By Stockpickr Staff
Posted on April 13, 2009

Economic indicators and forecasts are inherently flawed, because they are subjected to personal bias, upward and downward revisions and government interference. So when a leading economic indicator such as the Baltic Dry Index is forecasting a downturn, we'd better pay attention.

The Baltic Dry Index, published by the Baltic Exchange in London, measures the cost of moving major raw materials, including coal, iron ore and grain, by sea. Simply referred to as the BDI, the index covers Hnadymax, Panamax and Capesize dry bulk carriers over 26 shipping routes.

Simply put, the BDI is a leading indicator of economic growth, demonstrating a direct correlation between actually rates and the underlying demand from that related commodity.

Despite the recent rally across world markets, the BDI is now down for 21 days in a row; rates seemed to have peaked on March 10 at 2298. Currently, rates on the BDI as of April 13 are 1557, which equates to a peak-to-trough decline of 55% in three weeks' time.


Source: Bloomberg.com

Nonetheless, commodity-sensitive stocks have rallied hard. Freeport-McMoRan (FCX), the world’s largest copper producer, which closed at $34.17 on March 10, was up to $45.59 at Monday's close. BHP Billiton (BHP) went from $39.93 on March 10 to $48.54 on Monday, and Potash (POT) rose from $75 on March 10 to close at $88.01 on Monday. Moreover, oil, which is also a highly sensitive economic asset, seems to have stabilized a bit.

The Australian economy, which ties more than half of its GDP to commodity-related exports, has seen recent strength in its cross-currency pair against the U.S. dollar. A strong Aussie dollar suggests strong demand for commodities.


Source: X-rates

But don't disregard the BDI altogether. Last week, CSLA Asia-Pacific published its monthly purchasing manager’s index for China. A decline from 45.1 in February to 44.8 in March suggests a potential slowdown in industrial growth. Moreover, China has experienced a lower-than-expected 3.8% rise in industrial production in January and February.

The investment mosaic is never easy, but given the decline in the Baltic Dry Index, investors should wait for a sizable pullback in companies such as Cliff Natural Resources (CLF), Rio Tinto (RTP) and Mosaic (MOS).