First published on Friday 18th January
I have avoided glancing at my personal portfolio this week; I don’t think I can stand the pain… I am an investor for the long-term and not a trader, so I have confidence in the long-term outlook for the companies I have invested in.
However, that does not mean I am not concerned.
Ben Bernanke’s speech yesterday showed that he favoured financial stimulus; nothing in his speech eased market expectations of a 50-basis-point cut in interest rates at the Fed’s 30 January meeting.
George Bush is also expected to unveil tax rebates for individuals in a speech later today. Senior House of Representatives Republican John Boehner said Bush was considering a package of $100bn-$150bn. Unfortunately, Bush has a history of pushing through tax cuts that benefit only the very rich. He has to target the hard-working middle-classes with these rebates if it has any chance of keeping the “R” word at bay.
Bernanke did say he was not currently forecasting a recession, but growth forecasts are likely to be cut.
Of course Bernanke will not publicly forecast a recession at this stage – but I bet they are frantically discussing it behind the scenes.
Storms ahead?
However, this has not been my main concern this week…
My main worry is what has been happening in the Baltic Dry Index (BDI). It’s been sliding rapidly and, as it is a good indicator of the global economy, I do not like it… I don’t like it one bit… However, there could be a reason for the falls that is actually a positive for sector investors and not a negative… but I will come to that in a moment.
The BDI measures freight rates for bulk commodities such as iron ore, coal and grains. In the last two months the index has fallen by a third, with its largest-ever one-day fall seen last Friday. The index started in 1985.
Some analysts would have come to the conclusion that these falls are a portent of the end of the commodities boom, as the sub-prime fallout and slowing growth bit the world economy hard.
Falls in the index have resulted in a global slump in shares in shipping companies. There is a real panic in the sector. However, this may just have presented a great buying opportunity… Unless the world’s economy implodes.
I sold the shipping stocks for the portfolio of my Outstanding Investments newsletter two or three months ago. Watching the sector slump this week I am glad I did. However, I do not for one moment believe that this represents the end of the commodities boom – which would imply that value has now been uncovered in the global shipping sector.
In an interview with the Telegraph, UBS metals analyst Robin Bhar said that he actually thought the slide was a correction that reflected a pause in bulk deliveries to China at the end of last year.
A potential buying opportunity?
Some have also said that the index fall is nothing more than a reflection of pricing machinations being conducted by major suppliers. It has been suggested that miners are withholding exports to improve their bargaining power as contract pricing negotiations continue. Obviously this is impacting shipping loads.
This would imply a reversal following completion of these pricing talks – so buying the index could now represent good value.
As a commodity investor, I think that the BDI is a very important indicator to consider – and I wait with bated breath to see which direction it is heading from here. My gut feeling is that the speculation about pricing discussions is valid – and I therefore expect a rally in the BDI in the second half of the year once pricing discussions have completed.
However, should any further sharp falls appear, then this could be THE indicator which convinces me that a recession is underway. I will be watching it closely. I recommend that you do too.
This article is taken from Garry White’s free daily email ‘Garry Writes’.