Watch This Index
Research for Online Investors

by John Dalt

7/15/10

Don’t you love the sound of a V8 engine?  When I was younger, hotrods and muscle cars were a joy to drive and listen to.  The full throat sound in the exhaust was exhilarating.  You could hear the power just by tweaking the throttle.  You could also hear any problem in the engine.  Many an hour was spent standing around a car analyzing the sound of the motor.  Did it have a miss?  Was the timing off?  Was it running too rich?

The constant efforts we made to keep our cars running perfectly should be replicated in our analysis of the markets. We had to take all the information we could gather to understand what was, or wasn’t operating correctly with our cars. As investors we need to develop the same detached concentration on all the moving parts of the world’s economies, market sectors, regulatory climate, and individual management capabilities to operate with any confidence.

One index to check the world’s economic pulse is the Baltic Dry Index (BDI).  The BDI tracks the cost of transportation for bulk commodities on ocean going vessels.  The shipping cost of items such as coal, iron ore, copper and grains are calculated in the BDI.  The heavier the demand for shipping these commodities, the higher the BDI goes.  When demand for shipping is lower, the BDI moves lower.

The BDI can really spike if ships are in short supply, and plummet if ships are idled waiting on loads.  BDI can be affected by shipping costs such as fuel.

The BDI has been going straight down since the last week of May, and is now at a 14-month low.  The index is down over 50%!  It doesn’t add up that China is increasing exports to the U.S. and Europe as we reported on June 9 in A Break in the Clouds and the BDI is tanking.  How can their May exports be up 50% but the Baltic Dry Index down 50%?

There are only two plausible explanations; China has cut imports of raw materials or somebody is lying.  It is not impossible to think that China is restricting imports of raw materials.  They bought copper and iron ore through the last 18 months at fire sale prices.  There have been reports of stockpiles.  They have also been negotiating new multiyear contracts for many raw materials.  As the world’s largest customer, what better way to exert influence on prices than cut back on purchases, and work through some stockpiled material?

CSX Corp. reported total rail shipments were up 13% in the third quarter.  CSX is the U.S.’s third largest rail carrier.  Their bulk traffic in coal was up 7%, and metals shipped were up 44%.

Not to strain our credibility, but I don’t always believe government reports out of China.  I don’t believe many of the reports out of the U.S. government, but that is because of ineptness first and then propaganda.  With China, every economic report is vetted and released to serve the purposes of the ChiComs.

If you believe the world economy is stronger than the BDI reflects, or that nothing can go down forever, take a look at Dryships Inc. (DRYS).  DRYS owns and operates a fleet of 39 dry bulk carriers and 2 ultra deepwater semisubmersible drilling rig platforms, with 4 more under construction.  DRYS is trading at close to their 14 month low.  Their stock has been hurt by the BDI, and the six-month moratorium on deepwater drilling.  So much for the efforts to diversify!  DRYS may deserve your attention if the price takes a dip.

Our concerns about the Gulf Oil Spill have been confirmed in the last few days.  On 7/2 in It Can’t Be That Bad, we wrote about the danger of oil flowing outside the drill pipe and possibly outside the casing into the surrounding rock.  This could make the well impossible to seal, with the only option to let the well “bleed out.”  This meant the possibility of over 2 billion barrels of oil spewing into the gulf before the tapped pool was depleted.

In the last few days a new cap has been put on the well, but the government delayed BP from shutting the three valves that would increase the pressure on the well.  They were waiting on a seismic study of the ocean floor, and comparing it to a study done before the well was started.  The only reason to compare the seismic studies was to determine any changes in the ocean floor surrounding the well.

BP is scheduled to shut the valves today and monitor well pressures for 48 hours.  If the pressure begins to drop, it is because the oil is finding other routes to escape.  This could indicate the oil is flowing out into the rock surrounding the well.  We will be watching to interpret the developments.

To the mailbag:
Cramer is a Cheerleader to help get the animal spirits joining in and try to make the citizens feel good about the economy.---paid up subscriber T.M.

John’s reply:  Same shtick.  I just saw the headline today and was amused.

When I look at the "BIG PICTURE," there is nothing on the horizon that screams the market has any support. Your newsletters are much appreciated.--- subscriber G.C.

John’s reply: Dry powder is a good idea, but don’t be afraid to spend it below 1010.  Just remember to buy on the way up, not the way down!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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