Baltic Dry

After a 0.5% decline overnight, the BDIY is now at exactly 1,700, marking the longest sequential decline since the launch of Windows 95. Little to add here. We anticipate that Tim Geithner will soon suggest stress tests to be conducted on dry bulk shipping vessels to the 5 or so Greek CEOs running the industry, with bailouts to come for those leaked to be in need for financing.

The record slaughter of shippers continues as the BDIY posts the largest overnight drop of 4.5% in the most recent 34-consecutive day trounce in dry bulk shipping rates. Short term Capsize and Panamax charters for Pacific delivery have hit $29k and $19k, respectively, both approximately 30% lower than comparable Atlantic delivery rates as the Chinese transit corridor is now massively oversupplied. At this point it is not a question of if but when the bulk of shipping companies, especially levered ones, start going bankrupt and flood the seas with yet more anchored rusting dry bulk hulls.

The CSX earnings surge can be easily explained now that the rail company has cornered the China-US transportation corridor (what's that, it's an ocean? that's ok - the president will enact a law changing that). Because goods transit sure isn't using the dry bulk shipping sector, where the Baltic Dry has plumbed to a fresh 14 month low, continuing its longest drop in 9 years, down for a 33rd sequential day to 1,790 from 1,840. Don't look for any record numbers out of the China Customs agency or the US trade deficit in the next month.

Don't panic - the fact that capesize operators are on the verge of losing money on charters and facing bankruptcy is irrelevant: China just announced the biggest export balance with the US on record. And that very credible number must surely mean all is good, and trade by Pacific Ocean rail is surging. In the meantime, the BDIY dropped 3.3% to 1840 from 1902, a 32nd sequential decline and a the longest drop in 9 years.

And the leading indicators continue collapsing (ECRI later today): the BDIY has posted its 31st sequential decline, and has closed just barely above 1,900, at 1,902, and back to March 2009 lows. One wonders when the BRICmaster, Jim O'Neill, will ever put the appropriate spin on this particular statistic in his weekly permarosy missives.

The Baltic Dry, which contrary to what some may claim, actually is one of the best leading indicators on global trade and thus the health of the economy, continues to plunge, and is now below 2000, hitting fresh 14 month lows, at 1940. It is now at the levels last seen during the March 2009 "generational" low, and just after the Lehman bankruptcy. Yet futures are up as initial claims beat expectations by 6,000 very statistically relevant people.

After slumping 4% yesterday to close at 2,127, the Baltic Dry has plunged yet another 5% today, to close just above 2,000 at 2,018. This is the lowest level for the index in 14 months since May 5 of 2009 when it last traded by 2,000 and a reason for all Chinese trade "resurgence" bulls to reevaluate their thesis. Did China outsmart everyone, with the Yuan "reval" coming at a time when planned foreign trade would be de minimis? In the meantime, this is bad news for Australia and Brazil, and especially the AUD and the BRL, but who cares about facts anymore.

The biggest reason for the runup in the JPYAUD and its immediate secondary carry derivative, the stock market, was the earlier announcement out of the RBA claiming all is clear, there is no bubble in China, there is no bubble in OZ real estate, and all the other usual talking points one would expect out of a central bank whose future is inextricably linked to the endless commodity stocking in China. And indeed, one glance at the far more neutral indicator of the Baltic Dry index paints a far more dire picture: the BDIY plunged 4% overnight to 2,127, posting the longest consecutive decline in 6 years at 28 days. Despite the optimism from the conflicted money printers, those whose livelihood actually depends on a ceaseless influx of goods into China and broader commodity trading in general, are not nearly quite so happy, having seen a drop in their margins by almost 50% in just over a month.

The decoupling theorists are about to experience a second smackdown in 3 years. After the biggest bubble of 2008 blew up spectacularly and made beggars out of the Greek CEOs of various dry bulk shippers, only to see their fortunes go back to unchanged again, it looks like they may be retesting the benevolence of NetJets repo men for the second time. The BDIY chart has now completed a rather mutated head and shoulders, after dropping nearly two thousand points in the span of a month - the fastest plunge since the S&P 666 days.And with the Bank of China in liquidity salvage mode as reported earlier, look for much more gravity to come in this index.

The Baltic Dry index, which is the closest proxy for China's bubbleliciousness, has dropped to one month lows, and continues accelerating its drop to the downside. The dry bulk shipping sector, which was the bubble of late 2007 and early 2008, does not appear poised to make a repeat appearance just yet. As concerns over commodity overstocking in China, and Australian extraction concerns courtesy of the recent supertax, keep investors awake at night, is CNBC's "favorite" index about to retrace its 2009 lows? Furthermore, if the recent Afghanistan raw material discovery is even close to scale, the next big "thing" in Asia will be the Railroad Dry index, as construction of the world's biggest railway hub in Kabul is likely already underway. Throw in a few nuclear power plants, a couple of smelters, discover some bauxite and soon Afghanistan will eclipse Australia and Brazil as the premier commodity production center in the world. Is it time for Jim O'Neill to rebrand the N-11 index, formerly known as the BRICs, to the A index?

One word: Reundecoupling (was also very appropriate last year when the China thesis plummeted, but investors have 24 hour long-term memory).