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An Overlooked Index
Posted On Wednesday, August 26, 2009 at at 3:20 PM by Finance Fanatic
Markets traded mixed on Wednesday and once again ended with the miraculous end of day rally to push the Dow slightly into the green once again. However, the past few days have shown us that definite uncertainty remains with investors as volume remains extremely light, and selling is becoming more and more prevalent. Unfortunately, I still believe manipulation exists with such low volume levels, which continues to make it an unnerving market for me to invest in at the moment.
I wanted to discuss an interesting benchmark that I track that many overlook. In fact, CNBC actually talked a bit about it today in a good article, however, you had to dig a bit to find it. Click here to read more about it.
The Baltic Dry Index (BDI) is an index measuring shipping activity along 20 of the world's biggest routes. As a result, many economists use the index to measure overall demand of goods. I really like this indicator, because I believe it is a good measure of consumer progression (which is the biggest contributor to GDP growth). Also, conveniently, it has an almost flawless record of predicting recessions.
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Despite all of the big gains we've seen on Wall Street the past few months, the BDI has been consistently declining since June, which as a whole, has been about a 43% decline. The indicator has found to have a large influence on China's economy, which since August, The Shanghai Composite is down 16%. The large decline in the BDI is believed to be largely due to lower demand of metals, which in turn could be a very strong indicator for a near deflation, which I have feared. Believers in this demand measure fear that more economic problems are headed for the US and the global economy and recommend investors to take higher cash positions.
This is just one more indicator that has been thrown to the side as we have seen nothing but green in the markets. As unpopular as the index has been, like I said, its track record is impeccable in predicting recessions and usually is directly related to consumer demand. One more caution for those believing we are out of the woods. Happy Trading
I'd be interested to know your thoughts on this:
http://seekingalpha.com/article/157487-rethinking-the-baltic-dry-index
Anon,
the BDI tends to be a leading indicator so to evaluate its peaks compared to the peaks in the market is not signifcant. Also, the writer (who I feel isn't familiar with the index) is mostly speaking of this past year's comparison, which in all reality, is a skewed perspective, considering the market has not followed any fundamental indexes as of late.
You will see that China stocks follow the index much more closely, consider there huge reliance on exports. However, regardless of the point the writer was trying to make, the index is a great measure of consumer demand.
The marine index is a great measuement of world economic strength or weakness.