Friday, August 21, 2009

So What Is The Baltic Dry Index Telling US Now?

I last wrote on the baltic dry index was when I featured an article from CIMB on the sector: Featured Report: CIMB Says Dry Bulk Shipping To Fly

The BDI closed at 2534 last night.

And here is how the index is doing this year.

And clearly the index has been retreating since hitting the peak in June.

Now there's this article on the theaustralian called "Froth and bubble: dipping into the commodities rally"

  • SO what is it: a bear market rally in commodities and resource stocks or just a temporary pullback in the new bull market run?

    It's rather a critical distinction: if it's the former, then late July may have been the peak of the rally and we're in for some difficult trading months; if it's the latter, then these dips are the time to be getting set for the next leg-up. Pick the right way and you'll be seen as a genius but get it wrong and the trading account balance starts looking terminal.

    The analysts are generally urging caution when it comes to stock portfolios.

    But not panic, or cashing out.

    A consensus seems to be building that there will be some sort of correction. But, unlike the generalised slaughter of late 2008 and early 2009, when many investors had their heads handed to them, the next downturn could be more discriminating. Any substantial reversal in metals prices will not only be matched by falls in resource stocks but probably send some sectors into a tailspin. But -- and this is important -- companies with money coming in the door (rather than going out) will withstand the buffeting better than the juniors with nothing more than high hopes and glossy PowerPoint presentations.

    The data is, at best, confusing. Take the first week of August as an example.

    On the one hand, there was copper selling at a price 90 per cent above what it was on January 2. Nickel set a new 2009 high in late July, as did zinc.

    On the other, the Baltic Dry Index -- the shipping index that shows us the health of the seaborne trade in bulk commodities by the prices shipping companies are able to charge -- had its worst week since October. ( Moolah: yes, isn't this very intreresting? For the folks that kept on saying that the bdi is a leading indicator, why is the bdi contradicting the markets? :p2 )

    And October 2008 was a very bad time for the BDI. Having risen to a record 11,793 the preceding May, the index plunged as the year ended, bottoming out at 663.

    By this month there were signs of some green shoots, but during the first week of August it took a 4.6 per cent hit, falling to 2772. That's a long way back from the December bottom, but even further from the May 2008 high.

    No wonder the recent Diggers & Dealers mining forum in Kalgoorlie was dominated by the subject of where this is all going. Delegates spent a good deal of time of fretting about whether this market rally in resource commodities had run too far, too fast. At the same time, scratch an investor and you'll probably find them obsessing about how they should have had the nerve to buy any time between December 2008 and last March, when everything looked like it was going to the dogs, and then subsequently ridden stocks that have doubled or trebled in value since.

    To buy now or not: that is the question to which everyone seemingly has a different answer. But it's not just the average punter who missed the bus earlier this year.

    David Thurtell, Citigroup's commodity man in London, says the professionals also picked up on the rebound too late.

    "It appears that most macro funds have missed the risk rally and are now buying in on the dips," he tells The Australian.

    "That's why the dips are so shallow."

    Thurtell adds that even in July he was hearing that some funds were still not buying the recovery story; others were in the market not out of conviction that commodities had turned the corner, but in order to retain clients who were bullish.

    The last time Wealth looked at commodities was four months ago, and the change of sentiment since then has been nothing short of extraordinary.

    Back in April, we were heartened by copper rallying to a six-month high and the firming oil price.

    But there were plenty of caveats then.

    There were warnings that the economic outlook was still grim, with contraction rather than expansion in the developed countries the more likely scenario.

    One analyst said the global outlook was so soggy that commodities were unlikely to catch fire; another tentatively ventured that "it could be a very good time to get in" because of the extraordinary injections of liquidity through central bank stimulus moves. No such chasm between opinions exists any longer.

    Analysts tend to agree there will be a pullback in commodity prices sometime later this year, but that 2010 is looking good. Really good.

    They differ only on timing for the correction -- sometime between now and December is the range -- and the extent of the retreat.

    Thurtell is on the low side, offering the prospect of about a 5 per cent correction in prices, but that is because his predictions for price bounces by 2010 have already come to pass. It is also based on his reading that funds are ready to pounce on any pullback.

    Others say it could be between 10 per cent and 20 per cent.

    Hartleys resource analyst Andrew Muir is convinced that there is a correction around the corner.

    He puts a pullback in the "more than likely category" because of the level of heat generated in the market during the past few months. "I don't see it being sustainable in the short term," he adds.

    Muir has also been struck by the fact that even while metal prices have been rising, so has the Australian dollar, a correlation that has taken a good deal of the gloss from those price rises. Gold hit $1546.70 an ounce on February 20, largely because of a decline in the local currency. But, at the time of writing just six months later, it's about $1150 an ounce. While all the base metals have risen in that time, the appreciating Australian dollar has trimmed off a substantial slice of the gains for producers here. ( Moolah: Ahh... the denominating currency is rather crucial when one buy gold, no? )

    However, says Muir, not many investors seem concerned about this trend. If that is the case, it's further evidence that a bull market mentality is taking over.

    Those who fail to learn from history are doomed to repeat it, goes the old saw. The problem with this ageless piece of advice is that when it comes to financial markets, it usually is "different this time".

    A few months ago everyone was googling the 1930s Depression to try to figure out how to prepare for deflation.

    You can bin that material because, as National Australia Bank analyst Ben Westmore points out, the commodity buying surge has been driven by renewed inflation expectations in the US.

    Commodities were bought as a hedge against currencies losing value.

    And Warwick Grigor at BGF Equities says the BDI and shipping rates may not always be a reliable guide to what is going on in the metals markets anyway.

    He believes the collapse in the BDI last October was not a reflection of demand for metals but had more to do with Lehman Brothers going to the wall.

    And Lehman Brothers was one of the big freight insurers. "For four weeks no one could get shipping insurance, but this was seen as 'no one wants anything'," says Grigor. And many a wrong decision may have been based on this misreading of the situation.