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A Tale of Two Shipping IndicesDave Forest I'm back in Tokyo after a week in Koh Samui, Thailand. The beach time turned out (pleasantly) to be more of a vacation than expected (thanks to my good friends at Miskawaan Villas). Thus my sporadic writing last week. I'll try to make up for the absence at the end of this letter with a "bonus" look at a very exciting new project I'm involved with. One I hope and believe will change the way investors track emerging financial trends. Despite having a break from work, the past week's tropical island setting several times drew my mind back to the subject of the global financial situation. Much of the time, the island was idyllic. The sun was perfect, the sand just the right grain, the ocean a poetic shade of blue. Every meal was delicious and detailed. I even got fireworks in honor of the birthday I share with a good friend in Samui. In short, a near-perfect experience. And yet, every so often a storm would roll in. Quite suddenly the sky would grow dark. The ocean would turn from blue to grey. Rain pelted down, forcing beachgoers indoors. So it seems with the markets today. For the most part, life is a beach. The financial crisis is more than a year behind us. Stocks worldwide had a stellar 2009. Many economic indicators are turning positive again. But storm clouds persist. Such as last week's announcement the U.S. will seek stricter rules for American banks. The rain came down hard across stock markets on Thursday and Friday, with the Dow Industrial down 430 points in two days. It seems investors are easily spooked these days. They want to be happy. To believe recovery is at hand. But their collective gut tells them there are still unpleasant surprises lurking. You can't fault the uncertain sentiment. Even the economic data looks a little schizophrenic lately. Take for example, shipping indices. Most investors know about the Baltic Dry Index. This measure tracks costs for hiring commercial shipping globally. It's a rough proxy for economic activity. When shipping costs (and therefore the index) are rising, more goods are being shipped creating greater demand for charters. Lately, the BDI has signaled trouble off the starboard bow. In November, the index performed well, rising over 50% from 3,000 to a high of 4,650. But through December the BDI fell relentlessly. Returning to 3,000 by early January. The new year has brought little reprieve. For the last three weeks, the index has been flat-lining near 3,200. Shipping demand seems to have stagnated. Reading this data, an investor might feel cautious about the global economic recovery. But take a look at another (admittedly lesser-known) shipping index: the China Containerized Freight Index. The CCFI tracks costs for shipping goods to and from China. And lately Sino-shipping has been on a tear. Over the past five months the CCFI has risen steadily, up 15%. In fact, last week the index took one of its largest jumps in recent memory. Up 3.5% on the week, with sub-indexes for shipping to Europe, the U.S. and the Mediterranean up 7%. True, the CCFI's increase over the last few months hasn't been huge. But the lack of any protracted decline in the index stands in stark contrast to the Baltic Dry. Are China's import-export markets faring better than over the rest of the globe? One possible explanation is western businesses are restocking. Companies have drawn down inventories over the last several months. Waiting to see how the economic recovery played out before committing to buying new product. Perhaps those buyers are now convinced they can move their wares. And have begun ordering new stocks from Chinese manufacturers. There's one problem with this theory. Restocking should lift shipping in all parts of the world, not just China. Global businesses still buy a lot from Europe, America and Japan. Why is the Baltic Dry not showing any increased shipping activity from these hubs? An alternative explanation is Chinese re-exporting. Over the last year, China has been a strong buyer in several markets. Including raw materials such as metals and crude oil. Rising imports into China meant build-up of large stockpiles. Look at copper. Through the first eight months of 2009, China stockpiled 1.6 million tonnes of refined copper. A stunning 550% increase from the 250 tonnes stockpiled during the same period in 2008. It's believed much of this material is held "on spec" by investors hoping to sell for a profit as prices rise. The risk being that if these investors get antsy, they might sell indiscriminately. Unleashing a flood of metal onto world markets. Increased shipping traffic from China (and China alone) could be a sign of stockpiles being re-exported. Raising the question: are other global markets healthy enough to absorb the increased supply? Without damaging prices? And now the quick aside I promised. I'm often asked how I manage to track all the data discussed in these pages. Some of it is simply being the type of person who (for better or worse) loves information and can't help but spend hours poring over obscure publications and webpages. But I do have some help. One of the main props being Statsweeper. My associates and I devised Statsweeper several months ago as an in-house data tracker. The idea being a computer would be much more efficient at monitoring the world's financial developments than any person, no matter how geekishly motivated. The concept is simple. Every minute, the Statsweeper system checks in with online financial and economic data sources worldwide. The Federal Reserve. NYMEX futures markets. The Energy Information Administration. Statsweeper pulls a variety of data from these systems. Open interest in futures contracts, and daily trade volumes. Petroleum imports and exports. And yes, the shipping index data discussed above. Simply having all this information in one place makes my life much, much easier when I sit down to analyze and write. A lot of the data is not easy to get at otherwise. Did you know for example the U.S. government reports daily on its debt position, down to the dollar? The only problem being this figure is buried in eight-point font on page 20 of the Daily Treasury Statement. Getting the data straight from the source takes some doing. Viewing it through Statsweeper takes only seconds. But Statsweeper has an even more important benefit. Automated analysis. The problem with financial data is there's a lot of it. Even collected on one webpage, you could spend a long time looking through numbers to spot emerging trends. Which is why we've trained Statsweeper to keep an eye out for us. You just never know where important bits of information will turn up. Prior to the financial crisis and stock market crash, commercial paper yields were signaling problems in the financial sector. The few people watching this data had an "early warning". Many were able to avoid substantial losses, and even turn large profits placing bets against the market. We don't know in which data sets the next important signals will turn up. And monitoring all the numbers simply isn't an option for a human being. There's just too much to keep an eye on. But Statsweeper allows us to keep a finger on the financial pulse in just minutes a day. The system downloads thousands of data points every hour and analyzes the latest numbers against past series. Looking for emerging trends and unusual movements, the kind that suggest important events in motion. When the system spots anomalies, it simply posts an alert to the Statsweeper website. Checking this site over the past months, I've been alerted in near-realtime to significant developments in gold futures, crude oil spreads and Federal Reserve monetization of U.S. debt. My associates and I have come to rely on Statsweeper as our "eyes and ears" on the frontlines of the financial system. It's become a dear part of our daily work. And as the Buddha instructed, "That which is most dear should be given away." Therefore, we've made the decision to offer Statsweeper to all our friends and co-workers who share in Pierce Points. All of Statsweeper's alerts, and all the data collected are available for free at the system website. You can even download data series to Excel, and create graphs for quick viewing. Of course, our intentions are not purely altruistic. We're hoping to gain your help in making the system work even better. After you've had a chance to look through everything Statsweeper offers, please send me your comments and suggestions. As always, I'm ever-available at dforest@piercepoints.com. Like I do, you can check in with Statsweeper several times daily at www.statsweeper.com. Or even easier, simply stop by at the end of the day or the week. In any case, you'll get the "Coles Notes" version of the most important financial and economic happenings you won't read about on Bloomberg. I hope you find it as useful as I have. Here's to bringing the wide world of finance a little closer together. ### Jan 25, 2010 Copyright ©2009-2010 Resource Publishers Inc. Note: To subscribe to Pierce Points please click here: www.piercepoints.com Pierce Points
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