By MoneyMorning.com.au
In yesterday’s Money Morning, David Stevenson showed you the most bearish chart in the world – the Baltic Dry Index (BDI).
Well, we think we’ve found one that’s at least as scary. A chart that’s so bearish it just could be a signal that it’s time to buy. But first a recap…
The BDI charts the strength (and weakness) of commodity shipping rates.
Right now the index is on the weak side… the very weak side. As this story from Bloomberg News shows:
“D/S Norden A/S (DNORD), Europe’s biggest publicly trading commodity shipping company, hired a Supramax vessel at no cost other than fuel charges, its first such transaction in a quarter century.”
Then there’s this story from BusinessWeek yesterday:
“Glencore International Plc hired a commodity ship with the operator of the vessel earning nothing and contributing to some of the fuel costs after freight rates for hauling raw materials had their worst-ever start to a year.”
Free shipping! It’s one thing to get free shipping for a book or pair of pants… But free shipping on a Supramax ship that can carry more than 45,000 tonnes of iron ore or grain? That’s something else.
Especially when these voyages can take weeks or months (it takes the world’s largest iron ore miner, Vale do Rio Doce, 45 days to ship iron ore from Brazil to China). So it tells you something about the state of the shipping industry if a firm is willing to give away cargo space rather than wait for a paying customer.
Super-Charged Buying Signal
But it’s not just the BDI that gives an insight into world shipping. And it’s not just commodity shipping either. As the HARPEX index of container shipping shows, container rates are low too… near 2008/09 financial meltdown levels:
The HARPEX index provides similar data to the BDI. The difference is, rather than monitoring the cost of dry bulk shipping (grains, ore, salt, etc.), the HARPEX monitors shipping costs for container ships.
From the 2008 peak, the BDI is down 86%.
As for the HARPEX, from the peak in 2005 to today, the index is down 78%.
Long term buyers of those indexes have taken a bath. And as recent news reports show, low rates are actually sending some shipping firms bust. Those that haven’t gone bust are only just hanging in there.
Shares in U.S. bulk shipping firm, Frontline Ltd [NYSE: FRO] have fallen 81.7% in 11 months.
But that’s exactly why we see both indexes (BDI and HARPEX) as potentially bullish indicators. Here’s why…
If you look at the HARPEX index and a longer-term chart of the BDI you’ll see something interesting. You’ll see they are a super-charged leading indicator.
That is, when the economy shows signs of promise, these indexes don’t just go up a little bit… they take off.
In fact, they tend to rise so quickly, that in the case of the HARPEX it gained 293% in two years… while the Aussie S&P/ASX 200 index gained just 40%.
Leads the Stock Market Up… and Down
But here’s the thing. When something takes off that quickly, it’s hard to keep up the momentum. So even though the stock indexes continued to go up for another two years, by 2005 the HARPEX began to fall… so that by late 2006 it had halved.
A similar pattern happened in 2009/10… the HARPEX index tripled while most stock indexes gained 50-100%.
But now, with both shipping indexes heading towards rock bottom that tells us it could be a great time for you to look at adding volatile high-growth stocks to your portfolio. For the simple fact that when you give stuff away for free, you can’t go much lower.
Shipping rates can only go up from here. Firms will go bust and excess ships will go to the scrap heap. That will leave surviving firms in a much stronger position. And hopefully allow them to raise their rates again.
That will take time. But remember, this isn’t the only hint we’ve had that the market could be at a turning point.
Other leading indicator indexes are flashing buy signals too. We’ve showed you the energy index and the oil services index. Both are near multi-year lows.
That means we’re approaching the stage when – as Slipstream Trader, Murray Dawes puts it – sellers become exhausted. That’s when you get buyers flooding in looking to pick up bargains.
Naturally, buyers don’t always get the timing right. At any point in time, buyers buy because they think they’ve spotted the bottom of the market. But sometimes the market keeps falling.
Yet a point comes where the upside risk is so much greater than the downside risk that it’s worth taking a punt. And right now the indicators and numbers are stacked up in favour of a rally.
Of course, it’s still a big risk. But right now, the potential for big returns is so great we’re happier being a buyer than a seller. And one of the best places to magnify your returns in a rising market is small-cap stocks.
Time to Buy Stocks
The built-in leverage that small-cap stocks provide means they tend to move fast when a market recovers. Simply because investors are happy to take risks.
The only thing remaining is to figure out which stocks are likely to do best in this rally.
That’s something we’ll discuss with attendees at ‘After America’ – the Port Phillip Publishing investment conference – next month. If you haven’t reserved your place yet, it’s not too late. Click here for details…
Cheers.
Kris.
Related Articles
The Conference of the Year for Australian Investors
Are ASX Energy Index Stocks Worth The Risk?
Will These Commodities Help You Claim The Best Investment Gains Of 2012?
