With the market rallying to higher levels, which will enable us to re-enter some of our key short positions, we wanted to flag a couple of key charts that continue to underscore slowing growth and heightened financial risk, globally. The charts are as follows:
- Baltic Dry Index – Interestingly, in contrast to many leading indicators of global growth, the Baltic Dry Index, a gauge for global dry bulk shipping rates, is well off its year-to-date lows, which were reached on February 4th, 2011. Despite this, on a year-over-year basis, the BDI is down more than 39% from levels in 2010. While the BDI is obviously influenced by changes in the global dry bulked fleet, it remains a good proxy for global economic activity and has declined meaningfully year-over-year.
- Indian Yield Curve – In the chart below, we looked at the difference between 2-year and 10-year Indian government bonds going back ten years. The key flag here is that Indian yield curve recently turned inverted in August and, as of the most recent market prices is only marginally off the inverted level. The last time that the Indian yield curve was inverted was in mid-2008. The time before that was February 2002. The key commonality was that in both periods this was a leading indicator for slowing economic growth.
- State Bank of India CDS – Currently, there is not an actively traded credit default swap market on Indian sovereign debt, but CDS on State Bank of India are a decent proxy for Indian related credit risk. While certainly the majority of sovereign debt discussion is and should be focused on Europe, the CDS of the State Bank of India are signaling the potential contagion effects as the weak links of Europe continue to unravel, but also reinforces slowing growth, even in the emerging markets.
None of these change our overall investment perspective, but we believe are worthy to flag. The key changes we made in the Virtual Portfolio today were:
- Sold Covance (CVD)
- Bought Silver (SLV)
- Shorted Capital One Financial (COF)
In sum, we are incrementally adding to shorts and precious metals in the corrective rally.
Daryl G. Jones
Director of Research