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Sunday, January 22, 2012

Baltic dry index continues to slides now at Jan 2009 year low - A Very Big Warning sign. TVIX, TZA, FAZ

Baltic Dry Index says it all how great is this global recovery
The Baltic Dry Index is a daily average of prices to ship raw materials. The index does not concern itself with finished goods or container ships, only raw materials such as coal, iron ore, steel, cement and dry bulk specific ships are factored into the calculation. The BDI offers a real time glimpse at global raw material and infrastructure demand. When the BDI increases, dry bulk shipowners win. The increase in the index directly increases their margins and revenues.

When the BDI decreases, every other consumer/producer in the global value chain wins. Since the BDI measures procurement costs, when these costs go down, producers benefit from increased margins, and consumers benefit from lower prices for finished products. BDI has direction relation with commodity demand, Oil prices and labor relation.

Commodity Demand - This is determined mainly by industrial production and energy demand. If commodity demand is strong, BDI rates will increase regardless of spot rates for those commodities. Companies that have contracted out spot rates will show increased demand through paying more for shipping of the materials. As more coal and steel are being demanded by China, so will the rates for dry bulk shipping increase.

Bunker Prices - Bunker fuel is a type of fuel oil a ship uses for propulsion. Bunker fuel accounts for between a quarter and a third of vessel operating costs. Higher crude oil prices also mean higher bunker fuel prices which will be reflected in higher BDI prices. So, just as higher oil prices will put a damper on Airline company margins, they will squeeze margins for dry bulk operators

Labor Relations - Nothing is loaded or unloaded from ships without labor. A dropping BDI suggest less labor required.

At present stock market is ignoring even BDI but sooner the market will come to reality. Buy any bear stock like FAZ, ERY, TZA, SDOW, SOXS, VIX, VXX, TVIX at Tuesday close. Below chart shows S&P500 performance when BDI declined. Usually the effect decline in BDI in S&P500 is seen after 1 month to 6 month time. Currently BDI has dropped over 50% since October.

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