Wednesday, February 17, 2010

Keeping an Eye on the Baltic Dry Index

One of the many leading indicators we keep an eye on at Pinnacle is the Baltic Dry Index (BDI). The index tracks worldwide international shipping prices of dry bulk cargo. Since the dry bulk materials shipped serve as raw material inputs to the production of finished goods, the index tends to be a good barometer of global growth. During the Great Recession the BDI plummeted by nearly 95%, with much of the loss occurring on the back of the credit freeze that unfolded in the wake of the Lehman Brothers collapse. After a brutal decline, the index began climbing in early 2009, well in advance of the markets, and while most economic data being reported was still quite horrific. In other words, as advertised, it did a good job of leading the rebound in global growth off the bottom.

Lately this index has turned down, and in the process, it has broken the uptrend that had been in place since early 2009. This is not a particularly positive data point, but to keep things in perspective, this index is volatile, and we’ve already witnessed a few temporary and benign setbacks in the BDI during 2009. In addition, there are many other leading indices we follow that still look very healthy and imply further improvement in growth this year. Lastly, according to a recent report by Ned Davis Research, the BDI has a history of rallying at the start of the Chinese New Year, which is taking place this week. So perhaps the index is poised to snap back in line with other leading indicators we are following.

At Pinnacle, we don’t view any one data point as a reason to change our view or portfolio allocations. Instead, the weight of many data points will continue to drive our forecasts and investment decisions. For now we continue to think that the economy and markets will likely grind higher in the first half of 2010. That being said, we are paying close attention to this recent downturn in the Baltic Dry Index, and will be watching other leading indices very closely for any signs that our current forecast is breaking down.

Baltic Dry Index 2008-2010