is."

The apparently critical-when-its-going-up-but-ignore-it-when-it-is-falling index of the cost of dry bulk goods transportation has 'crashed' in the last few weeks to its lowest level since January 2009 (back below 1000 according to today's levels). Whether this is seasonal output differences or weather impacts, it seems clear that lower steel output in China and a decline in European imports is having its impact on global trade. The index has fallen for 19 days in a row, down almost 50%, its largest drop since the harrowing period of Q4 2008.

The last time intermodal traffic dipped to this level, we were in denial about a Recession and the Dow continued to march from 11,500 in January of 2008 all the way to just above 13,000 in May.

The freefall in the BDIY is just ridiculous: following a steep plunge it has now gone in freefall, and is down 3.9% overnight to 1,186. And to all who are claiming that the index is merely indicating a supply glut from the onslaught of new ship arrivals, well the entire orderbook (in progress) has been public and transparent - to claim it is a surprise is about as "naive" as stating that 5 computers and a bunch of NYU kids control the US stock market. As for how much longer it will keep dropping? Well: he post Lehman low was 663. There is still a lot of pain. Especially if one is a non-chartered dry bulk shipper... With leverage.

Back in 2007 and 2008 every single dry shipping company had put in future delivery orders for everything from Panamax to Capesize vessels, at even the most shoddy of Chinese shipyards. Now, a few years later, as these orders are starting to be completed, the world's dry bulk shipping industry is suddenly experiencing an unprecedented supply glut of coal/ore carriers, which has resulted in the Baltic Dry index droppoing below 1,500 for the first time since 2009. And as Bloomberg reports, with at least 200 capesize ships, stretching at 35 miles end to end, expected to be completed by the world's shipyards, which represents an 18% expansion in the world's shipping fleet, the excess supply will once glut the modest demand rise which is expected to come at just 7%. The winners: raw material companies which have massive pricing power in an environment in which shipping costs are plunging, as well as the shipping companies which have managed to lock in charter contracts at historic rates. The biggest loser: dry bulk shippers operating at spot, and which have large, debt-funded balance sheets.There the pain will be substantial.

Is the BDIY a red flag or a red herring?

Either someone in China is pumping out 100 capesize ships every single day, and doing their best to push charter rates to just below zero, or, gasp, transpacific trade is really falling off a cliff (i.e., Chinese inventory accumulation has been put on hold). Of course, if it is the second, we will know in February when China reports its January trade surplus (and the US respectively reports its trade deficit). Should the gross imports and exports number plunge, it may confirm that the BDIY which is only mentioned by the MSM when rising, and ignored when plunging, may actually be relevant. And speaking of plunging, today it dropped for the third consecutive day by more than 4%, hitting 1,544, a 4.8% drop overnight, and the lowest number since April 2009.

Yesterday's drop of the BDIY to a one year low, coupled with stocks' (brief) jump to a one year high had quite a few technicians on edge: it isn't every day that we get such a major divergence between the two data series. But does this actually mean anything, and does it predict much in terms of future market performance? For the answer we go to one of the best technical analysts out there, Sentiment Trader, who shares the following piece of advice to those who are curious how stocks have traded in past occurrences of such notable divergences: "Overall, the S&P's median return over the next month or so was certainly below average, and I would consider this to be a minor negative, but not a major or terribly consistent sell signal." That said, there is also the threat that China is merely continuing to add additional supply in terms of Cape and other sized tankers, and we are confident that to some the plunge in shipping rates will be actually seen as a positive as it means less money has to be spent on chartering trans-Pacific transport. Which is good - a difference in opinions is, after all, what makes market.

When we noted last night that there was a Baltic fat finger index, we thought we were joking. Appears not. The BDIY has plunged by 4.5% overnight from 1,773 to 1,693, easily the biggest one day drop in a long time. And, more importantly, the index has just taken out the 2010 lows hit on July 15, when the BDIY last traded at 1,700. So in a normal world, one could argue, the fact that there no demand for shipping may actually indicate something. However, in this bizarro "5 year plan" politburo reality, this will likely result in futures once again surging as QE4.5 starts getting priced in.

BDIY was 1830 yesterday. It is now down 1.9% to 1,795. it would be only fitting if the index closed the year below its 2010 lows of 1,700. Would go well with year wides in sovereign risk, with gold at near all time highs, and with stocks at two year highs. Carry on.

Last week, we pointed out when the BDIY dipped below 2000 for the first time since August. In the next three days, the index slide has accelerated and after dropping 3% just overnight, is back to 1830, just 130 points away from the 2010 lows printed in July. And while the index topped in early September following a brief and uninspired climb, it has since been a one way downward pointing slope. Whether the BDIY is a leading indicator to anything is debatable: some believe it is a completely irrelevant indicator. Others disagree. A rather strong case for the former camp was made last week by Nordea which demonstrated, in its chart of the week, the average speed of its vessel fleet. One thing is certain: for whatever reason, demand for trans-Pacific cargo shipments is once again plunging.

Does anybody else notice the very close correlation between the Baltic Dry and the stock market/myths of economic recovery? Neither do we. Oddly enough, the BDIY did predict the late August S&P surge by about a month. And incidentally, we are back to early August levels all over again. Just as incidentally, the market was about 15% lower back then. Then again, our advice is to pay no attention to this index which tracks nothing relevant, and has no bearing on the world economy (and certainly not markets) whatsoever. And ignore the data on the Bberg chart: the value of the BDIY as of this morning is 1,999.

Yesterday was the inflection, today is the continuation, as the BDIY drops another 7 points to 1,957. Is the dead cat bounce officially over?

After the longest consecutive decline in the BDIY plunged the Baltic Dry shipping index to record oversold levels, the subsequent 200 point jump was sufficient for many to say that the next dry bulk shipping renaissance has arrived. Alas, the latest inflection point is here, a mere two weeks since the lowest point in years, coming before the index could even reach the psychological barrier of 2,000. The BDIY has now reversed its two weeks of gains, dropping 0.7% from 1,977 yesterday, to 1,963 earlier, with a drop in all three index rates: capesize, panamax and supramax. Is this the beginning of the second leg down in the BDIY?