Sunday, January 29, 2012

The BDI - Big Drop Indeed

UPDATE: Jan. 31 - How ironic is it, that no sooner had this piece been published yesterday, this article appears on Zero Hedge today?  Talk about impeccable timing.


Every once in a while the Baltic Dry Index is brought to the forefront for discussion.  This is one of those times and I guess for good reason since it has dropped 53% this month alone.  Are you kiddin' me?  Wow!  This shipping index deserves another look to be sure.

I personally haven't used the $BDI for the purposes of trying to gain any timing advice regarding the broader stock markets in the past 5 years at least.  I'll explain why a bit later on.  The theory is that since it's a kind of transportation index it gives an indication of the health of the global economy.  So in that respect it's different from the Transportation Index ($TRAN) or statistics on rail traffic which are both based on the US economy alone.  By far, the $TRAN and rail traffic studies offer much better guidance on the timing aspects for the North American markets.  Further, the $BDI is a measure of the prices charged for carrying ship cargo that, well... that is not liquid.  In other words, basically it's a measure of prices charged for the shipping of dry goods such as coal, wheat, lumber, goats, automobiles, steel, goats, textiles, electronic goods, goats, furniture, etc.  Did I mention goats?  But it doesn't include oil.  And neither does the CPI data and we know how accurate that ridiculous measure is.  But for the purposes of measuring the health of the global interactive economy, the $BDI does offer a general clue.  Currently, the Baltic Dry Index is off its all time high of May, 2008.  Down by 93.8% to be more precise.

The ghost fleet.  Empty dry-cargo ships with nothing to do.
Although there are those who claim to see signals from the Baltic Dry Index that give indication about the future direction of markets, I think those virtues are restricted to only the grandest of scales.  There are a couple of good reasons why the $BDI should be considered unreliable as an indicator for 'timing' the markets.  The first is that although it measures prices paid for shipping cargo, this is not a measure of the quantity of cargo being shipped. The second and equally important reason is that it tends to be rather capricious.  At times, when the index is tracking the equities markets quite nicely, it can suddenly veer off course without warning.  The habit of 'suddenly veering off course without warning' is not a particularly endearing characteristic to have at the best of times, let alone if you're  in the shipping industry.

In any event, the correlation between the $BDI and the global equities markets should actually be recognized as as being rather flimsy because there are just too many other factors that affect shipping rates.  Those factors include the all-import
consideration of new cargo ships that are about to hit the water.  Not to mention the question of what will happen to future shipping rates as a consequence of the number of new ships that are 'planned', those that are indeed already 'on the drawing board', those that are currently 'under construction' as well as those that are about to be launched.  The effect of these added factors becomes quite apparent by noting what happened with the $BDI relative to the world's largest stock market (as proxied by the S&P) back in 2005, and again in the winter of 2010.  But generally speaking, yes of course the $BDI normally wants to move in the same direction as the global economy.

We're only going to look at one chart of the $BDI... but in two different scales.  First up... the weekly chart in logarithmic scale which in all respects is the best one to use when we're dealing with charts showing large moves on a percentage basis.    The most amazing phenomenon to note is the stunningly wild swings that are completely normal for the Baltic Dry Index.  Each and every one of the white dashed lines on the chart below represents a move of 44% or greater.  There's no getting around it, this would be a remarkable characteristic for the movement of any market or index.  The graphic below represents the very epitome of 'volatility':

Left click either chart to bring up the Lighbox.  From there you can toggle between the two for an interesting comparison.  Click here for a full blown live version.

I draw your attention to the 3 blue rectangular boxes, particularly the one on the left.  For nearly a full year encompassing almost all of 2005, the $BDI was on sell mode and yet the correlation with the equities markets was pretty much zero.  In fact, in that period of a single year the $BDI lost 72% of its value and the global stock markets didn't even flinch.  In fact the S&P gained approximately 17% during the same period.  A similar event occurred in the second blue box depicting late 2010.

But on the larger picture, the most stunning statistics are these:
The $BDI peaked in May. of '08.  By time it hit bottom 7 months later, it had lost 94.4%.
From its Dec. low, when it bounced, it bounced hard...gaining 547% in 6 short months.
And more recently, between late '09 and today, the $BDI has again lost 84.4%.

Net result... between their respective peaks of late '07 through to today, while the entire NYSE has lost 24.2%, the $BDI is currently sitting with a loss of  93.8%.  And that my friends, is not a sign of inflation within the shipping industry.  And whether there be new ships hitting the water or not, neither does it signal any great degree of robustness within the global economy.  Perhaps it signals the opposite?  Oh, I think maybe that's what it's signalling.  Imagine the agony those shipping giants are going through when they are unable to charge higher prices for their services and yet the price of their greatest expense, fuel, continues to hold at a high level.  What's going to happen to those shipping giants when oil spikes due to a certain to occur war with Iran?  They're not going to gain anything from shipping oil that's for sure.  Neither are the oil shippers because if there's any one thing we can be totally certain of, it's that once that war breaks out they'll be shipping less oil, not more.  Surely at least a few shipping corporations will be facing bankruptcy sooner or later.  And that prospect could hardly be viewed as providing an inflationary outcome either.  Sombody's not going to be paid back the money he's owed. Needless to say that prospect too is the very definition of deflation... the disappearance of money right out of existence.

And now for a different type of drama effect (as if the log scale wasn't dramatic enough), we look at the same chart (shorter time frame though) in order to zero in on the more recent action and using the more commonly used linear scale:

Left click either chart to bring up the Lighbox.  From there you can toggle between the two for an interesting comparison.  Click here for a full blown live version.

Man, if that isn't a classic cup and handle pattern I don't know what is.  What I do know though, is what happens when I turn a cup upside down.  I get a friendly reminder from the Maitre'D that if I keep doing that I risk being tossed from the restaurant.  The other thing that happens is that all the contents of the cup spill out.  From that aspect, the outlook for the $BDI is all of a sudden looking quite grim indeed.  The only saving grace might be the Dec., 2008 low of 663.  Will it hold?  It's very difficult to say of course, but with the downward momentum currently behind the $BDI's January crash it's difficult to imagine what kind of miracle would arrest the decent at that level.  Before we could even begin to consider a bottom in this amazing crash we would want to see at least some form of stabilization.  But wait!  We just did!  And the Baltic Dry failed miserably to advance after a full 8 months of consolidation followed by a false break-out. That particular type of pattern in itself is a very bearish event.  We would have to see prices improve to the point where, at the very minimum, the 6 week moving average turns higher.  One question often asked is "Well it has already lost 85% so how much further can it fall?"  And the answer as always, is of course: "It can fall another 85%".



  1. <=====Nice choice of avatar LOL. It looks like the artificial reef/Ital-Captained cruise ship/troop carrier business should be booming if the BDI tanks any further. I call steerage! What was the purpose of the promulgation of so many excess vessels in the first place? Didn't the industry just shoot itself in the loins by creating such excess ability?

  2. I do believe Dictionarydotcom is correct. And...I always use the Cramer/GS agreement correlation as a contrarian indicator...Someone should do a study.

  3. AR once again great article. As stated in my original post on the BDI my concern is, the magnitude of the decline. I failed to mention at the time that the real concern, given the huge decline in freight rates, is that it must be having a calamitous impact upon the financial integrity of many the worlds shipping lines.
    That in itself is something that may very well set-off a tidal wave with huge implications throughout Europe. I have seen estimates that loans exceed $500b and could be as high as $750 to shipping conglomerates many of whom eminate from eastern Europe.

    All I can say is that if was a bank that had loaned money for a cargo ship, I'd be one VERY worried banker.


  4. From the research I've done on cargo and container ships, not only were thousands of new 'excess' ships 'stored,' but thousands of cargo ships already in the water were being stored.  

     Keep in mind that retailers, manufacturers and shippers have to 'guess' several months ahead of time about what products and raw materials they're going to ship and receive. As you've pointed out, there are a lot of factors to leep in mind, but as a whole, the BDI can give us a clue about what's really coming down the road at us wrt the markets.

  5. "All I can say is that if was a bank that had loaned money for a cargo ship, I'd be one VERY worried banker."

    That kind of sums it up doesn't it.  So would I, and I'll bet some of the shipping giants don't make.  I find all this so ironic, since some of the greatest fortunes 4 decades ago were the Greek shipping magnates.  I remember when Aristotle Onassis and Stavros Niarkos were two of the richest men in the world.  The same Onassis who married Jackie Kennedy after she'd lost JFK.

  6. Looks like we might get that test of 663 right quick like as it currently sits a mere 39 points away @ 702. If the index maintains sub 1500 levels this could spell real troubles for the large debt shippers, many of whom have consistently requested loan/value waivers. And who holds a lot of that debt - you guessed it, Euro banks and therein lies the rub. Not to mention, how on earth will the Greeks recover with an anemic shipping industry?

    Another great article thanks for posting, your efforts shine thru and are much appreciated :)

  7. Thanks for the kind words KB03.  Just judging by the momentum behind the January drop, I don't think there's a chance in hell the $BDI is going to find a bounce at that previous low of 663.  I mean it just spent 10 months consolidating and building a base... and then the bottom falls out again, lol.  True, it's very oversold and after a loss of 53% in one month I suppose a bounce is in order sooner or later.  But I'd be really surprised if it bounced up even as high as the blue baseline.  Good lord... if that thing lost another 50% in February (which it has shown it has the ability to do with flying colours) then it would be at 350.  How much farther can shipping rates fall before some of them finally have to cry "Uncle"?

    And yeah... some of the biggest shippers in the world are Greek.  Funny you should mention the troubled Euro banks have so much exposure to shippers.  I'm not sure if you saw the article entitles "Dax And The Entire European Financial Index" but in that one I demonstrated how the DAX was going parabolic when priced in units of the DJ European Financial Index.  In fact it showed that the DAX was pretending to go to the moon while the entire European financial sector was crashing all around it.  Obviously that can't go on much further.  Either the DAX has to crash back to reality or by some miracle the European banks are all going to recover their share value in a big way.  How in hell would that be possible?  And needless to say, that ratio is still going more and more parabolicer every day.  Something's gotta give and I say it's the DAX.

  8. According to AH action. this is what the 60 min. chart of Amazon is going to look like tomorrow morning:

  9. Plus, this: EUR/USD 1.3037 -0.0103 (-0.78%)

    Remember the days when one tenth of a point was a huge move?

  10. I sure do.  I remember when a move of a half a percent in the S&P or DOW was considered a monster day.  Overnight gaps?  Unheard of.  These days they're the favorite toy of the thieves.  Mind you, I started reading about and studying the stock markets with a great deal of interest when I was 11 years old.  The Dow hadn't yet hit 1000 in its history..

  11. Thanks for the AAPL:$NDX chart you posted in response to pebble over at DE's.  It's a beaut!

  12. You're welcome Zim.  It's actually from an article I wrote on that topic quite a while back. I think I first wrote it on Mike's site about 9 months ago.  That was the chart that Dino scoffed at as being useless, lol.  On the contrary, it offers one of the best "tell"s we could ever ask for. I've been planning on doing a re-write but just haven't gotten around to it. 

    One would think that the exact same benefit would come from a similar ratio of the IBM:INDU because the weighting of IBM is darned near as heavy in the DOW as AAPL is in the NAS.  But it just doesn't work the same at all.  I haven't investigated why yet but I did do one comparison between AAPL and IBM on a performance style chart and discovered that the performance of AAPL is consistently about double that of IBM.  IBM just doesn't swing the DOW around like a rag doll like AAPL does with the NAS.  Then next thing I'd have to look at is total market cap of both companies and I'll bet that's where the key is.  VOLUME!  When I get time, lol.

    Thanks for checking in bud.  It's always nice to see you.

  13. AR saw your entry over at PW.

    Think we saw alot of distribution on the DOW and SPX today and if it wasn't for FB I think the Naz would have gone the same way. Gold volume is declining drmatically with price and bonds as you mentioned are singing a different tune than the markets.

    Here's a little intersting look at the DOW

    Cheers  matey

  14. AR saw your entry over at PW.

    Think we saw alot of distribution on the DOW and SPX today and if it wasn't for FB I think the Naz would have gone the same way. Gold volume is declining dramatically with price and bonds as you mentioned are singing to a different tune than the markets.

    Here's a little intersting look at the DOW

    Cheers  matey

  15. AR saw your entry over at PW.

    Think we saw alot of distribution on the DOW and SPX today and if it wasn't for FB I think the Naz would have gone the same way. Gold volume is declining drmatically with price and bonds as you mentioned are singing a different tune than the markets.

    Here's a little intersting look at the DOW

    Cheers  matey

    PS Not a fan of this DISCUS

  16. Hi Allan.  How's my friend from the land of Aus?

    Yeah, Pebble's an awesome dude.  He and I chat whenever we can find the time.

    I agree bud... but it's just so god damned infuriating what those asshole banksters are doing.  And man... you have no idea how much I like that chart you posted.  Holy shyte... that's what I'm talking about.  I wanna believe.  I wanna believe.

    You're not alone in your distaste for Disqus.  Every blog owner I know (including myself) share your disQust.  But there are a few tools that it affords us which our friend Danno just refuses to use.  Some of those tools can reduce the problems quite a bit.  For example, your name has been "whitelisted" on this site, which means that any comment you submit, whether it contains links or not, "should" be ignored by the Disqus spam filters and give you a green light.  That way, at least in theory, you should never have a comment vanish on you.  Not from this site at least.  That's the theory anyway. 

    For example, over at Pretzel's site, Pretzel has "whitelisted" me so I have great success in having longer comments (with as many as 4 links) pop right up with no problem.  On Danno's site, they'd vanish.  That's because the Disqus spam filters take it upon themselves to decide what they think is spam or not.  And thanks to the actions of the asshole trolls at Danno's site, Disqus now watches me much too closely, thinking I'm a spammer because some of my comments were needlessly and maliciously "flagged for review".  God damn their oily hides.  But if Danno would only go to his spam box and mark those innocent comments as "not spam" and then "whitelist" me, like Pretzel has done, that problem 'should' be solved.  No guarantees, but that's the plan.

    By the way, I'll give you one guess why there hasn't been a single troll comment published here.  Wagner tried it twice and he got shot in the face both times.  He's gone for life.  And when the day comes that he shows up with a new identity, it's gonna have to be from his boyfriend's address, because he's not gonna be able to post here from his home in Walnut Creek, California.  Yup, I know where that prick lives now, because he's stupid.  Same thing would happen with about 8 of the children who have gone to such great lengths to ruin the other site.  There is no reason they have to be allowed to make peoples' lives miserable over there.  But what can I say... I'm not the owner of that blog.

    So hang in there with the Disqus if you can.  I don't think you'll have as many troubles with it here as you might have experienced elsewhere.  Fingers crossed.

    Nice to see you as always.

  17. That chart reflects where I've expected the market to head for the last six months. I reckon I'm ahead of the curve again. ;)

  18. Central Banks are the next housing bubble. Just a matter of time.  Nothing new here, just presented very well.

  19. Thanks AR glad you enjoyed it !

    It seems like a perpetual money machine.  But the CB's and Banks are they only ones in the loop.
    Banks are not creating money the way they usually do ( lending money to individuals and corporations)
    May be Europe falls into a deep recession.  Who knows it could be Japan that hits the windshield first.

    It just seems so much like 2002-07 that i think 12-18 months  is all i would give this current bubble.

  20. Waiting on the numbers 

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