The Baltic  Dry Index; What is it and Why it is Important to Investors.

This communication is intended to add value to your life by helping you separate the real news from the white noise, understand the critical economic events that you read about every day and outlining  alternative investments which might be advantageous to you in these times.  We send this weekly e-mail to both clients as well as individuals we hope become future clients.  Thus, to my valued clients, since we use many alternative investments in your portfolio currently, some of the e-mails might discuss assets that you already understand.  It never hurts to review your knowledge of those investments.

The Baltic Dry Index (BDI) tracks the cost to ship raw materials, including fossil fuels, by sea. It is a very detailed index that tracks different size cargos as well as many different geographical routes in order to get a good measure of the changes in cost to ship by sea. 

Since we have become more and more of a global economy, understanding the cost and changes in volume of cargo being shipped by sea is a very good leading indicator. Too many investors get caught up with news that historically has been lagging indicators, i.e. changes in the trend of the indicator occurs after the stock market changes direction. One of the most well known, historically speaking, lagging indicators is the unemployment rate. There is a lot of focus on the unemployment rate in the media and by investment journalist. I understand it is news and should be reported because we all have loved ones, friends, or people we know who have lost jobs over the last year. However, in terms of when or if to invest in the market, not much can be determined by watching the unemployment rate.

But back to the Baltic Dry Index, since we are looking at the very beginning of the manufacturing process, changes to it may give us an indication of what is going on in the global economy. As you have heard me state many times, we must eliminate the white noise when investing.   The Baltic Dry Index cuts to the core of what is really going on in the global economy.

Another reason it is important is that a high percentage of shipping trade is contracted on credit. This global crisis is more of a credit issue than anything else. Since this economy will have a hard time recovering completely without the credit crises being fixed, the Baltic Dry Index can give us an indication of credit is improving or not.  

Let’s take a look at how the index is performing this year in the following chart:

Interestingly, the index peaked in June has been steadily declining since, dropping over 40% from its 2009 high. The S&P 500 has risen over 10% since the BDI peaked. In many cases this would be called a market divergence and be a real concern for the future direction of equities. However, as it normally works, the devil is in the details. As you can see the index bottomed in December of 2008 while the S&P 500 bottomed in March of 2009.    The index was a leading indicator because it started rising before the stock markets did. The uptrend happens to be the same time as many of the global stimulus dollars were being spent. Specifically China was spending billions on raw materials at the time in order to build a stockpile. So the peak in 2009 is probably an anomaly due to China. The question is where the index should be today. 

The number I am watching is 2000. I would like to see the trend to start leveling out and changing directions if we are really going to see economic growth in early 2010. Since large cargo shipping has long lead times and is at the early stage of the production process, it should move upwards prior to any improvements seen at the back end of the sales cycle (e.g. earnings, which affect the S&P 500).

Let’s continue to eliminate the white noise and focus on leading indicators!

Don't forget to listen to my radio show, airing Saturdays on CNN 1190 Radio (am) from 4:00 to 5:00 pm.  We will be pre-empted by the Texas Tech football games the next two weekends, but will be back on air Octoboer 17th.  We also have the previous shows taped on the website for your listening pleasure.

Best Regards,

Brian Tillotson

Wealth Manager

Virtus Wealth Management

2435 E. Southlake Blvd

Suite 120

Southlake, TX 76092

817-717-3812

866-407-4320

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www.virtuswealth.com

Securities and Advisory Services offered through VSR Financial Services, Inc. a Registered Investment Adviser and Member FINRA / SIPC

Virtus Wealth Management is independent of VSR

The attached commentary contains opinions and analysis that are provided by the author for informational purposes only and should not be used as the primary basis for an investment decision.  Technical analysis relies on past performance; which cannot guarantee future results. Nothing in the Virtus View should be taken as a recommendation; this has been a general explanation of these trends.

Past performance does not guarantee future performance.

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