Baltic Dry Index is Rolling Over

Montreal, Canada.

The Baltic Dry Index is turning over. And that might portend to weaker commodity and stock market values over the short-term because lease rates are declining. Also confirming weak economic activity since early August is the action in Treasury and Euro-zone bonds – suggesting broader trends in soft consumption as long-term bond yields fall sharply from their summer highs.

The Baltic Dry Index is an important leading economic indicator, similar to copper. It typically rallies ahead of rising shipping rates for dry cargo and equally will decline when the global economy is slowing. From its peak of 4,291 on June 3rd, the Baltic Dry Index has declined to 2,534 this morning – a significant 41% tumble in just over two months.

Earlier this year, the Baltic Dry Index was spectacularly oversold following an enormous contraction of global trade starting in Q4 2008; the index crashed a cumulative 94.4% after hitting an all-time high last year ahead of the Lehman Brothers bust in mid-September. The index has since soared 282% off its oversold level but has run into a wall since June. I view this price action as bearish.

In addition to the Baltic Dry Index, copper is a vital commodity in global industrial manufacturing and consumption. Where copper goes, so goes the global economy.

Copper has not rolled over, yet. The primary trend for copper still looks good as momentum is riding above its 50-day and 200-day moving averages, unlike the Baltic Dry Index, which is now confortably below its 50-day. I’m watching copper ever so carefully; if she pops, that’s the nail on the coffin for stocks and commodities.

Yet even if copper continues to rally, another commodity equally vital to global expansion is crude oil. And crude oil is soaring again – probably fostering the seeds of its own destruction in what is still a very weak economic recovery working off heavily leveraged balance sheets, tepid domestic consumption and a decline in Chinese oil imports this year.

Even before the credit collapse last fall oil prices were running to Mars and peaked at $145 a barrel in early July before tanking. We’ve seen oil prices more than double off the lows earlier this February and everyone is talking about $100 again. Though I like oil longer term and would never sell my oil stocks, I’ve got a hard time clinging to the view that the world economy will enjoy a firm v-shaped recovery. Soaring oil prices and a badly fractured global economy mired in debt reduction can’t be bullish for earnings.

In my book, the markets for risk-based assets like stocks, commodities and junk bonds have more room to run this summer and, possibly, this fall. The momentum here has been impressive – even after Monday’s big tumble. But once the Bush tax cuts are history next year and Obama’s tax hikes are introduced, it’s big trouble for the U.S. economy again. By that time, this round of fiscal spending will be running out of gas as the market looks for more stimulus in the absence of domestic consumption, rising unemployment and next to nil bank lending.

Have a good weekend. See you on Monday.

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