The Baltic Dry Index, an increasingly popular key indicator for the economy, measures the global shipping rates of transporting bulk dry commodities worldwide.
It is considered a key indicator, because it gauges the demand of the basic raw material inputs that go into almost every factor of finished goods, building materials, and food.
The index registers a high number when economies are strong—because of strong demand for all commodities like zinc, iron ore, iron, steel, etc. In an economic slowdown, demand falls, and so do rates.
Just before the stock market crash of 1987, and just before the Dow Jones Industrial Average lost about 4,000 points in 2001 and 2002, the Baltic Dry Index dropped significantly, reflecting the economic slowdown before the market did (source: Baltic Exchange).
It’s scary to see that this key indicator recorded its lowest level in 25 years last week.
In January of 2012, while the stock markets were rising, the index had its poorest showing since it began recording prices back in 1985.
To provide an example, six weeks ago, large freighters carrying grain were able to charge $15,000 a day. Today—just over a month later—the rate is $6,000 a day. Talk about economic slowdown!
In all fairness, new ships have entered the market. It takes a few years to build these ships and, of course, when the economy was going gangbusters like back in 2007-2008, the orders were flooding into the shipbuilders. After the economic slowdown and crash, these orders could not be cancelled.
The global fleet stands at 8,900 today, but could expand by another 1,246 ships this year (source: Baltic Exchange).
Despite the rise in new ships, clearly, the demand worldwide is not materializing along with it. It is one thing to say that rates have fallen, but it is another to say that the economic slowdown is so severe that rates are now below operating costs.
In Asia, charter rates have fallen over 60% in the last two months because of the economic slowdown!
One Australian firm needed to get its ship to Europe. Instead of paying the cost of moving the ship empty, it offered Glencore International Plc minus $2,000 a day, for the first 60 days of the charter, to move Glencore’s grain. Basically, for the complete trip, Glencore is paying some of the fuel costs; that’s all.
Some have criticized this key indicator as hitting new lows because of the oversupply of vessels; but again the economic slowdown worldwide is pressuring rates to a level below operating costs.
The fact that the Baltic Dry Index has predicted other market falls and economic slowdowns before is also noteworthy. No indicator is foolproof, but since it has been a very accurate key indicator in the past, it is certainly worth paying close attention to the fact that the Baltic Dry Index is screaming, “More economic slowdown ahead!”
Michael’s Personal Notes:
Don’t give up on Chinese stocks yet…
As I’ve been writing, there is no question that the Chinese economy is slowing down. But its economy is changing as well. China is moving from a manufacturing-based economy to an acquirer of strategic world assets.
Last week, Germany’s Chancellor Angela Merkel visited China in the hopes that the country would help Europe through its crisis, by investing in the eurozone. The eurozone is the Chinese economy’s largest export market, so it is certainly in China’s interest to ensure it helps its biggest customer. The historic trip by the Chancellor of Germany, Angela Merkel, to China (and not the U.S.) is evidence that China has the money.
The Chinese economy is not only the manufacturing engine of the world, but it is actively (and smartly) seeking to purchase intellectual property, patents, and know-how.
China’s way of achieving this is by making strategic acquisitions. Where countries in Europe refused them in the past, now because of the crisis, these same European countries are embracing China because of the need for cash. This is now translating into deals for the Chinese economy that would have been unheard of even 10 years ago.
Is it a coincidence that Chancellor Merkel’s visit occurred in the same week that China made its largest purchase of a German firm yet?
China’s Sany Heavy Industry, a direct competitor to Caterpillar Inc. (NYSE/CAT), purchased Germany’s concrete pump maker Putzmeister Holding for an estimated €360 million. This mid-sized engineering firm is a prized jewel for the Chinese economy.
Last week as well, the State Grid Corporation of China acquired a 25% stake in Portugal’s national power grid, with the promise to invest €1.4 billion in the firm. Portugal was forced to sell part of its national power company in order to meet the terms of its bailout package from Europe. Another coup for the Chinese economy.
In December of 2011, China’s Three Gorges Corporation acquired a 21% stake in Energias de Portugal, Portugal’s largest power company, in a deal worth €8.0 billion.
China’s state-owned utility company, State Grid, which already owns transmission assets in Brazil and the Philippines, paid a 40% premium to own 25% of Portuguese utility firm REN. As part of the deal, State Grid becomes a strategic partner with REN’s expansion into Angola and Mozambique, benefiting the Chinese economy.
Italy’s highly indebted Ferretti Group, the world’s largest luxury-yacht builder, was sold to China’s Shandong Heavy Industry Group, in January of this year. With so many more millionaires being created as a product of the Chinese economy, Ferretti is looking to expand into China.
There is no question that China is using the money it has to purchase key distressed assets in Europe. Europe’s need for investment will ensure that China gets the companies and assets it wants. These purchases will help solidify China’s place as the next superpower in the world and will, in turn, return some very healthy profits for investors in the intermediate to long term.
Where the Market Stands; Where it’s Headed:
The bear market rally is playing out exactly like it should. Slowly, more and more people are turning bullish on the economy and the stock market. The Dow Jones Industrial Average continues its slow path towards 13,000. It’s picture-perfect for a bear market rally.
In March of 2009, a bear market rally (a classic Phase II of a bear market) was born. The purpose of a bear market rally is to lure investors back into stocks before the market moves back down with a vengeance (Phase III of a bear market).
What He Said:
“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.