Eye on the Baltic Dry Index

“I have no friends and no enemies - only competitors.”

          -Aristotle Onassis

We’ve had our eyes on the Baltic Dry Index, which has had a massive rally year-to-date and over the last three months.  The BDI is one of the best proxies for global demand as it signals the increase in demand for cargo containers.  As shippers require more containers, simple supply and demand dictates that the price for those containers will commensurately increase.  The quote from the now deceased shipping magnate, Aristotle Onassis, explains this relationship directly.  Shipping is a highly competitive industry, so rates for shipping are very sensitive to increases and decreases in economic activity. 

The Baltic Dry Index, in particular, is very relevant.  As was recently written in Slate, “because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.”  Further, “because it provides an assessment of the price of moving the major raw materials by sea, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."

The important takeaway form the move we have seen in the BDI year-to-date (outlined in the chart below), which has also been echoed by the prices of copper and related commodities, is that this economic resurgence we are seeing in the prices of commodities globally is not illusory. There has been a real and sustainable pickup in demand for basic industrial inputs on a global basis.  China has obviously been a key driver of the pickup in shipping rates, as Andrew Barber discussed in detail in his recent China Black Book.  Specifically, China has imported an estimated 297 million tons of iron ore in the first half of 2009.

While the price move of the index verifies what we already know, the question remains, what is the BDI telling us about the future?  We are seeing certain rates decline over the last week, which may suggest that we are seeing a bit of a summer slowdown.  Some strategists are suggesting that we will see a serious decline in economic activity from China in the upcoming quarters.  We currently do not hold this view, but will be watching the BDI as an indicator for continued demand from China for materials needed to continue its furious infrastructure building activity.

Daryl G. Jones

Managing Director

Eye on the Baltic Dry Index - a1

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more