Friday, July 16, 2010

Market Going Down With the Ship?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

This morning the Baltic Dry Index, a measure of freight rates for international shipping, was at 1700. It hasn't been at this level since April 2009, only four months after its Credit Crisis low and only one month after the stock market was at its bottom. 

Bloomberg News noted a week ago that the index had dropped continuously for the longest period in nine years. Yes, the current drop in the preceding seven weeks (from a high of 4209 in late May) has been bigger than anything seen during the Credit Crisis. The last drop of this magnitude was in August 2001 in the middle of that years recession. Lack of shipping activity from China, the engine for global economic activity, was cited as the main cause for the falling index. Charter rates for all types of ships tracked in the index are falling.

Prices for dry bulk shipping, which doesn't include energy commodities, tend to be very sensitive to economic activity. A sharp drop in rates indicates a significant drop in global trade. Based on historical charts it looks like the Baltic Index can lead, be coincident or lag movements in economic data and the stock market. The index seems to be most closely correlated with prices of industrial commodities and the industrial sector of the global economy. While this is not the largest component of the U.S. economy (the service sector is four times larger), it is the key sector in developing economies. It was manufacturing though that had the biggest rebound in the U.S. since last year. The service sector has remained lackluster.

The stock market will likely be following the Baltic Index down, although perhaps not with such a precipitous decline. The Index has dropped almost 60% since late May. With the exception of the small cap Russell 2000, none of the major stock indices have had even a 20% drop - at least not yet.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

Jim Smith said...

What are the chances that the Fed and the crash-prevention-team will artificially keep the market propped up till the Nov elections are over?

With so low volume at play, it won't be difficult for them to manipulate!