Monday, November 03, 2008
Baltic Dry Index - The Best Index In Town
Monday, 03 November 2008
No question--we're in a global recession. So now what? Well, it's time to start looking for the bottom. And for that, we need a really good leading indicator. Some investors keep an eye on the leading economic indicators for a bunch of important areas: the U.S. or the Eurozone or Japan. Others go to the World Bank site and scroll through the lavish amount of data on trade performance in various regions. But if you're looking for an index that requires a minimum of effort and offers a maximum of targeting, then I would suggest the Baltic Dry Index.
It sounds like a vodka made from gefilte fish, yes--but stay with me for a minute.
The BDI, or the "Baldry," records the average daily price for shipping dry bulk like coal, iron ore, wheat and soybeans. It's generated by London's Baltic Exchange, whose members are buyers and sellers of shipping contracts. Every day the Exchange gathers information from brokers in a variety of categories like shipping routes, types of cargo and ship size. The result is several indexes based on ship size, which are then amalgamated into the mother index, the Baldry.
Long story short: The Baltic Dry shows how much people are willing to pay to ship certain raw materials. You can track it at Bloomberg or by going to the exchange's own Web site.
The Baldry has three virtues:
First, it's elemental. Since it's an index of raw materials, it captures activity at the very beginning of the production process. Since it's a snap-shot of ocean-shipping volume, it reveals what's happening on the ground (as it were) to the great driver of global economic growth--international trade. And since shipping is a heavily financed business, it indicates how tight or loose credit conditions are.
Second, it's pure. There's very little speculative interest for the simple reason that people don't hire a ship unless they have cargo. (It's possible to hedge contracts by using freight-derivatives, known as forward freight agreements which are traded over-the-counter.)
And, finally, it's fun. You can acquire a whole new vocabulary. Adepts can toss around terms like bunker price (the price of oil used for fueling the ships) and choke points (the narrow shipping straits like Hormuz and canals like the Suez and Panama). Even the classification of ship-size is interesting. My fave is the Capemax--those 100,000-plus-ton giants that are way too large to go through narrow straits and must go around the capes.
But there are some tricky bits.
The Baldry records spot prices, not prices for transport done under regular contracts. And most commodities are carried on ships under long-term contracts.
It can be enormously jumpy. The supply of shipping vessels is very, very inelastic--it takes at least two years and tons of bucks to build a ship--so even the tiniest shifts in the demand curve will generate great changes in prices. And there lots of possibilities for demand disturbances--like swings in commodity prices, changes in the weather and variations in the price of bunker fuel which can move operating costs.
OK, so what's happening now? No surprises here. The Baltic Dry Index had a strong run-up between 2005 to the end of 2007. This year, it reached a high of $11,793 in May, but it's been pretty much tanking ever since. It's now under $900--having lost over 90% of its value.
A major factor behind the run-up was, of course, the commodity bubble. And the Baldry proved its worth as a leading indicator by turning down two months before that bubble burst. Plus, I would also point out, the Baldry forecast the slowing growth in China. Chinese demand for raw materials from the West--including a ravenous appetite for coal and iron ore--has been fierce. Some say it's been a critical driver of the Baldry. So the announcement a few weeks ago that growth in China has slowed wasn't news to those who've been following the six-month collapse of the Baltic Dry Index.
Simply put, if you're in the market for a quick and efficient way to spot the bottom of the global recession, watching the Baltic Dry is a very good bet.
Adapted from Forbes
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