Baltic Dry Index versus the S&P 500

[Neubarth]

to reflect reality, either world shipping has to increase by 100 percent, or the S&P500 has to fall by fifty percent. These two indexes should be in lock step for the world economy. That unfortunately is not the case.

 

[Toro]

Why should the level of the Baltic Dry Index be related to the level of the S&P 500? There is no correlation between the two.

Here is the index going back to 1990.

 

[Neubarth]

There is a direct correlation between the two. They are not in lock step with each other, but as one goes up the other must follow and vice versa. As you know average earnings on the S&P500 are about 20 percent of what they used to be two to three years ago. The BDI has come down to reflect the earnings of the S&P500, but the average stock price has grown totally out of proportion.

Years ago stock prices used to reflect the stock company earnings. The price would go up when earnings improved and would go down then earning fell. Well, the earnings have fallen about 80 percent, but the prices do not reflect that.

 

[Neubarth]

The ten year and thirty year treasury yields also roughly follow the Baltic Dry Index. Again, not in lock step, but close enough to let you know that the BDI can give you a good indication of the health of the world's economy and that of the US, too. Right now, China is having a lot of dry goods shipped and has driven up the BDI to new recent highs. That, of course, is a momentary aberration that will average out with time. The fact remains that the Baltic Dry Index says that the world economy is faltering, but S&P stock prices say the world economy is booming. S&P earnings says that is not true. I believe the earnings and the BDI. I do not believe the stock prices.

 

[Toro]

Neubarth

Throughout the entire 1990s, the BDI went sideways and stocks went up 500%. Dry shipping has its own dynamics. Day rates for shipping transport are a function of both demand and shipping supply. Stock prices are a function of earnings growth, interest rates, risk premiums, inflation, etc.

The BDI seems to have more of a correlation with commodity prices, and commodity prices have historically had a negative correlation to stocks.

 

[Neubarth]

Neubarth

Throughout the entire 1990s, the BDI went sideways and stocks went up 500%. Dry shipping has its own dynamics. Day rates for shipping transport are a function of both demand and shipping supply. Stock prices are a function of earnings growth, interest rates, risk premiums, inflation, etc.

The BDI seems to have more of a correlation with commodity prices, and commodity prices have historically had a negative correlation to stocks.

Toro, you need to look at the chart movement, not day by day movement. The Baltic Dry Index is a direct reflection of Global Economic Growth for companies that deal in some way with dry goods or commodities, and the S&P is a reflection of Global Economic Growth with an emphasis on the US.

I know what makes stocks go up and down. You are just being rude with a statement like that, and, as is my forgiving nature as an old man of 62, I will ignore that. I try to avoid useless argumentation unless the poster is trying to tell the world that Islam is a "Religion of Peace." Islam is a religion of constant insane bloodshed. Always has been and always will be if they follow the teachings of Mohamed.

As of the nineties, the US market has swung wildly as you have pointed out while the Baltic Dry Index has only reflected the growth in EARNINGS of the S&P companies while the S&P stock prices have moved up and down around their earnings (or lack of same as of late).

So, in the final analysis, knowing that stock prices need to reflect their earnings, we look at the following. The BDI is clearly showing that the Global Economy of the manufacturing companies is faltering or sputtering. The S&P Index is clearly ignoring that their companies are faltering and stock prices show that we are in another Gigantic Price Bubble. Funny how people never learn, especially when they can clearly see that when most companies go belly up, the stock holders are usually shafted. You know that stock prices need to reflect their earnings. Now, as I initially said, either the earnings have to soar, or the price of the stocks need to come down. Even the BDI is telling us that. It is even doing so while China is driving it up with all of their Dry Goods Purchases around the world that they are stockpiling for a coming period of tremendous privation. They are even telling thier citizens who have the means to BUY GOLD. They are not stupid in China. Not wise all the time either.

Why do you think they are doing that shipping, Toro? It isn't JUST to ramp up their economy in their stimulus program that will be winding down soon. You can only make so much stuff and they know it. If they are not shipping their stuff, they have to stop manufacturing the quantities that they have been producing. As it is most of the Chinese workers in production industries can take a four month vacation and still come back to jobs that would only require them to work a five hour day. I have written the Chinese leaders suggesting that they ballyhoo the fact that they will be the first nation to have their workers on a six hour work day or less in the coming future. The United States need to consider that as an option to put people to work. That is one of the reasons for Obama health care once public funds start to pick up the burden of the employer. (That is stage two of the program once stage one is implemented.) Looks like we are going to get stage one fairly soon.