The Baltic Dry Index As a Predictor?

About the Baltic Dry Index

The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts.

What is so special about it?

It is one of the purest indicators of the global economy. The reason for this is, unlike may other indicators such as oil, gold etc the Baltic Dry Index is not a tradeable instrument and is therefore not open to speculation. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand.

And one more point....it collapsed 95% in the past few months.

What can this indicate.

Well lets introduce the charts......
The Baltic Dry vs SP500



So given that trade and shipping costs have collapsed would we expect to see a continued rally/recovery in the S&P 500. I would suspect not. It indicates that retail and consumer demand has deteriorated dramatically recently and that the S&P is in the midst of a temporary bear rally which will unravel as future consumer data is released. The industrial commodities are likely to suffer further downside and the difficulties at the large US auto makers is likely to be more critical that their current financials suggest. I would therefore be short Aluminum (SALU.L) @ 81.09. The 'one day bonanza' sales in retail stores is going to be on the increase as retailers desperately try to turn around the excess stock which is piling up! So I would also be short retail, SW75 Put Marks and Spencer 200 @ 5.2 (a low geared warrant with medium risk).

So what about the BDI as a predictor?

Baltic Dry vs Crude Oil


There is a clear lag between the BDI and the crude oil price. The effect of speculation on the oil markets can clearly be seen. Whilst the Golmans analysts were predicting $200 oil, the BDI index was swooning. A temporary 50% drop should have sent alarm bells ringing and sure enough the oil rally succumbed to the inevitable collapse.

In conclusion

I would be temped to ignore the false market rallies and wait until a sustained recovery is seen in the Baltic Dry Index before being long equities. Combined with low trading volumes and a rising BDI it could signal that an end to the bear market is on the horizon.